CHAPTER 6

CORPORATE GOVERNANCE ISSUES AND THE FINANCING DECISION

INTRODUCTION

Financing decisions are concerned with how managers raise the funds needed to operate the company. From an accounting or financial statement perspective, the financing methods chosen appear on the liabilities and shareholders’ equity portion of the balance sheet and include bank loans, bonds, capitalized leases, preferred stock, retained earnings, and common stock.

The financing decision is important from a corporate governance perspective because the financial contracts written between the company and the suppliers of capital establish who controls the company and how this control changes if the corporation fails to honor its financial obligations. Just as important, ...

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