The Triviality of Capital Ownership

curtiss_leung at ibi.com curtiss_leung at ibi.com
Mon Dec 21 14:52:14 PST 1998


> Bondholders actually lend working capital where stockholders,

> other than at new issues, do not. Also, bondholders are contractors

> with the firm, not owners. The question with bondholders is whether

> credit is issued in a restrictive environment, giving bondholders

> undue influence and allowing them to extract unreasonable interest.

> In principle, however, bondholding is not an oppressive

> relationship.

The capital raised by a bond offering will (or should be) used to

expand production, sure, but I don't find that a particularly

altruistic act on the part of those buying the offering. They're

doing it not out of the goodness of their hearts, but in expectation

of some favorable return on their investments. What makes bonds

pernicious to me is precisely that aren't owners, but creditors, and

the interest that bonds pay have prior claims on a companies earnings.

I guess a back-of-the-envelope Marxian take would be that the rate on

bonds set a floor on the rate of surplus rate; come rain or shine, the

capital raised by the offering must generate the interest specified on

the coupon, which means that the rate of exploitation can never fall

below a certain level. And if a legal contract that specifies a

guaranteed rate of exploitation isn't oppressive, then I don't know

what is.

--

Curtiss Leung



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