Introduction: Capital Formation, Risk, and the Corporation

The corporation is the major institution for private capital formation in our economy. The corporate firm acquires funds from many different sources to purchase or hire economic resources, which are then used to produce marketable goods and services. Investors in the corporation expect to be rewarded for the use of their funds; they also take losses if the investment does not succeed. The study of corporation finance deals with the legal arrangement of the corporation (i.e., its structure as an economic institution), the instruments and institutions through which capital can be raised, the management of the flow of funds through the individual firm, and the methods of dividing the risks and returns among the various contributors of funds. The goal of corporate management is to maximize stockholder wealth. A major societal function of the firm is to accumulate capital, provide productive employment, and distribute wealth. The firm distributes wealth by compensating labor, paying interest on loans, purchasing goods and services, and accumulating capital by making investments in real productive facilities. The goal of corporate finance is to maximize the firm’s stock price. We will discuss management—stockholder relations. We will discuss, in considerable detail, socially responsible investing and the firm. Companies can “do good while doing good.” However, we firmly believe that management creates its corporate investment, dividend, research and development, acquisitions, and debt policies to maximize the stock price, which maximizes the market value of the firm.