Capital market stakeholders refer to those who contribute to the company’s capital. Examples are shareholders, venture capitalists, banks, and debt investors.
Capital market stakeholders are strategic because they provide companies with the money they need for working capital and investment. Thus, they affect the availability, capital structure, and costs of operating and growing the business. In addition, they can also influence strategic decisions such as appointing directors as done by shareholders.
Types of capital market stakeholders
Capital market stakeholders are divided into two based on what capital they contribute. They are:
- Shareholders
- Creditors
Shareholders invest money in the company. As compensation, they are entitled to ownership in the company. Their capital is recorded as equity on the balance sheet.
Another name for shareholders is stock investors. Both are the same. Usually, we refer to shareholders when they have substantial holdings with voting rights and have significant influence at the general meeting of shareholders. Another name is the owner because, in essence, shareholders or stock investors own the company.
Shareholders can come from individuals or organizations. Organizations can refer to companies, venture capitalists, or foundations.
Meanwhile, creditors lend money to the company. Examples are banks and bond investors (bondholders).
Creditors provide debt capital to the company and, consequently, require the company to repay it (principal plus interest). The debt capital can be bank loans, bonds, and short-term securities.
Unlike stock, debt capital does not represent ownership. Instead, it represents a financial obligation. Companies report it as a liability on the balance sheet.
Capital market stakeholders and their interests
Shareholders and creditors are strategic stakeholders. Companies often need external capital to meet funding needs. They may use it for working capital. Or they use it for investments such as buying a new machine or setting up a new production facility. Corporate actions such as acquisitions also often require external capital.
External capital is necessary because the funds for investment or acquisition are greater than those generated from the company’s internal cash. In other words, internal capital is insufficient to fund.
Internal capital refers to retained earnings. Companies usually don’t distribute all profits as dividends. Instead, they retain it for capital. And it is recorded as equity.
Companies raise external capital in several ways, such as:
- Selling shares
- Borrow from the bank
- Issuing debt securities
Companies sell shares, generally, by conducting an initial public offering (IPO) on the stock exchange. They offer shares to stock investors for purchase. After the IPO, the shares are available for trading by the public.
As compensation for the purchase, the investor acquires an ownership interest in the company. They are now shareholders. They are entitled to dividends distributed as a return on their invested capital. In addition, they also have the potential to get capital gains when the company’s stock price rises and sell it.
Long story short, shareholders are interested in the company to obtain a return on investment. They want companies to perform well because it allows them dividends and capital gains.
Meanwhile, creditors have an interest in interest and principal. They may be banks, bond investors, or venture capitalists.
Creditors or bondholders provide debt capital to the company and want it to repay it by returning the principal and paying interest. Unlike share capital, debt capital represents a financial obligation.
Creditors have higher claims on assets in the event of bankruptcy. The company has to pay them first when the assets are sold. The rest is distributed to shareholders.
Capital market stakeholder influences
Shareholder’s influences on the company
Shareholders influence the business in several ways. First, they influence decisions in general shareholder meetings.
The meeting is held once a year and is an event for strategic decision-making related to the following:
- Annual report
- Dividend
- Election of the Board of Directors
- Remuneration
For example, if shareholders are dissatisfied with the board of directors, they can replace them with new ones by voting.
Second, shareholders can influence the business by selling their shares. When companies do not provide adequate returns, they may sell their shares. The sell-off caused the company’s share price to fall.
A decline in share price can significantly impact a company if it involves significant ownership. It also encourages other investors to take similar actions, tumbling the share price.
Falling share prices make it difficult for companies to raise sufficient capital in the future. Even though they issued quite a large number of new shares through a rights issue, they only received a small amount of capital because the price fell.
- The right issue is a limited public offering in which the company offers new shares on a limited basis. Existing shareholders have the right to purchase the new shares at a discount from the market price on a future date.
Then, some shareholders with significant voting rights can also influence the company’s strategic decisions. They can force directors to improve company performance and take other short-term measures, such as efficiency, by decreasing employee wages.
This action is because they are interested in the company’s operating and financial performance, which affects the dividends and capital gains they will get.
Creditors’ influence on the company
Creditors are willing to lend money if the company can repay the debt plus interest on time. They pay attention to the company’s financial condition, including the company’s liquidity and solvency. They also look at credit ratings to determine the company’s default rate.
For example, if a company has a low rating, the potential for default is high. Their money is at risk. They may find the company does not fulfill obligations on time. Then, if the company fails to pay, creditors can file bankruptcy against the company in court.
Before lending money, creditors will see the cash owned by the company. In addition, they will also assess the company’s ability to generate cash. Thus, cash insufficiency and inability to generate cash flow will cause creditors to be dissatisfied.
Dissatisfied creditors or lenders can impose stricter agreements on subsequent loans. Or, they are no longer interested in lending money when companies apply for new debt.
In addition, creditors can charge higher interest rates, given the high risk of default. Higher interest means a more expensive cost of funds. As a result, the company must earn more money to repay the principal and pay interest regularly.
Creditors can also threaten to file for bankruptcy against the company in case of default. The threat alone may be enough to convince the company to pay to prevent closure.
The liquidator will sell all available assets if the company is placed in liquidation. And creditors will get their share first before the shareholders.
