Analysis of Corporate Finance - Essay Example

Sadly, when many firms find themselves with excess capital, they tend to waste it”. Is this a fair assessment? You can base your argument on any country you find appropriate Operating in the modern commercial market can be a challenging experience particularly for firms and entrepreneurs that face significant financial pressures. On the other hand, those firms that have managed to achieve a stable rate of growth are more likely to survive on the long term. According to Cooper et al. (1997) firms tend to be accepted by their market in accordance with their performance either in the short or the long term. For this reason it has been supported by the above researchers (1997, 75) that “at least in the long run, well-performing organizations survive while poorly performing ones disappear”. The above assumption is supported also by the view of Penrose (1952, 810 in Cooper, 1997, 750) who noticed that “positive profits can be treated as the criterion of natural selection -- the firms that make profits are selected or adopted by the environment, others are rejected and disappear”. In order to understand the needs of the firms operating in the modern market, we should primarily examine the issues related with their regulation. In this way their behaviour both in cases of positive performance as well as in failure could be evaluated. In this context, it has been supported by Fisch (2004, 39) that ‘historically, the regulation of business has been split between corporate law and securities law; corporate law is contractual, enabling, and administered by the states; securities law is national, mandatory, and administered by the Securities and Exchange Commission and the self-regulatory organizations’. In other words, in order for a firm to be successfully implemented within a particular market it is necessary to follow strictly the principles of the specific market. This ‘strategy’ will help the company to be better structured and be better informed regarding the administration of its profits. The same issues could appear in the case of firms that fail to meet the requirements of the market or understand the needs of consumers in a particular region. However, because in the particular paper the issue under examination is the firms that achieve a positive performance and increase their capital, the examination of the issue of firm’s financial administration will focus specifically in firms of this type. Furthermore, the legal and financial framework that will be used as a ‘pattern’ towards the investigation of the above issues is that of the US. The choice of a particular country has been based on the need for specific provisions used as examples in the analysis of the subject involved. The behaviour of the firm in a particular market is closely monitored by the relevant governmental authorities (in all countries around the worlds). Specifically, in the case of USA Song (2003, 257) mentions that ‘in the summer of 2002, Congress passed the Sarbanes-Oxley Act in response to a barrage of corporate governance crises and flagging investor confidence in the securities markets’. The above legislation is mentioned in order to understand the efforts made by the US government in order to control the operation of firms within its markets. In a high regulated market, like this of the US, firms need to follow specific rules while their activities are monitored through a series of continuous controls and audits. From this point of view, the administration of the firms’ profits is expected to be appropriate focusing on the necessary investments (in accordance with the firm’s financial deposits and its targets for the future). On the other hand, the existence of a detailed legal framework ensure that the investment of the firms’ profits in the country follow specific rules protecting the stockholders’ interests. In this context, Paredes (2004, 1063) supported that ‘corporate law is one small part of a complex U.S. corporate governance system comprising a wide array of complementary institutions, incentive structures, constraints, and practices that work together to create a whole that is greater than the sum of its parts’. The existence of legal rules regulated the corporate activities should be not regarded as a constraint towards the financial development of a particular company. On the contrary, they should be regarded as a valuable tool for the protection of firm’s stakeholders from potential frauds. Towards this direction, Kay et al. (1995, 84) referred especially to the Companies Acts of 1844 and 1856 and noticed that these Acts ‘established the limited liability corporation, and many contemporary commentators expected an explosion of fraud and irresponsibility but they were proved to be wrong; there were inevitable scandals and crashes, but the majority of corporations - which still controlled only a modest proportion of economic activity - were run with prudence and integrity’. More specifically, it is made clear that the existence of the above rules aims to the protection of all persons involved in the corporate activities and not to the limitation of the firm’s operations. Indeed, the support of innovation in firms has been regarded as a priority for all legislators around the world. Towards the same direction, O’Sullivan (2001, 4) focused on the relation between the innovation and the managerial plans and came to the conclusion that ‘to date, research on the relationship between the process of innovation and corporate governance has been limited because the leading perspectives advanced in the contemporary debates on corporate governance—the shareholder and stakeholder theories—have largely ignored the requirements that the developmental, organizational, and strategic characteristics of resource allocation place on the governance of corporations if they are to be innovative’. In other words, successful corporate governance is a primary requirement for the financial development of any company. However, there are cases where the strategies followed in the context of the corporate activities are against the interests of the general public and for this reason the intervention of the state is considered as necessary. However, it should be noticed that the firm’s managers proceed to all appropriate initiatives for the retention of the firm’s profits and the increase of its performance on the long term. For this reason the study of Botan (1997, 188) showed that ‘strategic communication campaigns are conducted under many labels including public relations, community relations, constituent relations, crisis management, health promotion, issues management, investor relations, membership relations, outreach, public affairs, public health, public information, risk communication, strategic advertising, strategic marketing, and the like’. The above initiatives are just indicatives regarding the efforts made by managers in all firms in order to improve the performance of the firms in the modern market. There are of course cases where such a target is not set. Then it is the time for the State to handle the issue. Firms have developed a series of strategies in order to achieve a profitable investment of the profit. At a next level, in order to understand the methods followed by companies we should present the sources of capital in corporate activities. In this context, it is noticed by Ruhnka (1985, 45) that “the primary source of capital for most start-up and development stage companies is equity capital raised through limited stock offerings that are exempt from expensive federal and state registration requirements”. In this context, the investment strategies followed by firms have to be formulated in accordance with the needs and the requirements of the particular firms (as well as its financial strength, its position in the market and its prospects for the future). For this reason, it has been supported by Ruhnka (1985, 45) that “effective planning for an exempt stock offering requires that the financial needs of a business be coordinated with the legal requirements for exemption; federal and state regulations control the maximum dollar amount of securities that can be sold in an exempt offering, the number of investors to whom such offerings may be sold, and required minimum intervals between offerings”. Stock offerings are just one of the more investment strategies available to firms. In terms of appropriate financial planning, a firm is required to have developed a scheme of investment that could serve for the administration of its profits when the performance of the firm reach a significant level. In accordance with the findings of the study of Davidsson et al. (2003, 1) “firms that have succeeded in surviving two to three years and that have gone through a number of crucial phases attain a stable foundation from which they can continue to develop”. The above assumptions are in accordance with the views of Gibb and Scott (1986, also included in Davidsson et al., 2003, 1) who “introduced the concept "base for potential development" as an expression of this stabilizing condition: a development base has been attained when the newly started firm is developed sufficiently concerning resources (capacity), experiences, control, leadership, and idea; with this basis, the firm then has the possibility to develop and to manage future environmental changes and thereby can be considered to have achieved stability”. This scheme proposed by the above authors is just indicatives. In fact there are many strategic schemes available to the companies that need to proceed to an investment decision. The number of these schemes proves their preference by the firms around the world as well as the value of investment as a main ‘vehicle’ for the survival of the firm in the long term. In order to use appropriately the investment schemes proposed in the literature, corporate managers need to be on continuous communication with all firm’s stakeholders. For this reason the study of Martin et al. (1996, 174) showed that ‘communication with a corporations financial stakeholders is heavily regulated by federal statutory law (Securities Act of 1993, securities Exchange Act of 1934 and the Investment Advisers Act of 1940) which establishes only the minimum amount of information a company must make public; by itself, complying with that minimum does not definitively establish the effectiveness of a companys financial communications”. The above analysis proves that the capital of the firm under any circumstances is being administered appropriately by the firm’s managers who apply the necessary investment plans. There are of course occasions when the behaviour of the managers is not the required one and the profits achieved are not administered appropriately. These cases are limited and they are monitored by the state. References Botan, C. (1997). Ethics in Strategic Communication Campaigns: The Case for a New Approach to Public Relations. The Journal of Business Communication, 34(2): 188-193 Cooper, A., Folta, T., Gimeno, J., Woo, C. (1997) Survival of the Fittest? Entrepreneurial Human Capital and the Persistence of Underperforming Firms. Administrative Science Quarterly, 42(4): 750-776 Davidsson, P., Klofsten, M. (2003). The Business Platform: Developing an Instrument to Gauge and to Assist the Development of Young Firms. Journal of Small Business Management, 41(1): 1-5 Fisch, J. E. (2004). The New Federal Regulation of Corporate Governance. Harvard Journal of Law & Public Policy, 28(1): 39-46 Martin, H., Petersen, B. (1996). CEO Perceptions of Investor Relations as a Public Relations Function: An Exploratory Study. Journal of Public Relations Research, 8(3): 173-209 O’Sullivan, M. (2001). Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany. Oxford: Oxford University Press Paredes, T. A. (2004). A Systems Approach to Corporate Governance Reform: Why Importing U.S. Corporate Law Isnt the Answer. William and Mary Law Review, 45(3): 1055-1105 Ruhnka, J. (1985) Raising Equity Capital Though Limited Offerings: Criteria for Choice of Exemptions. Journal of Small Business Management, 23: 45-53 Song, D. (2003). The Laws of Securities Lawyering after Sarbanes-Oxley. Duke Law Journal, 53(1): 257-280 Read More