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Financial Strategy - Essay Example

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Financial Strategy How Financialisation phenomenon has influenced corporate ownership and control Epstein (2001, 1) defines financialisation as the process where financial institutions, financial markets and financial elites gain higher control over economic outcomes and economic policies or become increasingly important…
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Financial Strategy
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Financial Strategy

Financialisation has influenced corporate ownership and control. Corporate control is basically the mode of its governance and this behaviour is what financial markets has worked to influence and change to align to their own interests. Financialisation has led to a change in corporate control in such a way that managers are disciplined by the prospect of ouster and takeover if they are unable to maximise profits. Because of this, managers are compelled to go for market efficiency improvements such as privately financed equity investments and leveraged buyouts as a way of satisfying stakeholder interests. Basically, managers of corporations are now forced to merge their interests with those of the financial markets. This has eliminated the countervailing force that previously interfered with the ability or willingness of managers to side with excessive financial interests. It has also broke the union-power that used to exist between corporations. This clearly depicts that financialisation has led to a drift in the corporate financial behaviour. Financialisation and its new approach to corporate control have fostered the growth of options like the stock pay option. The main reason behind this is that there is an increased need to align the interests of the management with those of the stakeholders and such options help to accomplish this task successfully. The top management of corporations have benefitted from these stock options and new pay practices and this has generated in managers the interest to maximise the short-lived stock prices. Financialisation has also led to excessive adoption of debt finance by corporations. The main motivation for this is tax code is more favourable to interest payments than on profits. In addition, managers of corporations have also adopted this strategy as a way of draining free cash from the firm leaving little for claimants on the income stream of the firm and putting pressure on workers (Bronars and Deere 1991). The overall effect of financialisation on corporate control is that corporate governance is becoming increasingly beholden to and dominated by financial markets. This implies that corporate managers have been pressurized to import behaviors from the current financial markets and these in turn have affected business decision-making and corporate investment. These investments and decisions include resource allocation whereby corporate managers of non-financial corporations have capitalized on stock repurchases as one of the main mode of corporate resource allocation. This has mainly been encouraged by the extent to which executives of corporations can enrich themselves by manipulating the stock prices of the corporation (Lazonick 2011, 11). These corporate control modes may be profitable and attractive and more profitable to firms. It also gives corporations a range of options for investing under various economic climates and profitability levels. For example, when profits achievable in financial markets are higher than those that can be achieved in the normal product market, then it becomes a motivation to corporation management to invest less in real assets and more on financial assets. However, such strategies may not be long-lasting. Palley (1995) and Palley (1997b), state that it is not good for the financial market behaviors of an economy or corporations are governed by short-terminism and herd behavior. Financialisation ... Read More
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