Financialization: Stock Market and Share Buy-back Strategy Essay

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

The main aim of the managers that run the corporations is to maximize the wealth of shareholders. Research indicates that many corporation managers especially in the US target increasing the wealth of the shareholders. This is basically achieved through the increasing the profits made by these corporations.

Then you will learn about the consolidation accounting for Berkshire Hathaway. The paper explains why Berkshire Hathaway prefers to use cash rather than stock when investing in a company. Warren Buffett also has a different approach on how long to hold controlling interests versus their passive interests. Warren Buffett never plans on selling a controlling interest, but they do keep the idea open to sell a marketable security. We also explain why Berkshire would like to receive dividends

Financialization can be shown in three perspectives. Firstly, financialization implicates finance regains dominant power in capitalism. Secondly, autonomy of financial institutions increases because of the increase in financial interests. Thirdly, wide range of economic actors is integrated into financial markets due to financial innovation and expansion of financial sector (Palley, 2007).

History shows that financialization has not only touched the United States, but has been a part of the cycle of economies throughout time. It affected Spain in the 1300s as well as England in the 1800s and 1900s. The definitions of financialization are many. One definition says that with regard to the operation of the economy, it has to do with the increasing importance of financial markets, motives, institutions, and elites (Assa 2012). Adam Smith defined it as the “growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns" (Collins 2015). It has also been said that in addition to its influence over the economy, its reach extends to other societal institutions such as government (Gautam 2014). The literature on financialization written in the last few decades highlights negative impacts on “both the real and financial sides of the economy” (Assa 2012).

The main strength of Ferguson’s book is the well supported arguments about the importance of understanding finance. First, Ferguson argues that money is important for human progress. This argument is well supported by his discussion of the evolution of credit and debt, banks, the bond market, corporate finance, insurance, mortgage finance, and corporate finance. Ferguson

The stock market is essential to the financial industry, as stocks are a source of funding for public corporations. In order to increase equity efficiently and cheaply, corporations issue stocks to the public who supply the funds. In return, the suppliers receive dividend payments and partial ownership in the company which classifies them as shareholders (Saunders & Cornett, 2015). Since, shareholders play an important role in the corporations funding, it is necessary for organizational leadership to be mindful of corporate policy changes, as certain changes may drastically impact the existing shareholder base. Moreover, corporate policy changes alter the appeal of a company’s stock, giving the public more or less incentive to purchase stocks. As a result, the implications of an organization issuing additional shares of common stock, announcing a new share repurchase program and increasing quarterly dividends per share, can all impact an existing shareholders view of the company and the market. Therefore, discretionary policy changes are fundamental, due to the signals certain announcements can indicate within the financial industry.

  Once there was a time when “shares in business corporations were rarely bought and sold because few companies were considered promising financial profits” (Blume 21). That is hard to believe considering almost everybody has invested in some stock today. The stock market went through some distinct changes since its inception, and has evolved into a shaping force in the world today. There is one idea that sparked the fire which produced the stock market: capitalism. Everything the stock market is, and was, rooted in the basic idea of capitalism. Without that idea, stocks and bonds would never have come to be.

But if the firm is not committed to some fixed payments such as interest expenses, managers could have incentives to “waste” excess free cash flows. That is why, in order to discipline managers, shareholders attract debt. Besides, it is a popular practice in debt agreements between banks and borrowers to introduce some financial covenants for firms (minimal level of the free cash flow, debt-to-EBITDA ratio, EBITDA-to-interest expenses ratio etc.). Managers cannot break these covenants, and hence are bound to be more effective. In addition, the law usually guarantees a right of partial information disclosure to the company’s debt holders, which serves as additional managers’ supervision tool. As a result, actions of managers become more transparent, and they have more incentives to create higher value for the owners. This is the essence of “Free Cash Flow Theory” of capital structure (Jensen, 1986).

Financialisation is the process in which financial institutions/markets increase in size and gain greater influence over economic policy and outcomes (Palley, 2007).Another link to financialisation is high degree of leverage. This is because with leverage, you can get a loan for 9/10s of the money, so you only need a small portion, and you are able to make lots of profit. Leverage is linked to financialisation in a sense that if it works, you get lots of profit with a working system, however if it doesn’t work, then you can lose lots of money, and in high degrees of leverage, you can be losing lots of money by the investment not working out, and someone then has to pay off the loaned money. In this essay, I will be analysing whether or not financialisation was the main cause of the 2008 global financial crisis, or if there were other factors involved in the great recession. I will be arguing that financialisation was a cause of the crash, but because it was aided by other factors, it is not the sole reason behind the collapse. The points that I will be making in my argument will be in relation to the financial crisis in the context of financialisation, talking about market deregulation and subprime mortgages. The second point that I will make will be about the greed of the CEOs on Wall Street, and their irresponsibility when it comes to the money of others. The final point that I will be making will be about the irresponsibility on behalf of the regulators, and how they

The conclusion that Woll reaches, that financial power is not simply a product of superior resources but more of a long term relationship between finance and the state is coherent with the idea that not only is the state influenced by finance, but also how finance needs the state (Datz

The opinion of Russian researchers, in contrast to the Anglo-American financial school, is that the essence of the financial system is revealed through its subsystems and components: banking, credit, monetary, fiscal and taxation and, consequently, they define it as an aggregate of different fields of financial relations, in which the funds are generated and used. (Drobozina, 2000)

Firms have two types of financial resources: shareholders and debt holders, each type has a different concern. While shareholders are wealth maximisation focused, debt holders are concerned with the ability of the firm of paying them back - with an agreed-upon interest rate. As

Maurer and Haber (2003) suggest that in the process of financial liberalization and financial deepening, the financing channels for low income people are not have effectively developed, and the difficulties for financing are not have substantial progress. On the contrary, the rich have more capital and convenience to get access into the financial activities and services and get more money.

List of abbreviations List of tables Acknowledgements Abstract 1. 2. 3. 4. 5. 6. 7. 8. Introduction Problem statement Objectives and hypothesis of the study Literature review Structure and performance of the financial sector in