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I'm confused, you don't go bankrupt from too much equity. There isn't an existential threat with too much equity. Why do we need to worry about it?
by jjeaff 4y ago
I'm confused, you don't go bankrupt from too much equity. There isn't an existential threat with too much equity. Why do we need to worry about it?
- eru 4y agoWell, what is bankruptcy? Bankruptcy just means that the company's old equity is 'deleted' and that what used to be debt gets turned into equity. Nothing about how the company operates has to change. In principle, workers can still make the same products, customers can still buy those same products etc. Airlines are the prime example of this: airlines go bankrupt all the time, you could almost say it's part of their business model. Of course, the process of bankruptcy also often comes with big changes in how the company operates. But you also often see those big changes and turnarounds without any bankruptcy. (Those big changes can even include shutting the company down.)
- jjeaff 4y agoYes, but equity holders don't have mandatory service payments. So they can't force a bankruptcy. Too much and it might make it a poor investment, but it doesn't affect cash flow. It's not a public emergency if a big company becomes too diluted.