Residual Equity Theory

DEFINITION of 'Residual Equity Theory '

An accounting concept that says that common stockholders take the greatest risk when they buy into a company; therefore, they should have sufficient information about the company's financial standing and performance to make sound investment decisions. Residual equity is calculated by subtracting the claims of bondholders and preferred shareholders from the company's total assets.

BREAKING DOWN 'Residual Equity Theory '

Residual equity theory was developed by George Staubus, Professor Emeritus of Accounting at Berkeley's Haas School of Business. A company's residual equity holders take the greatest risk of all the company's stakeholders because they are the last in line to be repaid if the company goes under. Residual equity theory is one of several equity theories; the others are proprietary theory and entity theory.



RELATED TERMS
  1. Residual Dividend

    The term residual dividend refers to a method of calculating ...
  2. Residual Income

    The amount of income that an individual has after all personal ...
  3. Residual Security

    A convertible security which may increase the number of current ...
  4. Residual Value

    How much a fixed asset is worth at the end of its lease, or at ...
  5. Residual Interest

    1. A charge for borrowing money that accrues on a credit card ...
  6. Residual Interest Bonds - RIBS

    A type of inverse floating-rate bond created by dividing the ...
Related Articles
  1. Economics

    Valuing A Company Using The Residual Income Method

    Residual income is the income a company generates after accounting for the true cost of its capital, which is the cost of funds it uses to finance its business.
  2. Forex Education

    Valuing A Company Using The Residual Income Method

    Learn the underlying basics behind the residual income model and how it can be used to place an absolute value on a firm.
  3. Economics

    Explaining Residual Value

    Residual value is a measurement of how much a fixed asset is worth at the end of its lease, or at the end of its useful life.
  4. Investing Basics

    Economic Value Added - EVA

    Learn about this metric that measures a company's financial performance based on its residual wealth.
  5. Professionals

    Investment Theory and Portfolio Development

    Investment Theory and Portfolio Development
  6. Fundamental Analysis

    7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.
  7. Professionals

    General Theory

    Chapter 3 - General Theory
  8. Professionals

    Types of Stock

    Series 7 - Equities Section 3: Types of Stock
  9. Professionals

    Dividend Policy

    Dividend policy is the set of guidelines a company uses to decide how much of its earnings it will pay out to shareholders.
  10. Mutual Funds & ETFs

    Introduction & Theory

    Introduction & Theory
RELATED FAQS
  1. How is residual value of assets taxed?

    Find out how and when taxes are assessed on the different kinds of residual value, including the residual value on a leased ... Read Answer >>
  2. What is the difference between residual income and operational income?

    Understand the key factors that go into calculating operational and residual income, as well as what each of these categories ... Read Answer >>
  3. Is residual income considered profit?

    Understand what residual income is and under what circumstances it may be considered profit. Learn how this can benefit personal ... Read Answer >>
  4. How is residual value of an asset determined?

    Understand what the residual value of an asset is and how the residual value of an asset is calculated. Learn how residual ... Read Answer >>
  5. What is the difference between residual income and passive income?

    Learn how passive income helps pay the bills with little work involved. Determine how residual income affects your ability ... Read Answer >>
  6. What does residual value represent in a private equity investment?

    Find out why private equity investors, particularly limited partners, are so concerned with the residual value of a fund's ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center