Finance and Potential Areas of Development - Literature review Example

Review of Literature on Finance and Potential Areas of Development for Further Research Introduction: Finance involves application of financial and economic standards with intentions of getting the most out of the wealth and value of a business (Groppelli & Nikbakht, 2006, pp.3-4). The implications of finance are not only related to business organizations. There is a worldwide connection between the financial markets through the use of telecommunications. In a country’s perspectives, the financial systems have been found to have significant roles that include settlement of payments, collection of funds and subdivision of shares, transfer of resources as per need, management of risks, gathering and securing financial information, and so on (Merton & Bodie, 1995, pp.1-10). Thus the concept of finance includes several underlying theories and understanding that make the system applicable towards the achievement of the financial goals and objectives of the business organizations or the world as a whole. The present study focuses on a literature review thereby discussing on the studies of several researchers on the topic of finance and would try to determine the potential areas of development for further research. Literature Review on Finance: The following literature review has been based on the studies conducted by several researchers as obtained from journals and different articles. These literatures have been particularly focused on the severe issue of economic and financial crisis that is capable of impacting the entire world through the phase of recession. The studies have been based on the issues of the theories discussed by the researchers and no quantitative analyses have been involved. The study has been narrowed down in the sense that irrelevant materials have not been included in the review. Since the length of the paper has been limited, hence number of sources has been considered accordingly. However the researches have been analyzed critically determining their objectives, and the strengths and weaknesses of the studies. In terms of the purpose of the study, only those researches have been included that are appropriate and relevant to the financial literatures and readers would be able to relate to the issues relevantly. A study conducted by Christian Marazzi reflects an understanding of the financial crisis and the nature of the problems considering the transformation that have been taking place over the years. Marazzi is an Italian economist who conducted an analysis of the global crisis that he considered as a new type of crisis that involved neo-liberal financial capitalism. He focused on the problems related to finance that have been mounting up over the years. Concentrating on the recent global economic crisis, he stressed on the level of unemployment and difficulties that the world was supposed to be encountered with. He mentioned that the financial deficits were leading to insolvency crisis hampering the banking system as a whole. In this regard he criticized the easy solutions considered by reformists. (Bria, 2009, pp.388-394). Marazzi’s study can be considered to be focused and relevant to the issues and impacts of financial crisis. He has tried to related theoretical aspects with the prevailing financial status across the world. However it can also be said that the study could be tried to be more specific in determining the measures that might effectively resolve problems associated with financial crises. Similar to Marazzi’s the study conducted by Barsky and DeLong lacked the wide ranging aspects and approach to specific measures in the context of financial crises and their impacts. Barsky and DeLong in their studies discussed about the fluctuations of the stock markets. According to them, fluctuations in the stock market are reflected by the asset pricing model that considers the present-value concept in the context of the efficient markets. The fluctuations that have been visible in the US financial markets over the years have been obtained to be in consistence with the model that considers the changes in present and expected prospect dividends that calls for determination of the expected growth rates by different investors (Barsky & DeLong, 1993). Thus it can be analyzed that these studies considered the financial theories related to cash flows and stock markets and these factors have been clearly defined. The authors have also significantly evaluated the defined issues. However there is a lack of focus on other issues that are relevant in understanding of the financial crisis. The topic of efficient markets has been discussed by Schleifer concentrating on EMH or efficient market hypothesis. According to this hypothesis, as studied by Schleifer, financial markets of the US bonds or stocks that are considered as the real markets of finance, are thought to be efficient financial markets. However this theory can be understood to be based on present financial information that might even represent exceeded returns and profits. He stressed on the fact that individuals often decide financial issues without considering long-term information. Thus dependence only on human beliefs proves to be fatal for the concept (Shleifer, 2000, pp.1-19). Although the language has been structured and the concepts have been clearly mentioned and discussed in the study, the author has not been able to bring out any relevant idea for the future that might enable investors not to depend on present information only. Shiller studied about the irrational exuberance that focuses on the behavior of the investors in stock markets. According to the study, the irrational behavior of investors is one of the primary causes of the increase in prices leading to more interests of the investors. The study presents the puzzled behavior of individuals regarding the financial markets and high prices (Shiller, 2005, pp.1-9). This study can thus be obtained to be based on the psychological understanding of the investors. The author has structured his arguments in an easy and clear flow that focuses on the behavioral causes behind rise in financial crises. However, the study would have been more effective if the author provided with suggestions for the future intending to correct the nature of investors. Also, the study has been narrowed down to one single issue and not including the wide ranging aspects of crises. Studies conducted by Shleifer and Summers stressed on the alternatives available to the concept of efficient markets. Their study was based on the assumptions that there are certain investors who are not rational in nature; their investments depend largely on theories and concepts that they are not completely justified. They also considered the concept of arbitrage that they studied to be risky and hence limited in use (Shleifer & Summers, 1990, pp.19-20). This study can thus be analyzed to have certain significant contribution towards finding alternatives and not only be dependent on the existing theories and concepts. Certain broad aspects related to finance have been suitably considered in these studies. Another well developed study has been considered by Shiller who stressed his studies on the understanding of the efficient markets concept towards behavioral theory. According to his study, the association of finance with other social sciences that is referred as behavioral finance has led to a reflective intensification of the comprehension of financial markets. He considered the application of right standards to be essential in the understanding of the impacts that behavioral finance might have. He also maintained that the efficient markets theory was weakening and there was a need to realize the importance of the eclectic approach (Shiller, 2003, pp.101-102). This study can be considered to have effectiveness on an understanding of the financial markets in a way such that individuals can have a widened view of the financial concepts and theories thus determining a positive framework for financial success across the nation. The study very well focused on the significant factors associated with financial and economic crises. Hence the focus of the study proves to be more meaningful. Sen in his views discussed about the capitalism that he observed behind the global economic crisis. As his article mentions, “The idea of old and new capitalism played an energizing part at a symposium called “New World, New Capitalism” held in Paris in January and hosted by the French president Nicolas Sarkozy and the former British prime minister Tony Blair, both of whom made eloquent presentations on the need for change. So did German Chancellor Angela Merkel, who talked about the old German idea of a “social market”—one restrained by a mixture of consensus-building policies—as a possible blueprint for new capitalism (though Germany has not done much better in the recent crisis than other market economies)” (Sen, 2012). Sen’s study reflects on a matured and clear structure of a study although focused on a single issue. There is a clear view of the financial theory of capitalism supporting a framework for crisis. His study proves his points well through the supporting views that he presented. However, the study still lacked a broad ranging opinion in regard to the causes of financial crisis. Christian Marazzi had considered another highly significant study where he discussed about the importance and assessment in the financialisation process. In this regard he mentioned that it is necessary to understand the process of transformation in the character of work and finance. According to him, it is not possible to realize the changes and transformation in finance without realizing the changes in the process of work. The study can be said to have managed to present a structured view of the opinions that the author derived from his studies. However, there is not much novelty in the study since these factors have already been used as measures of study by several researchers. Thus although the study might have been presented accurately with a proper structure, and understanding of the relationship between the theoretical and research perspectives, and the author has been able to present his proofs suitably as well, but not much has been focused into the improvement of the financial status in a nation as a whole. Studies of Foti also presented a focus on the problems leading to crisis, and he used well developed structure in presenting his studies and the opinions that he derived. It can be said that his study was strong enough to determine how to progress towards an understanding of the crisis and its measurements. Foti in his studies discussed about the recession issues and focused on the financial condition that arose without any prediction or security been considered from before. His studies reflect on the severe impacts of the recession that included increasing levels of unemployment for people who were not even prepared for the disaster. He believed that the crisis would lead to a new structure of social and political economic regulation expecting to bring out democratic solutions within a country (Foti, 2012). Guttman and Plihon considered their study on consumer debt in relation to financial capitalism. They mentioned about the banking system in the US in the 1930s that collapsed and was assisted to return to a safe position with the help of different acts and reforms. These represented economic development in the country. They also talked about the public policies that had significant role to play in this regard. SFC or stock flow model has been considered to be significant for an understanding of the vibrant essential in the expansion process of highly developed capitalist financial systems in the present times (Guttman & Plihon, 2008, pp.2-33). The theoretical aspect of the study has been more prominent in regard to this particular literature. However there has been significant focus on broader issues including the banking systems and economic development within a nation that increases the value of the study and contributes efficiently towards realizing the measures of improvement. The financial crisis of the 21st century can be considered to be unpredictable, and happened automatically that could be studied as an inevitable consequence of the business cycle under the influence of the capitalists. It is also assumed that is capitalist does not exist any further, the world would see a better place in regard to the financial systems. It can also be well feared that the capitalist views of finance might lead to war in the near future that would act as a mediator between crisis and revolution. Thus sincere measures are necessary in the current situations in order to “disarm the state and capital as much and as soon as possible” (Promissory Notes From Crisis to Commons, 2009, pp.2-16). Developmental Finance: Gaps in the Studies: The above studies have mostly been related to the global recession that threatened the world with problems of unemployment and other related severities. Finance and financial systems can be realized to have significant impacts on the individual lifestyles as well as different countries thereby having an impact on the world as a whole. This has also been proved by the recent economic crisis that initiated in the US but impacted the world more or less as a whole. Thus the above studies have been efficient in presenting a picture of what and how things have changed and transformed over the years and how the global financial system has weakened. However, the primary gap in the study lies with the lack of providing any significant future measures that might actually help in turning the poor financial status of the world and enable countries to successfully encounter phases of difficulty. The importance of the economic systems intended towards the growth of the economy in any country or the world as a whole needs to be significantly considered. It has been obtained that the World Economic Forum is trying their best to bridge the gap that is still prevalent in such an understanding of the financial system (Financial Development, n.d.). Thus further researches are required in this field to bring out the suitable understanding of financial systems such that countries might be able to re-consider their financial processes accordingly towards a global profitable success. Moreover further research and studies are required in the understanding of the relationship between the financial system and the growth in the economy (Levine, 2004, p.1). Although the above studies have discussed on how and why the global recession had initiated, yet there are no significant suggestions on the increasing realization of the relationship. In one of the studies as mentioned earlier, it has been suggested that capitalism, if removed, might enable a positive financial structure in the world. However, the study could not provide a clear picture of how it is possible. It can thus be said that still greater and more concise researches are necessary for the understanding of the development of finance in the world. It has been obtained from certain other studies that development in finance has a significant encouraging impact on the economic growth. Thus the relation of the capital markets and the economic performances of any country prove to be essential for a suitable understanding (Papaioannou, 2007, p.7). Studies of Ross Levine could be associated with these concerns. As a matter of understanding the gap in the development of finance in the perspective of the world, it can be said that the studies that further researchers need to revise the earlier conducted studied and present views and opinions that might enable different countries to have the basic knowledge and understanding of the relationship between financial systems and economic growth, a fact that is lacking in the current researches. Conclusion: The study has been focused on a literature review of different researchers on the financial issues prevalent in the present times. Different studies that have been considered in the particular report reflect on the causes and consequences of financial systems leading to the economic crisis. Factors like capitalism, transformations in financial processes have been considered as significant causes. Most of the studies have tried to determine an understanding on the concepts of finance and their financial relationship with the current economic status of the world. Thus concepts like the efficient markets theory have been significantly given importance. However, it has also been obtained that there are greater issues than what these studies have concerned. One most important issue is the understanding of the relationship between the financial systems and the growth in the economy that has not been considered too well in the studies. This reflects on the gap that is still prevailing in the literatures based on finance and its development in the world. Hence to conclude the study, it can be said that in order to achieve a successful financial status in the world as well as remain prepared to encounter any difficult phase, the world needs to focus on the basic knowledge and understanding that establishes the relationship of the financial processes and the relative consequences, combined with the already researched opinions that have been discussed in this study, that can be expected to create a more positively structured financial system in the world as a whole. References 1) Barsky, R.B. & J.B. DeLong (1993), Why does the stock market fluctuate?, The Quarterly Journal of Economics, Vol.CVIII, Iss.2, available at: http://www.jstor.org/discover/10.2307/2118333?uid=2129&uid=3738696&uid=2&uid=70&uid=4&sid=56033403843 (accessed on April 12, 2012) 2) Bria, F. (2009), A crisis of finance: financialisation as a crisis of accumulation of new capitalism, ephemera, Vol.9, No.4, pp.388-395, available at: http://www.ephemeraweb.org/journal/9-4/9-4bria.pdf (accessed on April 12, 2012) 3) Financial Development (n.d.), World Economic Forum, available at: http://www.weforum.org/issues/financial-development (accessed on April 14, 2012) 4) Foti, A. (2012), The Precariat and Climate Justice in the Great Recession, greatrecession, available at: http://www.greatrecession.info/2009/11/03/the-precarious-question-and-the-climate-struggle/ (accessed on April 13, 2012) 5) Groppelli, A.A. & E. Nikbakht (2006), Finance, New York: Barron's Educational Series 6) Guttman, R. & D. Plihon (2008), Consumer Debt at the Center of Finance-Led Capitalism, univ-paris13, available at: http://www.univ-paris13.fr/cepn/IMG/pdf/wp2008_09.pdf (accessed on April 14, 2012) 7) Levine, R. (2004), Finance and Growth, econ, available at: http://www.econ.brown.edu/fac/ross_levine/publication/forthcoming/forth_book_durlauf_finngrowth.pdf (accessed on April 14, 2012) 8) Marazzi, C. (2007), Measure and Finance, generation-online, available at: http://www.generation-online.org/c/fc_measure.htm (accessed on April 13, 2012) 9) Merton, R.C. & Z. Bodie (1995), A Conceptual Framework for Analyzing the Financial System, nek, available at: http://www.nek.lu.se/NEKeno/Finance%20B/A%20Framework%20for%20Analyzing%20the%20Financial%20System.pdf (accessed on April 12, 2012) 10) Papaioannou, E. (2007), Finance and Growth A Macroeconomic Assessment of the Evidence From a European Angle, ecb, available at: http://www.ecb.int/pub/pdf/scpwps/ecbwp787.pdf (accessed on April 14, 2012) 11) Promissory Notes From Crisis to Commons (2009), midnightnotes, available at: http://www.midnightnotes.org/Promissory%20Notes.pdf (accessed on April 14, 2012) 12) Schleifer, A. (2000), Inefficient Markets: An Introduction to Behavioral Finance, Oxford: Oxford University Press 13) Sen, A. (2012), Capitalism Beyond the Crisis, nybooks, available at: http://www.nybooks.com/articles/archives/2009/mar/26/capitalism-beyond-the-crisis/ (accessed on April 13, 2012) 14) Shiller, R.J. (2003), From Efficient Markets Theory to Behavioral Finance, The Journal of Economic Perspectives, Vol.17, No.1, pp.83-104, available at: http://www.hss.caltech.edu/~camerer/Ec101/EffMktsThryBehFin_Shiller_Win03.pdf (accessed on April 13, 2012) 15) Shiller, R.J. (2005), Irrational Exuberance, Princeton: Princeton University Press 16) Shleifer, A. & L.H. Summers (1990), The Noise Trader Approach to Finance, Journal of Economics Perspectives, Vol.4, No.2, pp.19-33, available at: http://www.e-m-h.org/ShSu90.pdf (accessed on April 13, 2012) Read More