Are Bondholders and Stockholders the Same Under Entity Theory?

by Walter Johnson
Stockholders can replace management, but bondholders can only exert influence.

Stockholders can replace management, but bondholders can only exert influence.

"Private property" is an eternally contested concept. The rise of the modern joint-stock corporation dealt a critical blow to the concept of property as it is usually defined. The result of this was "entity theory," a concept that held, among other things, that ownership of corporate property is radically distinct from the control, behavior or operations of the firm itself. Property, under this theory, now had little to do with actual control or real ownership.


The much older "propitiatory" theory holds that ownership is the same thing as control. For a small business with an owner and a few employees, this holds true. Any debt the small firm contracts is almost always the result of a specific decision of the owner. Hence, in this case, the single stockholder (the owner) and the bondholder derive from the same structure. In other words, there is one owner of a small firm and crucial debt decisions can easily be traced to this one proprietor.


The rise of the modern mega-corporation meant that the average stockholder had little idea of corporate decision-making and likely did not care. The average stockholders, taken collectively, have no real control over the firm. This means that firm property is totally different from firm management. In turn, this means that the debts contracted by the real controllers of the firm -- the management -- have nothing to do with ownership. Therefore, stockholders have nothing to do with the bondholders and likely have no idea who the bondholders even are.


A bondholder is someone who has advanced money to the firm with the expectation of trading the bond or getting paid at maturity. The average stockholder has done the same, except he enjoys a formal, but not real, ownership. Both groups of people, bondholders and stockholders, are the same in the sense that a) they have money invested in the company, and b) they care only about profits and capital gains, not actual decision-making power over the firm. In this limited case, stock and bondholders have similar qualities relating to the firm.

Bonds and Stocks

On the one hand, stockholders "own," but do not control, the firm. Hence, they are not responsible for any debts contracted by the managers, who actually do have such control. On the other hand, the relations between stock and bondholders are similar, since they both expect to profit from the firm without having any responsibility for policy. These are not literally the same people, but they have the same relation to the firm -- that of investors who seek quick profits from the work of others. In this case, the "others" are labor and management.

About the Author

Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."

Photo Credits

  • Comstock/Comstock/Getty Images