Self-Serving Actions That Management May Essay
- Length: 10 pages
- Sources: 10
- Subject: Economics
- Type: Essay
- Paper: #140949
Excerpt from Essay :
A company may be profitable, but not growing, and vice versa, thus affecting leverage (Aggaral and Zhao, 2007).
b. induce a negative relationship between firm value and leverage; conversely, if a firm is perceived with negative or flat growth, leverage is affected. Interestingly enough, new research shows that there are some micro-factors outside of growth that correlate to value and leverage. These include the way a corporation is managed, the size of the Board, the impression of large dividends and lack of focus on shareholder value, and milking of an industry (e.g. yellow pages in the day of the Internet). In addition, certain governmental regulations that are perceived as heavy handed and/or not conducive to growth or -- what is most critical -- perceived growth have considerable negative effects on leverage. Whether this psychological perception is valid or not, the research does not comment -- but it is surprising that an external person would look at board size, perceived growth, and other micro-trends as negative factors in leverage (Ibid and Aivazian, 1980).
How can an incumbent firm in a given industry use leverage to deter entry? Depending on cash flow and market position, firms that exist in say an oligopoly can use debt to commit to a longer-term strategic position that negatively affects rival firms who might want to enter that market. For instance, debt can be managed in a way that commits the organization to such a competitive price or delivery ratio that an entrant's lender would not even think of financing entry because the market is so saturated and the new entrant unable to have any form of positive cash flow. In a way, this is a hyper-sensitive competitive position because it commits the original company into servicing that debt and, therefore, a longer term commitment to the marketplace. In addition, it presupposes both debt as a strategic weapon and the market being able to self-regulate by credit rationing (Showalter, 2009).
Compare and contrast joint ventures and strategic alliances as a means by which a firm can compete more effectively in its industry. Essentially, the difference between joint ventures and strategic alliances comes down to two major factors: length and breadth of proposed arrangement and commitment of principles to each other and the market. A joint venture is more formal, contains more legal responsibilities and results in an independent firm being created by two or more other firms; whereas a strategic alliance is an agreement to cooperate in any value-chain activity from research and development to marketing and sales. In the age of globalism, for instance, many organizations realize that they do not have one or more critical aspect to effectively manage their product in a certain area -- distribution in the Far East, for instance. In this case a manufacturing company might form a strategic alliance with a distribution or warehousing company that specializes in the area needed. Advantages and disadvantages revolve around the resources and expertise a group can bring to the table; strategic alliances can be win-win for a time, but if they are not profitable, easily dissolved. A joint venture is much more serious, and should be thought of as a semi-permanent relationship. For instance, if a company wants to enter certain foreign markets, it might behoove them to form a joint venture with a company in that foreign environment -- limiting export/import, taxation, and/or regulation issues (Waggoner, 2009).
8. List the external governance groups that influence a firm, and explain how they curb self-serving decisions by a public firm's management. Repeat for internal governance groups. External governance is a set of customs, laws, policies, and institutions that affect the way a company is administered and controlled. Essentially, it was put in place to ensure a higher level of accountability within an organization. In effect, one school of thought holds that external governance protects shareholders and the public from unscrupulous practices, something, for instance, that the recent ENRON scandal showed to be of limited value. This, in fact, resulted in the 2002 passing of the Sarbanes-Oxley Act, which intended to restore public belief in corporate governance (Bumiller, 2002). Examples of external governance are all Federal, State and Local taxation agencies; the Securities and Exchange Commission; any governmental agency that participates or requires permits or licenses; large institutional investors, and external legal entities concerned with operations (environment, etc.).
Internal governance, on the other hand, is based on the type of organization and its structure and make-up. In some organizations, for instance, the Board of Directors is very powerful, in others; the CEO and COO control most of the major decisions. Internal stakeholders include employees (union groups or others), lower level management, human resources, the market pool, at times suppliers, consumers and in newer firms, even the very nature and structure of management itself. Internal governance has a two-pronged responsibility: first to avoid external mediation and, second, to ensure that appropriate managerial steps are utilized on a tactical basis to underlay profit and ROI. These are essentially the systems of rule and laws created by the company or the company's board to allow business to occur (Internal Governance, 2009).
9. Discuss the various advantages of being a large (vs. small) firm.
The size of the firm is often dependent upon the product or service, the marketplace, ease of manufacturing, and the ways in which economies of scale either positively or negatively impact that organization. For instance, a company that makes custom opal jewelry could not become too large because they would be unable to delivers the kind of expertise and uniqueness that their business model focuses upon; similarly, it makes sense for an appliance company to be large so that parts, labor, and materials are spread out and the company allowed to leverage its skills better. Debt, ability to borrow, human resources, and market need also help regulate a smaller vs. A larger company. Some products that are heavily labor intensive (e.g. catering or floristry) require huge amounts of human labor to produce, deliver, and set up -- yet the market has set such a low margin on these products that one can almost net more by remaining small -- adding more staff, more vans, etc. does not always translate into more profit. Marketplace and competitive nature also plays into this question, which revolves around both emotional and logical decisions. A large corporate can often provide better benefits and add-ons for employees; but has a longer process to implement solutions and/or solve problems. A smaller corporation is less rigid, but has fewer opportunities for growth and actualization (Melvin, 2010).
10. Discuss the general assertion of the Efficient Market Hypothesis (EMH) about the price of a security, and its specific assertions. The EMH tells us that financial markets are informationally efficient and thus one cannot achieve returns that are consistently in excess of average market returns. There are three major versions of the theory: weak, semi-strong, and strong. Weak EMH claims that price on assets reflects all the historical information based on their performances. Semi-strong claims both that price reflects publically available information and that any change to the price point reflects new information. Finally, strong EMH claims that prices and price changes affect both public knowledge of the item as well as hidden documentation. Those who believe in this theory say that if the analysis is done correctly, the trends and internal information on a given item will provide anything needed to predict its future performance. Critics say that it is not the knowledge that is inherent in the instrument or market that relying too much on this internal philosophy causes capitalists to forget the basic principles of Keynesian economics, or "the movement to deregulate the financial industry went too far by exaggerating the resilience - the self-healing powers - of laissez-faire capitalism" (Cassidy, 2010).
In order to find this theory sound, one must believe that historically share or market prices self-regulate and adjust to the point at which a sort of equilibrium takes place -- almost a universal grounding of laws. Of course, we know that type of behavior rarely exists in nature. The domino effects from new competitors, market conditions, and global business are not always accurately within the structure of the product or service. Thus, this theory is often termed behavioral economics which contrasts with pure Keysian's more practical concrete model of expectations (Beechey, Gruen and Vickery, 2000).
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Aivazian, V. a. (1980). Corporate Leverage and Growth. Journal of Financial Economics, 8(4), 379-99.
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