The Case of Tesla – Corporate Stakeholders and Corporate Finance

The Case of Tesla  – Corporate Stakeholders and Corporate Finance
Blomst / Pixabay

Way back in 1988, Alan Shapiro and I published a paper called “Corporate Stakeholders and Corporate Finance.”

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Tesla Model Y Production
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The point of the paper was to highlight a manner in which corporate finance policy could have a major effect on corporate value - in contradiction to the famous Miller-Modigliani theorem. The paper proposed that corporate finance affected value through its impact on corporate stakeholders, particularly customers. Our point was that customers would shy away from a company in financial distress because they feared the products would be terminated, support and repairs would be withdrawn, and second hand prices would plummet, if the financial distress worsened. This leads to a downward spiral. If customers stay away, revenues drop and the financial crisis becomes more acute, leading to further loss of customers. The implication is that companies that want to keep their customers need to be sure to have plenty of financial slack so that customers do not have to worry about the company's future.

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That leads to Tesla. With cash dwindling and debt ratings falling Tesla is headed for possible financial distress. For the first time, potential customers are lighting up the internet with concerns about buying cars from a company that might not be able to support them. It is not yet a Cornell-Shapiro downward spiral yet, but it is something to worry about.

 

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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.

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