THE INSTRUMENTS OF CORPORATION FINANCE our inquiry into corporation finance can follow the tree trunk and a few main branches, we shall probably gain a more thorough un derstanding of the financial structure of cor porations than we can get by looking from the outside at the obvious foliage of multitudin ous security forms and financial plans. Books on the subject have mostly confined them selves to answering the question " What ? " and have largely ignored the question " Why ? " So far as possible we shall find the determining causes first, and afterwards con sider the results they work out. We shall confine our inquiry to the capitalization of corporations, and not enter on many matters that the general subject of corporation finance might properly lead into.
On pressing the inquiry, we are able to find several main formative influences which explain the various developments of corpor ate capitalization. The desire to apportion the elements of risk, income, and control volved in an enterprise largely accounts for the numerous forms of securities. A ledge of this line of inquiry makes the est way to an understanding of the many kinds of stocks, bonds, and other financial paper of corporations. The present and spective earning power of a corporation, with the desire of those in control of its affairs to make as much as they feel they safely can on their own capital invested, gives another principal influence determining the financial plan. It partly decides the kinds of securities the corporation finances on, and more cially their relative amounts. We shall cuss this relation of capitalization and ings under the head of "Trading on the Equity." Another line of inquiry follows the relation of assets to capitalization; the extent, that is, to which they determine the form and amount of security issues. We shall take this up under the head of " Watered Stock." Next after these three forces existing in every case, we find the desire to extend the enterprise of a corporation affecting the finan cial plan and leading to a number of new kinds of securities. A consideration of "Fi
nancing an Expansion" will look into the working of this influence. In a discussion of "Amortization" we shall see in what ways a desire to pay off long-term indebtedness may shape corporation bond-issues. A number of influences determining details and affecting larger matters naturally group under the captions of "Form" and "The Market and Price." On the subject of " Capitalization and the State" we shall raise the questions in volved in government regulation of capital ization and earnings, and describe what the public service commissions of the three states which have carried this matter farthest have done.
Corporation finance has developed through the promoters, organizers, or managers of corporations bargaining with capital-owning members of the community. Usually both these parties deal through a third party, the investment banker. Though not an agent in any legal sense, the banker nevertheless does act as an intermediary, and frequently occu pies, with considerable dignity, the rather difficult position of having an interest in both the other parties to the transaction.
As a matter of fact, the banker, rather than really representing either party, almost occur pies the position of an umpire, and decides on the fair bargain all round. Of course he charges as much as he can for his services and any risks he takes. In many transactions his entire concern lies with the investor, whom he calls his client; and it always should lie most in that direction. Whatever his inter ests, the banker, assisted by the advice of his lawyers, has, without doubt, exercised the chief directive influence in the development of corporation finance.
Since our subject has grown, and is grow ing, in this way, we can get much help in un derstanding it by examining this bargaining among the parties, and tracing through the various transactions.