Corporate Finance

Corporate Finance

AUTHOR: RISHIKESH MISTRY

 

Corporate Finance over the Past 25 Years

 

BRENNAN,(1995) says that the growth of firms whose major asset consists of human rather than physical capital, prominent examples being in computer software and film production, poses a new challenge to theorists and empiricists alike, for the paradigm example underlying most of our theoretical models is the manufacturing firm, which dominated the growth of the economy around mid-century. The new knowledge-based firms have quite different characteristics, since their major assets are autonomous agents rather than inert machines. Finally, relatively little progress has been made in understanding the international dimension of corporate finance. The continuing trend towards the globalization of business activities suggests that transnational considerations will become more important in the future. . The author started this brief survey by sketching the state of corporate financial theory 25 years ago and then describing how the prevailing paradigm broke down under the weight of new developments. A second area in which research effort lags practical developments is the proliferation of corporate security types, such as LYONS, PERCS, and ELKS. While general accounts of securities innovation have been offered, there appears as yet to be no systematic study of the nature of the benefits offered by these and other tailored securities.

Corporate investment and financing with uncertain growth opportunities

 

CHEN, B. et.al (2021) describes that this paper develops a continuous-time model of the firm’s sequential investments when the future growth opportunity may arrive with uncertainty. The existing literature neglects the relationship between first-stage investment and future expansion with arrival uncertainty. For levered firms, their results show that the future growth uncertainty has a positive significant impact on the initial investment decision. This impact is non-monotonic, in that it is increasing (decreasing) with the high (low) arrival rate, depending on the relative dominance between the degree of growth uncertainty and future debt overhang. Although they haven’t illustrated whether such type of uncertainty is a necessary mechanism through which the initial investment is impacted by future growth opportunity, it provides a valuable economic guidance on the capital budgeting decision, especially for those projects with large scale expansion opportunities while there are uncertainties to realize them.
Corporate Finance Policies and Social Networks

FRACASSI, C. (2017) Concludes that Reliance on decision externalities is widespread in society and arises from constraints on their ability to process or obtain costly information. This paper pro-videos evidence that decision externalities could also play an important role in large corporations. Managers seem to rely on their social networks when making corporate finance policy decisions. Using biographical information of key executives and directors, they create a matrix of social ties from current employ-mint, past employment, education, and other activities. They had demonstrated that these social connections influence the way companies make corporate finance decisions. In particular, companies are influenced in their policy decision-making process by their nearest social neighbours. They addressed concerns for endogeneity problems and direction of causality using proxies for similar characteristics and preferences of managers. The results extend to other discretionary corporate finance policies such as R&D, cash reserves, and interest coverage ratio.

Corporate Governance, Finance and the Real Sector.

 

FULGHIERI, P. and SUOMINEN, M. (2012) states in their model that the differences in levels of the agency costs of debt and equity across countries and industries, together with differences in production technologies, jointly determine the financial and industrial structure of the economy is presented. The Basic model shows that i) the strategy of each entrepreneur maximizes his payoff given the strategies of the other players; ii) the goods markets clear and iii) the firms’ capital structure and the number of entrepreneurs entering the market are such that no additional entry can occur with entrants earning nonnegative profits. They have used a structural model to make predictions on the relations among several endogenous, codetermined industry-level and firm-specific variables. In their model, the differences in the levels of agency costs of debt and equity across countries and industries, together with differences in production technologies, codetermine industry concentration, firms’ technology choices, profitability, and financial structure. We show that in countries and industries characterized by poor corporate governance, industry competition is less intense, and firms rely more on inefficient technologies, have greater leverage, and have more concentrated equity ownership. Then they have used model to study the effects of financial market policies.

Good Practices in Empirical Corporate Finance and Accounting Research

 

GRUSZCZYŃSKI, M. (2018) says that the corporate finance and accounting research calls for applying modern statistical-econometric methodology, with the extensive use of sets of microdata on companies. For this purpose it is advisable to use several “good practices” in order to avoid unnecessary efforts leading to incorrect results. The research projects in corporate finance and accounting applying the techniques of micro econometrics are exposed to a number of risks, most of them connected with uncertainties about relevant methodological approach. The financial micro econometrics topics emerge as the field for examining both practical and theoretical questions about applying econometric techniques in corporate finance and accounting research based on the use of microdata. This paper offers a short survey on recommendations concerning quantitative research in corporate finance and accounting. Thoughts of Faff (2017), Kennedy (2002), Adams (2017) and Hyndman are supplemented by the author’s own experience. The catalogue of good practices is by no means exhaustive although it may serve as the starting point for considerations about new research projects in corporate finance and accounting.

FinTechs and the Market for Financial Analysis

 

GRENNAN, J. and MICHAELY, R. (2021) assembled novel data to describe their capabilities, users, and consequences of equity market intelligence financial technology firms (FinTechs). The growth in Equity market intelligence FinTech has been significant. FinTechs are introducing new technologies into the financial sector. Much of this revolution in the financial industry is happening from outside because entrepreneurial start-ups are attempting to disrupt incumbents. They studied a group of these start-ups called equity market intelligence Intech that streamline and synthesize many data sources, including non-traditional ones, relevant for equity investment recommendations. To help us understand who uses these Intech, how they use the information from them, and their potential impact on price dynamics, they hand-collect Intech data and merge the data with a broad combination of data sets. They thus have an extraordinarily rich view of Internet users’ information sets and how they use them. They also examine the potential value and challenges inherent in extracting information from the non-traditional sources that these Intech aggregate. They evaluate millions of financial blog posts linked to specific equities and find evidence to suggest that there is crowd wisdom in these data. However, our analysis also reveals that it is very challenging to uncover the crowd wisdom without a FinTech investment tool that can identify it. Importantly, their econometric investigation suggests that FinTechs are beneficial to the underlying goal of market efficiency. Overall, our findings suggest that the information presented to investors by FinTechs is likely to play an increasingly important economic role.

 

 

Capital Reserve Studies

 

STAEBLER, P. (2021) concludes that the Capital reserve studies are a worthwhile endeavour for appraisers who have a strong financial under-standing and an understanding of property components. Appraisers are in the unique position to offer their analytical skills to reserve study clients. Appraisers’ potential reserve study clients are often known to the appraisers through their appraisal work. Existing clients and buyers of familiar types of properties could become reserve study clients. Another valuable tool in increasing connections to this client base is the Community Associations Institute, 10 which has local chapters all over the United States and Canada. The chapters are usually composed of property managers, board members, community volunteers, and service providers such as appraisers and/or reserve analysts. If reserve studies become a major part of an appraiser’s business, then it is highly recommended that the appraiser seek the Reserve Specialist (RS) designation offered by the Com-munity Associations Institute.

Investment and Competition

 

AKDOĞU, E. and MACKAY, P. (2008) examines whether industry structure affects corporate investment patterns. Real options theory shows that the value of deferring irreversible in-vestment in the face of uncertainty must be weighed against tube threat of losing investment opportunities to competitors. Overlaying this basic wait-lose trade-off, industrial organization theory shows a strategic role for investment. Consistent with these theories, they found that firms in monopolistic industries exhibit lower investment-!? Sensitivity and are slower to invest than firms in com-putative industries. They also found that investment-ivy sensitivity and investment speed are highest in oligopolistic industries, suggesting that the value of investing strategically can outweigh the value of waiting. Confirming the importance of strategic investment in oligopolistic industries, they found that these industries experience less entry and more exit than competitive or monopolistic industries.

Corporate Stakeholders and Corporate Finance

 

CORNELL, B. and SHAPIRO, A. C. (1987)  suggests some of the ways in which corporate financial policy depends on the role of non-investor stakeholders. A key concept in the analysis is the distinction between explicit contracts and implicit claims. If only explicit claims are considered, then Stakeholders will not play an important role in the financial policy of most firms because their explicit claims are generally senior to those of stockholders and bondholders. However, many of the claims issued by management to non-investor stakeholders take the form of tacit promises of continuing supply, timely delivery, product enhancement, and job security. Since the pay-outs on these implicit claims are not set. The prices stakeholders pay for such claims depend on the condition of the firm, including its financial policy. Among the implications of the stakeholder approach for financial economics are the following. First, the response of stock prices to announcements depends on the extent to which the announcement conveys information to non-investor stakeholders as well as invest-tors. Second, management may choose financial policies in order to signal their intent to make payments on implicit claims or to bond promised pay-outs on implicit-it claims. Finally, the stakeholder approach suggests that the costs of financial problems are likely to be larger than the direct cash drain indicates, because they make it difficult for the firm to sell implicit claims.

Review on financial bubbles

 

HARSHA, S. and ISMAIL, B. (2019) says that Identifying unambiguously the presence of a bubble is an open debate problem in standard econometric and financial economic approaches. Initially, it was very pleasant to hear the idea of “free from fundamental” tests like tests based on durations and tests based on neural networks. But unfortunately, such procedures have failed to capture more attention from the researchers due to the uncertainty in the performance of the approaches and their mathematical complexity. In this direction, the tests based on Johansen-Ledoit-Sornette (JLS) model produce promising results. Clearly, future research in capturing and modelling non-linearity in financial bubbles would be of great interest.

CONCLUSION

To conclude, Corporate Finance includes or covers all the sub sections which of them are shown above. Over the past 25 years, corporate finance has undergone significant transformation driven by technological advancements, globalization, regulatory changes, and evolving market dynamics. Corporate investment and financing decisions in the context of uncertain growth opportunities require careful consideration and strategic planning. Firms must balance the pursuit of growth with managing financial risk and optimizing capital allocation. Key considerations include Risk Management, capital budgeting etc. Social networks have become integral to corporate finance policies, influencing capital access, information sharing, decision-making, talent management, brand reputation, market intelligence, and risk management. The presence of social, educational, and professional connections among directors and top executives affects firms’ corporate policy decisions. It is important to understand how and why individuals imitate, learn, confirm, or adopt contrarian behaviour relative to the social environment. When the firm issues both debt and equity to finance the first-stage investment, we show that the financing decision can be greatly affected by the interaction between the arrival possibility and growth size. The relation between optimal leverage ratio and growth size also presents a non-monotonic shape. A capital reserve study identifies the components that an association or community is responsible for and examines the status of the reserve funding for these components’ future maintenance, repair, and replacement. A reserve study includes a construction component analysis and a financial analysis. Given the importance of industry structure to investment documented in this study, it seems likely that industry structure would also affect investment of same firm segments active indifferent industries. Recent decades have witnessed a series of damages in the financial sector due to the unpleasant movements of prices beyond certain limits. These movements are commonly termed as Financial Bubbles.

REFERENCES

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