358 Part Four Financing Decisions and Market Efficiency
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serious recession hits the economy. But all companies live with this risk to some degree, and
it does not follow that less risk is better. Finding the optimal debt ratio is like finding the opti-
mal speed limit. We can agree that accidents at 30 miles per hour are generally less dangerous
than accidents at 60 miles per hour, but we do not therefore set the speed limit on all roads
at 30. Speed has benefits as well as risks. So does debt, as we see in Chapter 18.14-2 Common Stock
A corporation is owned by its common stockholders. Some of this common stock is
held directly by individual investors, but the greater proportion belongs to financial
intermediaries such as mutual funds, pension funds, and insurance companies. For example,
look at Figure 14.3. You can see that in the U.S. almost 50% of common stock is held by U.S.
financial intermediaries, with mutual funds holding 25% and pension funds a further 15%.^4
What do we mean when we say that these stockholders own the corporation? The answer
is obvious if the company has issued no other securities. Consider the simplest possible case(^4) Figure 14.3 does not show U.S. holdings of overseas shares. These amount to 20% of the total equity holdings of U.S. investors.
◗ FIGURE 14.2
Ratio of debt to debt plus
net worth for nonfinancial
corporations, 1965–2014.
Source: Board of Governors of the
Federal Reserve System, Division
of Research and Statistics, Flow
of Funds Accounts Table B.102 at
http://www. federalreserve.gov/releases/z1/
current/data.htm.
0
5
10
15
20
25
30
35
40
45
50
Book debt ratio
De Market debt ratio
bt ratio, %
19651968197119741977198019831986198919921995199820012004200720102013
◗ FIGURE 14.3
Holdings of corporate equities,
December 2014.
Source: Board of Governors of the Federal
Reserve System, Division of Research and
Statistics, Flow of Funds Accounts Table L.213
at http://www.federalreserve.gov/releases/z1/
current/data.htm.
Other
(1.4%)
Households
(36.7%)
Pension funds
(14.6%)
Mutual funds, etc.
(25.1%)
Insurance companies
Rest of world(16.1%) (6.1%)