ABSTRACT

Downsides of democratic firm management include the problem of lodging the collateral needed to back up loans, the underinvestment issue, lack of portfolio diversification opportunities, as well as the monitoring and control issues. The reflections developed would seem to suggest that a system exclusively composed of democratic firms is barely the ideal solution and that policies for the enforcement of such a system would prove abortive. As risk taking is a sure sign of the operator’s confidence in the success of an enterprise, outside capital providers tend to grant more loan capital to firms that self-finance large portions of their investments. The partners wishing to increase the firm’s investments are likely to prioritise self-financing, while others might be altogether averse to self-financing or wish to minimise the self-financed proportion and maximise the surplus available for distribution. Vis-a-vis financers of limited companies, providers of funds to democratic firms face the considerable disadvantage of being unable to choose between shares of bonds.