Chapter 13: Corporate Financing Overview: Debt & Equity

Corporate Financing Overview: Debt & Equity begins by analyzing aggregate data to demonstrate that the primary source of financing for United States corporations is internally generated cash—comprised of retained earnings plus depreciation—rather than external financing. When companies do seek outside capital, the text highlights a distinct preference for debt over equity, noting that net equity issues are frequently negative due to the high volume of stock repurchases. The discussion delineates the critical differences between debt and equity securities, explaining that common stockholders hold residual cash-flow rights and ultimate control over the firm, whereas debtholders possess a prior, fixed claim with limited control rights unless default occurs. The chapter details various forms of equity, including preferred stock and distinct ownership structures like partnerships, trusts, and Real Estate Investment Trusts (REITs). It simultaneously explores the diverse landscape of corporate debt, categorizing instruments by maturity, interest rate structures (fixed versus floating rates tied to benchmarks like SOFR), currency denomination, and seniority, while also identifying disguised debt forms such as leases and pension obligations. A significant portion of the chapter is dedicated to the role of financial markets and intermediaries—such as commercial banks, investment banks, insurance companies, mutual funds, hedge funds, and pension funds—in channeling savings to real investment, providing payment mechanisms, pooling risk, and generating market information. The analysis extends to a global perspective, contrasting the market-based financial systems of the United States and the United Kingdom with the bank-based systems prevalent in Europe and Japan, and examines how investor protection laws influence corporate governance and ownership concentration. Finally, the chapter investigates the disruption of traditional finance by the Fintech revolution, covering innovations such as mobile payment systems, peer-to-peer lending, equity crowdfunding, artificial intelligence in credit scoring, distributed ledgers, blockchain technology, and the rise of cryptocurrencies and Initial Coin Offerings (ICOs).