Business risk

As a holder of corporate securities (equity shares or debentures), you are exposed to the risk of poor business performance.

This may be caused by a variety of factors like

1. heightened competition,
2. emergence of new technologies,
3. development of substitute products,
4. shifts in consumer preferences,
5. inadequate supply of essential inputs,
6. changes in government policies and so on.

Often, of course, the principal factor may be inept and incompetent management.

The poor business performance definitely affects the interest of equity shareholders, who have a residual claim on the income and wealth of the firm.

It can also affect the interest of debenture holders if the ability of the firm to meet its interest and principal payment obligation is impaired. In such a case, debenture holders face the prospect of default risk.