[ewalker9925]

Hello Professor Herbener,

In one of your lectures you stated that an increase in the stock prices of a company can benefit that company as it is an increase in the assets of those who control the company, i.e. the majority owners. With the increase in their asset prices, they can take loans out on their increased assets like a home equity loan However, I talked with some people who worked high level managerial jobs in businesses and they claimed that no bank is willing to give out loans on increases in capital value coming from stocks, due to the volatility of stocks. How would you respond to this, and what exactly is the value of stock trading (aside from IPOs) if the increase in value cannot be captured by the company to take out loans?

[jmherbener]

Unlike households, entrepreneurs do not have to take out bank loans to capitalize on more equity in their enterprises. With greater equity, entrepreneurs can financially justify selling more bonds or attract venture capital funding. The other method entrepreneurs can use is to sell shares of their stock share holdings to fund projects out of their built-up equity. Of course, the later method is limited to them maintaining a controlling interest in their enterprises while the former method does not face that restriction.

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