What disadvantage do shareholders face with equity financing during bankruptcy?

When a company goes into bankruptcy, the priority of claims against the company’s assets comes into play, greatly affecting shareholders. Shareholders rank below all secured and unsecured creditors in terms of their claims to the company's assets. This means that before any distributions can be made to shareholders, all creditor claims must be satisfied first. In a bankruptcy situation, this often leads to shareholders receiving little to no recovery for their investments, especially if the company's liabilities exceed its assets.

This hierarchical structure in bankruptcy is crucial because it illustrates the inherent risks associated with equity financing. Unlike creditors, who have a legal right to be repaid, shareholders, being residual claimants, only get paid after all other obligations are settled. This standing often results in significant financial loss for shareholders during bankruptcy proceedings, reinforcing the disadvantage they face compared to creditors.