Financial Management1

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FIN202-Financial Management

• L1-Ch.1 The Financial World
  • Objectives & Conflicts
    • Possible objectives of the firm
      • Target market share
      • Employee agitation(焦虑不安）
      • Survival
      • Creating an ever-expanding empire
      • Maximization of profit
      • Maximization of long-term shareholder wealth
    • *The assumed objective for finance: maximizing long-term shareholder wealth.
      • The practical reason
        • Multiplicity of objectives is difficult for decision making.
      • The theoretical reasons
        • The ‘contractual theory’（契约理论）
          • High risk of shareholders
          • Limited risk of workers, suppliers and banks
        • Society is best served by businesses focusing on returns to the owners (AS)
    • Conflict between objectives
      • Pro-capitalist economists（资本主义利益）
        • Paramount objective: shareholders’ interests (will benefit the firm and the society if the firm remain within ‘the rules of the game’)
      • Left-wing（左翼）
        • Primacy of workers’ rights and rewards (employees'’ interest maximized)
      • Balanced stakeholder approach
  • Shareholders wealth & Profit
    • What is shareholder wealth?
      • Maximising wealth can be defined as maximising purchasing power.
      • Maximising shareholder wealth means maximising the flow of dividends to shareholders through time. -----A long-term perspective
    • Profit maximisation is not the same as shareholder wealth maximisation
      • Prospects: Profit is a short-term perspective
      • Accounting problems：Judgment, guesswork, or even manipulation（操纵）
      • Risk：Profit figures do not allow for variability
  • Ownership and control
    • Problems
      • Diffuse and fragmented set of shareholders (不同集团的股东）
      • Control often lies in the hands of directors/executives
      • Separation, or a divorce, of ownership and control
      • The management team may pursue objectives attractive to them
        • Examples: perks, empire building, avoiding risky projects …
      • An example of the principal–agent problem（委托-代理）
    • Agency costs/ theory
      • The costs of attempting to ensure that agents act in the best interests of principals
        • Monitor managers’ behavior
        • Create incentive schemes and controls for managers to encourage the pursuit of shareholders’ wealth maximization
      • The loss resulting from failure to get them to act in this way
    • Corporate governance (Some solutions to Agency problem)
      • Annual general meeting
      • Corporate governance regulations
      • Linking rewards to shareholder wealth improvements. Example: stock option
      • Sackings: Humiliation & financial loss of managers
      • Selling shares and the takeover threat
      • Information flow
    • The financial manager plays a pivotal role in:
      • Interaction with the financial markets
      • Investment
      • Treasury management
      • Risk management
      • Strategy and value-based management
    • The flow of funds and financial intermediation
    • Savings into investment in an economy with financial intermediaries and financial markets