Solvent firms - The rules strategy: Legal capital - Distribution restrictions
3 important questions on Solvent firms - The rules strategy: Legal capital - Distribution restrictions
Which distribution to shareholders is most commonly restricted?
Distributions that exceed the difference between the book value of the company's assets and the amount of its legal capital as shown in the balance sheet
- Distribution constraints simply reinforce the credibility of the shareholder' promise to retain their capital investment in the firm
- With multiple borrowers the transactions costs are low
- Legal capital may not be sufficient protection for creditors
- Distribution constraints simply reinforce the credibility of the shareholder' promise to retain their capital investment in the firm
- With multiple borrowers the transactions costs are low
- Legal capital may not be sufficient protection for creditors
What are disguised distributions?
Disguised distributions: undervalued transactions between a company and its shareholders (also restricted besides dividends)
How does the efficacy of distribution restrictions depend on accounting methodology?
Conservative accounting provides less information about the ongoing value of the firms (more protective of creditors' interest)
True or fair accounting: easier to transfer assets to shareholders from the pool that bonds the company's debt
True or fair accounting: easier to transfer assets to shareholders from the pool that bonds the company's debt
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