Corporate Finance Strategy - Essay Example

The corporate finance is a complex and highly competitive financial strategy designed to give a company many cutting edge advantages in the emerging economy. The process of rapid globalisation has brought forward issues and factors that were hitherto not very relevant. Since corporate finance basically relies on the market efficiency, the dynamics of the market and the factors that influence it are of major concern to the corporate governance. The corporate financial strategy involves intricate and integrated methodology of interdependence of various pertinent factors like growth, credit, interest rates, capital investment and returns etc. It is therefore important that a company must be innovative and highly efficient in managing its long term and short term financial perspectives in a manner that promotes confidence in its investors and customers. The fast changing technological innovations have facilitated a wide scope of linking elements of finance and market derivatives that have considerable influence on each other. Very often, the market driven compulsions, affect the financial outcome of the corporate bodies, making them financially vulnerable to market forces. Hence, the companies that are listed on the stock exchanges and have definite ratings by the various well respected investors’ services must ensure that they have good feedback and accordingly formulate strategy to maintain good market position. Moody’s investors’ service is one of the world’s most trusted and utilized services that provides the investors with the protection of integrity of credit vis-à-vis the companies that it rates according to their financial and performance based fundamental strengths. It core business activities include credit rating, research and analysis providing a transparent system of market evaluation and upgrading the level of assessment of stocks with information based values. The most important aspect of Moody’s credit ratings is that it help the investors to analyse the credit risks for the securities and stocks of the company. Hence once a company gets a credit rating from the Moody, its credibility is established in the market. The higher the credit listing, the better the chances are for the company to maintain a low interest cost and high stake in credit-debt ratio. Moody’s approach to credit ratings, are based on the perspectives over a long period of time, within which the company would be not only be able to survive and succeed but also be able to meet its credit obligations. Therefore, it looks at the fundamental credit strengths and weaknesses and the management that are the driving forces of the company. The overall business plans and financial statistics of the company are comprehensively analysed for a full economic cycle, comprising of five to ten years and providing the investors with the relevant information that would give a clear picture of its performance and long term perspectives. Ratings are given only when the companies have long term scope with sound fundamentals to back them through short term adverse market forces. Another aspect of Moody’s rating is the considerable influence that it exerts on the market derivatives that indirectly affect the decisions of the investors. That is one of the reason that even when the Moody’s rating goes down, the performance and credibility of the company is not much affected. The lowering of credit rating is often associated with the current volatility of the market forces but it is assumed that the fundamental strength like good management, technology, infrastructure etc. would enable the company to withstand the adverse market forces responsible for the volatility of the market. It is seen also inferred that the Moody’s credit ratings have the advantages of getting good credit backing from the corporate investors like banking industries, public issuance of bonds, insurance policies, derivative transactions and others because the credit rating provides them with assessment of credit risk. This is a vitally important factor that forces the companies to seek good credit ratings from Moody’s invest services. Moody’s rating also facilitates information, both public and private that is crucial to investors for making good investments. The stocks that are listed on the stock exchanges and have Moody’s rating are considered more transparent in their activities and thus more credible as far as their future options are concerned. The market efficiency depends on the information that is available regarding the company. Broadly speaking, the market would reflect weak prices if only the historical data is known. Moderate efficiency would show the publicly known information and if all the information about the company (public and private) is known, market efficiency is strong and reliable. Roberts (1967) and Fama (1970) have operationalized this hypothesis in Famas well-known saying that ‘prices fully react to all available information’ by placing structure on various information sets available to market participants. This theory of efficient market has come under lot of controversy mainly because of the fact that if information was the driving force for price determination of the stocks in the market, them there should not have been any need for the process of forecasting and the changes that make markets volatile and extremely vulnerable to external forces. Had this been, solely the case, the investors would not only have taken advantage of current market but could also have manipulated it for their own vested interests! In markets where, according to Lucas (1978), ‘all investors have rational expectations… prices do fully react to all available information and marginal-utility-weighted prices follow martingales’. Lo (1999) further simplified it by including the concept of 3Ps: prices, probability and preferences in the total investment management, which form the basic principle of modern economics of demand and supply. Hence, when the investors form the expectations rationally and the markets aggregate the total information efficiently, the resulting prices incorporate all the available relevant information. The probabilities affect everyone concerns (consumers and producers) regarding the uncertainties of income, cost and business conditions, especially in the changing times. Grossman (1976) and Grossman and Stiglitz (1980) argue that ‘perfectly informationally efficient markets are an impossibility, for if markets are perfectly efficient, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse’. In the emerging financial market, the competition becomes a highly relevant issue that promotes dissemination of information and backed by technology boom, the investors has several means to corroborate the accuracy of the information. This in turn, gives a much wider scope of preferences and options for the stock, which ultimately becomes a major determinant for stock market prices. The corporate finance and market efficiency are co-related to the extent that any major decision making process and change in the primary factors like management and long term missions of the companies have far reaching affect on the stock market. The hugely competitive business environment, in the era of globalization, has promoted a more widely used knowledge based investment that not only benefits the companies but opens a vast area of opportunities for small and big investors. The empirical and theoretical studies of the efficient market theories has greatly contributed in understanding the compulsions of corporate finance and market derivatives that have wide ranging influence in the emerging new markets. The Moody’s credit rating supports the wider implications of scientifically analyzed information of the companies that facilitate unbiased and independent assessment of the credit risk that it may pose. The rating, therefore have twofold advantages. While on the one hand, the companies may benefit by getting more short term credits in adverse situations, the investors get a fair idea of the fundamental strengths and weaknesses of the companies concerned. Reference Fama, E. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance 25, 383-417. Grossman, S. (1976). On The Efficiency of Competitive Stock Markets Where Trades Have Diverse Information. Journal of Finance 31, 573-585. Grossman, S. and J. Stiglitz. (1980). On the Impossibility of Informationally Efficient Markets. American Economic Review 70, 393-408. Lo, A. (1999). The Three Ps of Total Risk Management. Financial Analysts Journal, 55, 87-129. Lucas, R. (1978). Asset Prices in an Exchange Economy. Econometrica 46, 1429-1446. Read More