Question

Having a residual claim is a positive or a negative thing for shareholders? and why?

Answer 1

Residual Claim-The right of a shareholderor or some other investor, to the profits of the company after all prior obligations have been paid.Residual claims are also called Equity claims.

Residual claim can be either negative or positive. If positive, the company has enough assets to cover its liabilities. If negative, the company's liabilities exceed its assets; if continuing for a long time then, this is considered balance sheet insolvency.

Negative Residual claim is considered as risky & unsafe from investor(shareholders) point of view as it means that a company's liabilities exceeds its assets & positive residual claim is considered as beneficial from shareholder point of view as company has enough assets too cover its liabilities.