Final answer:
The interests of shareholders and creditors can align in good times but diverge in bad times. Creditors are focused on recovering their loans with interest, often through guaranteed measures, whereas shareholders may seek growth and recovery strategies that can clash with creditors' conservative aims. The method a firm uses to access financial capital impacts these relationships.
Step-by-step explanation:
When examining the interests of shareholders and creditors, it becomes evident that their priorities can diverge, particularly during periods of financial distress. In good times, when a firm is solvent, the interests of shareholders and creditors can be quite aligned, both groups benefit from the firm's profitability and stable operations. Shareholders are interested in seeing their share value increase, whereas creditors are focused on the firm being able to make regular interest payments on debt.
In bad times, however, when a firm is facing financial distress, such as having difficulty paying interest, the interests can greatly diverge. Creditors, whose main concern is the return of their loaned capital with interest, may prioritize cost-cutting measures or asset liquidation to ensure they are paid back. Shareholders, on the other hand, may prefer the firm to take risks or invest in potential growth opportunities to recover, which can be at odds with creditors' preferences for preserving capital.
When a firm decides its method to access financial capital, it can borrow from a bank, issue bonds, or issue stock. Issuing bonds or taking a bank loan commits the firm to scheduled interest payments, regardless of their financial health, while issuing stock involves selling off company ownership, aligning the firm with the interests of shareholders, but diluting control.