Question

What is equity financing? What are some of the reasons new businesses may rely more heavily on equity financing in times of economic downturn? What are some potential drawbacks to relying too heavily on equity financing?

Research at least one case, statute or legal news article on the issue of equity financing. Be sure to comment on your classmates’ postings.

Answer 1

Equity financing means raising capital by issuing shares of an enterprise, in other words, it refers to the sharing of ownership of the business. public companies raise equity finance via IPO(initial public offerings) and Private entrepreneurs raise it from few of their friends and family, it not only means issuing of common stock it also includes issuing of Qazi equity instruments like convertible preferred stock. their regulators who regulators equity finance in a particular country for example SEC in the US and SEBI India. equity financing has its own benefits like there is no need make a fixed payment of periodic interest payment of dividend entirely depends on the discretion of the company.no concept of credit risk involved with equity financing, no need to pay any principal amount.

In the economic downturn, nobody has faith in the creditworthiness of others hence only public companies are able to raise debt finances but some private ventures are able to manage to raise debt financing as the interest rates are very low(i.e. in2008 credit crises)

but though the interest rates are very low, in economic downturn where the aggregate demand falls the production, sales and profits of the companies also falls due to this they are not even able to pay the interest and for that they have to take another loan which makes them end up with huge debt and interest pile in the times of economic recoveries when interest rates rises. this situation was faced by many companies in 2008 even though the interest rates were low they could not repay it.

in spite of all the advantage of equity financing it has its own drawbacks, for example:

Higher the no. of equity shares higher the no. of people who share profit which lowers the EPS.

Equity shares give participation in the company via voting rights which reduces the control of existing shareholders that is why there is a concept of right shares

sharing of ownership can result in potential conflict in owners and management and within the owners themselves.