Uncertainty, Financial reporting, Risk, Confidence intervals

Journal Article Expected Utility and Continuity Get access Lucien Foldes Lucien Foldes London School of Economics Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 39, Issue 4, September 1972, Pages 407–421, https://doi.org/10.2307/2296509 Published: 01 September 1972

James L. Bicksler, Comment: Portfolio Theory and Industry Cost-of-Capital Estimates, The Journal of Financial and Quantitative Analysis, Vol. 7, No. 2, Supplement: Outlook for the Securities Industry (Mar., 1972), pp. 1463-1467

William L. Sartoris, The Effect of Regulation, Population Characteristics, and Competition on the Market for Personal Cash Loans, The Journal of Financial and Quantitative Analysis, Vol. 7, No. 4 (Sep., 1972), pp. 1931-1956

J. L. Dake, Comment: An Empirical Test of Financial Ratio Analysis, The Journal of Financial and Quantitative Analysis, Vol. 7, No. 2, Supplement: Outlook for the Securities Industry (Mar., 1972), pp. 1495-1497

Jerry L. Jordan, Comment: The Strange Journey of Monetary Indicators, The Journal of Financial and Quantitative Analysis, Vol. 7, No. 2, Supplement: Outlook for the Securities Industry (Mar., 1972), pp. 1643-1646

Christian T. L. Janssen, Comment: Deposit Insurance in the United States--Evaluation and Reform, The Journal of Financial and Quantitative Analysis, Vol. 7, No. 2, Supplement: Outlook for the Securities Industry (Mar., 1972), pp. 1613-1618

J. W. Elliott, H. L. Uphoff, Predicting the Near Term Profit and Loss Statement with an Econometric Model: A Feasibility Study, Journal of Accounting Research, Vol. 10, No. 2 (Autumn, 1972), pp. 259-274

The current literature or business finance states that debt is a cheaper source of capital than stock (tending to reduce the firm's cost of capital), because interest is deductible for income tax purposes while the return to common stockholders is subject to tax. It is even possible to issue debt without increasing the risk to the owners (the debt is issued to stockholders in proportion to the ownership of stock, or equivalently investors buy a mixture of stocks and bonds on the market). However, it is argued in this paper that if we assume that the present stockholders have no further resources available for investment in the firm, but the enterprise needs additional resources, then the present stockholders have to make a basic decision about whether to issue stock or debt to raise the additional needed capital. The issuance of debt in this situation increases risk, and the issuance of stock dilutes ownership. Even when bondholders require a much lower contractual return than the expected annual return of stockholders, the issuance of more stock may be preferred to the issuance of debt.