Financial Management1 FINANCIAL MANAGEMENT. Financial Management2 MODERN FINANCE THEORY (Modified...
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![Page 1: Financial Management1 FINANCIAL MANAGEMENT. Financial Management2 MODERN FINANCE THEORY (Modified from Megginson, 1997) FINANCE INVESTMENT PORTFOLIO CAPM.](https://reader036.fdocuments.net/reader036/viewer/2022071717/56649e4e5503460f94b455e5/html5/thumbnails/1.jpg)
Financial Management 1
FINANCIAL MANAGEMENT
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Financial Management 2
MODERN FINANCE THEORY(Modified from Megginson, 1997)
FINANCEFINANCE
INVESTMENTINVESTMENT CORPORATE FINANCECORPORATE FINANCE
PORTFOLIOPORTFOLIO
CAPMCAPM
EMHEMH
OPTION PRICING MODELOPTION PRICING MODEL
CAPITAL STRUCTURECAPITAL STRUCTURE
DIVIDEND POLICYDIVIDEND POLICY
AGENCY THEORYAGENCY THEORY
SIGNALING THEORYSIGNALING THEORY
CORPORATE CONTROLCORPORATE CONTROL
FINANCIAL INTERMEDIATIONFINANCIAL INTERMEDIATION
FINANCIAL INSTITUTIONFINANCIAL INSTITUTION
BANKINGBANKING
MISMIS
MARKET MICROSTRUCTUREMARKET MICROSTRUCTURE
Insurance Insurance
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Financial Management 3
Saving and Investment
• Fisher (1930): how to earn higher return by lending on the capital market than they could by seeking out individual borrowers, and borrowers can obtain inexpensive financing without incurring search costs.
Investment
• Fisher Separation
Theorem Financing Decision
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Financial Management 4
Portfolio Theory
• Professor Harry Markowitz (1952): “Don’t put all your eggs in one basket”.
• Base concept: unsystematic risk and systematic risk efficient portfolio
• Technique and measuring correlation, covariance, standard deviation, and total variation in portfolio setting.
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Financial Management 5
Capital Asset Pricing Model (CAPM)
• Sharpe (1964), Lintner (1965), and Mossin (1966)• Contributions:
1. Trade off risk and return: capital market line
2. Beta (β)• Ross (1976): Arbitrage Pricing Theory (APT) with
more than one factor that influence the expected return of asset such as economic variables.
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Financial Management 6
Efficient Market Hypothesis
• Fama (1970): speed and complete of relevant information incorporated in capital market.
• Degree of efficient:
1. Weak form
2. Semi-strong form
3. Strong form
• Basic concept is investors are rational.
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Financial Management 7
Option Pricing Theory(Black-Scholes Option Pricing Model)
• Black and Scholes (1973)• 8 Assumptions:
1. Market are friction2. Short sales are allow3. No dividend payment or other distribution4. Market on going (continue)5. Stock prices random walk6. Constant variance rate of return7. The option can be exercised only at maturity8. The risk less interest rate is known and constant
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Financial Management 8
Market Microstructure
• First modern market microstructure study was Ho and Stol (1981) base on Demsetz (1968) and Tinic (1972)
• Market crashed in American capital market in 1987
• Two basic model: spread model and price formation model
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Financial Management 9
Market Microstructure (continued)
• Using intraday data to study. So, need appropriate application software e.g: SAS
• Some basic empirical model: trade-off between dealer and informed/uninformed trader, evolution of stock prices, trading day vs non trading day, asymmetric information in international capital market, market design, market mechanism, privat vs public information, herding, etc
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Financial Management 10
Corporate Finance
• The major study of corporate finance are capital budgeting, capital structure, dividend policy and merger and acquisition to maximize shareholder’s wealth.
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Financial Management 11
Capital Structure
• Modigliani and Miller (1958): M&M irrelevant propositions, called proposition I and proposition II
• Link of the study is asymmetric information such as signaling model, pecking order hypothesis, agency cost/tax shield trade-off model
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Financial Management 12
Dividend Policy
• M & M irrelevant model
• Empirical model to test the dividend policy: agency cost/contracting model and signaling model.
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Financial Management 13
Agency Theory
• Jensen and Meckling (1976)
• Contributions:
1. Agency cost model of the firm
2. Compensation policy
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Financial Management 14
Signaling Theory
• Arkelof (1970) and Spence (1973): the original economics papers on signaling. Leland and Pyle (1977) was the first major financial application of signaling theory.
• Corporate insiders better informed than outside investor
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Financial Management 15
Corporate Control
• Bradley (1980): Merger and acquisition in business world.
• Later empirical study: stock voting rights, the value of concentrate vs dispersed ownership structure, benefit shareholders on the various compensation plans for company manager, etc
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Financial Management 16
Financial Intermediation
• Financial Institution: reksadana
• Banking: investment vs commercial banking
• Banking: national banking vs Universal banking
• Insurance: life, investment, pension, education, etc
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Financial Management 17
Management Information System
• Base idea: unite disparate financial function into a single, integrated system that provide complete visibility into financial system
• MIS functions:1. as a management tool: support of management change2. provide a wide range of financial and non financial information3. as a system: connect, accumulate, process, and then provide information to all parties in the budget system on a continuous basis
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Financial Management 18
MIS (Continued)
• Main steps in introducing MIS:
1. Preparation
2. Design
3. Procurement
4. Implementation
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Financial Management 19
Summary
• In pricing assets, only systematic risk matter• Emphasize investment rather than financing• Emphasize cash flow rather than accounting profits• Remember that finance is now a global game• Remember that finance is a quantitative discipline• All theories are based on the principles of informationally
efficient capital markets populated by rational, utility-of-wealth-maximizing investors who can costlessly diversify unsystematic risk and are thus concerned only with pervasive, economy-wide forces. So, where is the behavior finance stand?
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Financial Management 20
Good luck