Residual Equity Theory

AAA

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.

INVESTOPEDIA EXPLAINS '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. Queuing Theory

    A mathematical method of analyzing the congestions and delays ...
  2. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  3. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  4. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  5. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
  6. Common Stock

    A security that represents ownership in a corporation. Holders ...
Related Articles
  1. Investing

    What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the ...
  2. Investing

    Why do some preferred stocks have a higher yield than common stocks?

    Before we answer this question, let's just take a quick review of what a stock's yield is actually measuring.The yield is calculated by taking the stock's annual expected dividend and then dividing ...
  3. Bonds & Fixed Income

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  4. Investing Basics

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  5. Investing

    Why would a company have multiple share classes, and what are super voting shares?

    Firstly, do not confuse different classes of common stock with preferred stock. Preferred shares are an entirely different type of security, affording their owners priority dividend payments ...
  6. Fundamental Analysis

    What is the difference between cost of equity and cost of capital?

    Read about some of the differences between a company's cost of equity and its cost of capital, two measures of its required returns on raised capital.
  7. Fundamental Analysis

    Is depreciation only used for tangible assets?

    Learn if tangible assets can be depreciated, as well as what other assets are eligible for depreciation so you can account for them accurately.
  8. Fundamental Analysis

    What does a high weighted average cost of capital (WACC) signify?

    Find out what it means for a company to have a relatively high weighted average cost of capital, or WACC, and why this is important to lenders and investors.
  9. Fundamental Analysis

    How do intangible assets appear on a balance sheet?

    Understand how various types of intangible assets are handled in a company's accounting and which of them you can find on a company's balance sheet.
  10. Fundamental Analysis

    What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based on conversion of sales into cash.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center