Final answer:
Firms choose financial capital sources based on information accessibility and patterns in market conditions. As information about a firm becomes more widely available, outside investors like bondholders and shareholders are more inclined to invest without personally knowing the managers.
Step-by-step explanation:
When firms consider different ownership structures and methods of acquiring financial capital, they must evaluate the levels of information available to investors. Direct answer: Firms choose between financial capital sources based on information availability and patterns where established businesses with transparent operations attract more external investors like bondholders and shareholders.
The process depends on imperfect information dynamics where those within the firm possess more knowledge about potential profits than outside investors. Over time, as a firm's track record becomes more transparent, personal knowledge of managers becomes less crucial for investors. This increased information disclosure leads to a larger pool of willing investors.
Strategic decision-making also involves determining who will serve on the board of directors, which, due to several shareholders' lack of incentive or knowledge to nominate alternative members, typically remains a decision within a closed group. Sample scenarios illustrate how familiarization with business plans and managerial personnel becomes less significant as a company grows and publicly shares more about its operations.