MANAGEMENT DECISIONS AND SHAREHOLDER VALUE
A rigid financing decision always reflects some view about the recent position and prospect outlook of the capital markets. For example, presume a firm chooses to finance a major growth program by issuing liability. The financial manager first considers the conditions of the obligation matter and determines what price is fair. In totaling, the manager has to conclude whether the firm's shareholders are superior or inferior off by issuing supplementary debt to finance the rigid operating behavior. Both of these decisions necessitate a deep understanding of the capital markets and how organization borrowing affects the value of rigid shares.
Considerate how the resources markets function is the same thing as considerate how investors value financial resources. New theories during the last two decades have been developed to explain how investors price stocks and bonds. These knowledge have worked well in the sense that they seem to provide fairly accurate explanations of the link between financial managers' decision and changes in financial refuge prices. Let us now examine some of the key factors a speculation manager considers before making any speculation decisions.
Time and Uncertainty
The shrewd financial manager is required to factor in what consequence indecision and time may have on the value developed by an investment decision. Rigid often have the occasion to advance in assets that generate little or no cash flow in the short run and expose the rigid and its shareholders to significant risk.
Best examples of this kind of investment are investigate and development operating expense. The investment, if undertaken, may have to be financed by debt that cannot be fully repaid for many years. The firm cannot simply ignore that such choices involve hard trade-offs-someone has to make a decision whether the occasion is worth more than its costs and whether the extra debt burden can be safely borne. An indecent assessment of the costs and benefits of such decisions can generate financial adversity for the organization, or even bankruptcy.
Understanding the Value of Information
Information is an extraordinary and expensive product during- out the world of business. In financial markets, the rights data can be worth millions-but only if other investor do not have the same data at the similar time. Assume, for example, you learn that one organization will imminently make a takeover offer to obtain another organization at a price that significantly exceed that organization present market price. Such information is potentially worth a marvelous amount of money. Unfortunately, fiduciary household tasks and legal limitations prevent the discriminating distribution of precious information previous to complete public revelation. Because financial markets are competent, as soon as important financial information is exposed, it travels immediately to New York, Lon- don, Tokyo, and all the other main financial centers.
Organizations expend substantial time and money provided that information to investors. If they did not do so, investors would be disbelieving and hesitant of a firm's future forecast. They would have to disburse individual resources annoying to gather information for them, and they would be reluctant to pay as much for the rigid shares. This would increase the organizations cost of obtaining the financing it wants for its investment decisions. This would decrease a firm's capability to spend gainfully, hurting society as a result.
As the saying goes, talk is discounted. Should investor's faith the information given out by organization? The answer is: not always. But institutions have been produced to condense this reliability problem. Sometimes a rigid of accountants or speculation bankers, who put their reputation on the line when they endorse a company's financial reports and statements, certifies the information. Sometimes managers send a message of assurance by "putting money where their mouth is." For example, it is easier to elevate money for a new business if you have already invested a huge segment of your own net appeal in the organization.
Many financial decisions take on additional significance because they communicate or indication information to investors. For example, the decision to condense the cash dividends paid out to share- holders usually signal difficulty for the firm. The stock price may fall sharply when the payment cut is announce, not because of the payment cut per se, but because the cut portend poor performance in the future. Given the complexity a financial manager must factor into any decision, how does one act to generate value?