Aswath Damodaran 292
Debt and Discipline
Assume that you buy into this argument that debt adds discipline to management.
Which of the following types of companies will most benefit from debt
adding this discipline?
# Conservatively financed (very little debt), privately owned businesses
# Conservatively financed, publicly traded companies, with stocks held by
millions of investors, none of whom hold a large percent of the stock.
# Conservatively financed, publicly traded companies, with an activist and
primarily institutional holding.
Conservatively financed (Equity financed), publicly traded firms with a wide and
diverse stockholding.
Private firms should have the incentive to be efficient without debt, because the
owner/manager has his or her wealth at stake.
Publicly traded firms with activist stockholders (like Michael Price) might not
need debt to be disciplined. Investors looking over managers’ shoulders will
keep them honest.
