the owner-manager (OM) would sell a part of his/her equityshares to outside investors, mostly because OM (1) needs externalfunds to finance growth & expansion; (2) wants to reduce therisk of business failure (risk sharing); and (3) enjoys the perksat the expense of outside investors.
(i) Suppose that OM, instead of selling equity shares, decidesto sell unsecured long-term debt like debenture (under the firm'sname). Would reasonable investors in the financial market beinterested in buying the firm's debenture? If not, whynot? Â
(ii) Do you think the role of auditors to thosedebenture-holders should be different from that to theequity-holders?
Hint for (i) - In reality, stock IPO (or venture capital) isonly a plausible option for initial external financing for OM. So,short answer to the question would be no (because of marketfailure).
