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Benefits and Limitations of Publicly Held Firms
In the business field, most organisations are either held publicly or privately. The choice of ownership in a corporation has their advantages and disadvantages. In a situation where an organisation is held privately, this implies that majority of the funding, capital and finances largely comes from the private owners. Such an organisation is more likely to have very few investors into the business. On the other hand, when an organisation is reserved public it has a better portion of the corporation’s shares, stocks and bonds that are not found in the market. A publicly traded company is identified since its stocks are in the market where they are bought and sold to the general public who are or might be interested in making purchases stocks for the company (Cole, & Mehran, 2016).
Benefits of Publicly Held Corporations
The decision of a corporation to go public is considered one of with a number of benefits, going public means that the business will have a better chance of improving its financial conditions through the process of locating money that the company will not necessarily repaid. Such money through the sale of stock is instrumental since it provides the business with the required capital for growth and expansion. Additionally, a stock that is sold in the financial markets is largely utilised in the company as part of finance acquisition of other organisation this implies that part of the buying made can then be paid back in terms of stock given to the creditors and shareholders. A publicly traded company can use its company stock as a form of stock choices which can be offered to the staffs and other contractors as an expressive for of incentives and payment. The provision of stock to employee provides them with a feeling of direct ownership of the company.
A publicly held company sells its shares in the public which then provides an indisputable assessment of the company on a daily basis. Stocks are traded on a daily basis where the company can be able to tell whether its stocks are adding value or losing on a short term basis. The ability to ensure the stock prices remain constant is instrumental since it is easy to ensure value for money is achieved. Publicly owned corporations benefits since such companies increase their prestige and visibility in the market. This acts as a marketing strategy which ensures inclusive market viability for the company. Through trading, a business publicly makes the shareholders of the business benefit from holding the shares that are all subject to restrictions making them more freely sought-after and practical as collateral when seeking loans in financial institutions such as banks. In the financial markets, it is evident that shares that are publicly traded have the higher process compares to shares that are not publicly traded (Chincholkar, et al., 2016).
Investors who purchase shares from publicly traded corporation have the ability to diversify their investment portfolios due to increases marketability of their shares. Managers and employees working in a publicly held company are compensated higher compared to those working in a privately owned company. Lastly, it is evident that management personnel tend to upgrade their experience, employability and knowledge by the virtue of having gained experience through serving in a more responsible high ranked executive position in a publicly held company (Cole, & Mehran, 2016).
The limitations of publicly held firms
In a situation where a corporation goes public then the management loses its freedom to made unilateral decisions without the approval of the board of governors and the approval of a common of the shareholders in any matter that pertain the company. Moreover, the shareholders who act as the owners of the corporation tends to judge the management in relations to stock price, dividends and profits. This may force the management to largely emphasise in short-term policies rather than long term objectives which might be riskier compared to short term investment. Additionally, the cost used during an initial public offer also called IPO is largely substantial. This is because it comes in form of underwriter’s expenses, commissions, legal and accounting fees, registration and printing cost. Sometimes the cost involved during IPOs is huge and costly, making it uneconomical for an organization to carry it out (Chincholkar, et al., 2016).
Among the requirements for an organization to become publicly held, it is required to reveal sensitive information on its ongoing basis. The information released includes; financial results, business strategies and executive salaries and their compensation arrangements. Such sensitive information may be used by the competitors in the market as a tool of winning and gaining the competitive advantage. Business and corporations should ensure sensitive financial information is kept secretive for it to ensure it has a competitive advantage within the market. Companies that are publicly traded are mandatory to have their financial statements fully audited on a systematic basis. The auditing process is involving and also costly as organizations are required to pay for the services delivered. Due to the legal requirements, public companies are characterized by continuous costs for intermittent reports and other substitution statements that are all filed with the supervisory agencies which are then disseminated to the company shareholders and stockholders (Chincholkar, et al., 2016). This implies that a large substantial portion of management time that could have been used in other progressive activities is used in the early and the on-going periodic reporting desires of the regulatory activities as opposed to the supervision of the company’s business procedures (Cole, & Mehran, 2016).
Publicly held corporations are required to have always updated and upgraded accounting and management information system which is then sent to the shareholders. This makes the management ability to market their shares to have partial constraints through the prevention of insider trading classification of their shares and prohibition on short sales on the shares as restricted securities. Taking an organization into public trade makes the management of the company to lose control and decision-making powers. This largely happens when a group of investors or dissident investor and then obtain the majority control which may lead to a hostile takeover making the company lose all its ownership (Vigneron, & Mard, 2016).