In a capital structure decision, the analyst point of view plays an important role. Where different consumers are concerned, different interests are involved. Where these interests are contrary to one another, as they often are when a limited resource is being parceled out, it is important to set up a point of view for the analyst. For whose interest is the Chief Financial Officer responsible? Decisions are generally analyzed from the existing equity owner’s position.
There are pressures from other stakeholders, such as suppliers, customers, employees, and management that must also be balanced. This analysis assumes that these requirements have been satisfied to at least a minimal degree by the cost of sales, the general costs, and appropriate management of current assets and liabilities. Although the law traditionally made the directors responsible only to the stockholders, some states have altered their statutes to make the directors responsible for the health of the company. The implication is that an action that is for the good of the company is required even if it is harmful to the stockholders.
This perspective seldom presents a problem for the smaller company. Even if the managers are not the owners, the managers and the owners should be in close enough touch that the manager is working toward the owners’ goals. If this is not so, then the responsibility for the problem has to be assigned to owners, who are not exercising proper oversight.
Finally, management should be concerned with existing shareholders. It is to those who already hold the stock that the manager owes first allegiance. The professional manager is naturally concerned to create a financial deal that will be fair to any new common stockholders, for the manager has to live with them, too. But, when a choice must be made, the manager should act for the existing shareholders. The prospective shareholders decide, given appropriate disclosure of financial information, whether they are willing to take a proposition. The existing shareholders have no such option; management must act for them.