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Investors and Other Stakeholders

2025 Curriculum CFA® Program Level I Corporate Finance
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Overview

Corporate issuers are financed with debt and equity. Debt and equity securities have different risk and return profiles for both issuers and investors. This learning module discusses these differences and their implications, while also considering the perspectives of a broader group of stakeholders beyond debtholders and shareholders. We introduce these groups and discuss potential conflicts of interest among them. Balancing stakeholder interests is important, as both issuers and investors have increasingly incorporated environmental, social, and governance factors into their decision-making processes. Analysts assess ESG factors to better evaluate issuers’ expected future performance and risk profile.

  • Corporate issuers are financed with debt and equity. Debt is a f inancing source with a finite length, and interest and principal payments are promised on pre-specified future dates. Debtholders have a priority claim over shareholders to an issuer’s cash flows and assets.
  • Equity is a source of permanent financing, and no promises of repayments or distributions to shareholders are made. Equity is a residual claim on an issuer’s cash flows and assets.
  • From the perspective of an issuer, debt is riskier than equity. From the perspective of an investor, equity is riskier than debt. The proportion of debt in a firm’s capital structure affects both the potential return and the risk of cash flows.
  • Conflicts of interest may exist between debtholders and shareholders. Debtholders’ payoff is limited to promised interest and principal payments, while shareholders’ payoff is theoretically unlimited as increases in firm value over the value of debt accrue to shareholders.
  • Besides debt and equity investors, corporate stakeholders include the board of directors, managers, employees, customers, suppliers, governments, society in general, and the environment. The stakeholder theory of corporate governance broadens the focus of corporate decision-making beyond that of the shareholder theory.
  • Environmental, social, and governance (ESG) considerations are becoming more important to both investors and analysts. ESG factors affect firms’ values and can present both risks and opportunities.

Learning outcomes

The candidate should be able to:

  • compare the financial claims and motivations of lenders and shareholders;
  • describe a company’s stakeholder groups and compare their interests;
  • describe environmental, social, and governance factors of corporate issuers considered by investors.

1 PL Credit

If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.