In fact, I don't know what the net effect of those considerations is on bondholders (or other creditors... I left that out). I'm only saying that at the time of bankruptcy, bondholders (and other creditors) are senior to common shareholders in the capital structure, making it far less likely that common shareholders will receive the cash from the company treasury than if it had already been paid out to them via dividends.burritoLover wrote: ↑Tue Jun 21, 2022 10:07 am Except your example leaves out the fact that a company flush with cash is a lower credit risk and therefore the bond interest would be lower for that company than the company that paid dividends. Therefore, you can't say that the bond holders of the non-dividend paying company would be better off over the life of the company. In fact, a company flush with cash that it had no use for wouldn't need to issue bonds at all. Another false equivalency.
Try to figure out why bondholders (and/or other creditors) are being paid cash that's there only in scenario (a) and not (b). If you think equity investors, as a group, did equally as well in scenarios (a) and (b), then that's the equivalent of saying that scenario (a) generated "free money" for bondholders (and/or other creditors).
But, be advised... someone warned us not to believe in free money.
There's nothing wrong with a company keeping a lot of cash in its treasury.Da5id wrote: ↑Tue Jun 21, 2022 10:16 am Also unclear how it would go into bankruptcy with apparently the companies entire lifetime accrued earnings sitting in a bank account just waiting to be paid to bond holders. Scenario realism at its best? Generally companies that don't pay out earnings (via dividends or buybacks) don't behave that way, but rather (more or less successfully) use the money to grow their business or acquire things.
If you want, you can run scenario (c), where the cash is squandered on unwise investments. Scenario realism, if you will.