FINANCE

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Today, the corporate structure is ubiquitous all over the world, and yet continues to evolve in the face of new forces. In 2008 the financial crisis once again transformed the financial landscape, bri... nging down giants like Bear Stearns, Lehman Brothers, and AIG and reshaping investment banks like Goldman Sachs into government-guaranteed commercial banks. These changes have as profound an effect on the future of corporate finance. Government bailouts have provoked challenging questions regarding the role of the federal government in the control and management of private corporations. In the wake of the crisis, significant reforms of the regulation and oversight of financial markets were passed into law. Understanding the principles of corporate finance has never been more important to the practice of business than it is now, during this time of great change. The focus of this lecture is on how people in corporations make financial decisions. This lecture introduces the corporation and explains alternative business organizational forms. A key factor in the success of corporations is the ability to easily trade ownership shares, and so I will also explain the role of stock markets in facilitating trading among investors in a corporation and the implications that has for the ownership and control of corporations. The Four Types of Firms We begin our study of corporate finance by introducing the four major types of firms: sole proprietorships, partnerships, limited liability companies, and corporations. I will explain each organizational form in turn, but our primary focus is on the most important form—the corporation. In addition to describing what a corporation is, we also provide an overview of why corporations are so successful. Proprietorship A sole proprietorship is a business owned and run by one person. Sole proprietorships are usually very small with few, if any, employees. Although they do not account for much sales revenue in the economy, they are the most common type of firm in the world, as shown in Figure 1.1. Statistics indicate that 71% of businesses in the United States are sole proprietorships, although they generate only 5% of the revenue.2 Contrast this with corporations, which make up only 19% of firms but are responsible for 84% of U.S. revenue. Sole proprietorships share the following key characteristics: [Show More]

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