the owner-manager (OM) would sell a part of his/her equity shares to outside investors, mostly because...

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the owner-manager (OM) would sell a part of his/her equityshares to outside investors, mostly because OM (1) needs externalfunds to finance growth & expansion; (2) wants to reduce therisk of business failure (risk sharing); and (3) enjoys the perksat the expense of outside investors.
(i) Suppose that OM, instead of selling equity shares, decidesto sell unsecured long-term debt like debenture (under the firm'sname). Would reasonable investors in the financial market beinterested in buying the firm's debenture? If not, whynot?
(ii) Do you think the role of auditors to thosedebenture-holders should be different from that to theequity-holders?
Hint for (i) - In reality, stock IPO (or venture capital) isonly a plausible option for initial external financing for OM. So,short answer to the question would be no (because of marketfailure).

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3.7 Ratings (698 Votes)

i due to initial external financing for OM reasonable investors wont be interested in buying the firms debenture because it would have already been a wide distribution of power of management and besides this no major investor would have been standing due to See Answer

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