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Though managing an organisation involves long-term thinking and careful consideration of the organisational dynamics, many corporations cannot handle untimely alterations of the business environment. This is because the global monetary crisis comes at an unprecedented time, thus not easy for some organisations to put their operations in order for them to cope with such financial challenges.
Despite the reality that the financial challenges have hit global business operations in one way or the other, and at different times, the horizon at which the companies operate has not been so proactive (Gustavo, Michaely & Swaminathan 2002, p. 379).
For instance, the corporate finance and agency problems have created monetary conflicts that exist between the management of the company and their stockholders, an issue that has really affected the decisions at the corporations (Gustavo, Michaely & Swaminathan 2002, p. 389).
The conflicts are relevant to corporate finance since the managers of the company, who are meant to act for the best interest of the shareholders often, fail to do so as expected of them. These managers, who act as agents of the shareholders, are meant to make decisions, which are geared towards maximizing the stockholders’ wealth. However, they fail to do so, owing to their desire to maximize their own wealth.
In essence, these agency problems are related to the corporate finance in the sense that they help in understanding and analyzing the stockholder’s equity, corporate governance, and agency costs. Contemporary studies evidence that the non-responsive nature of the management to information related to the eventual financial crisis, lead to compromised decisions about the specific monetary problems.
Corporate stakeholders are often faced with the conflict of interest to pursue personal goals other than the intended objectives of the company. This makes it difficult for them to formulate guidelines, which might help the company avoid the impacts of financial crisis through pre-empting the market situation and other financial environment of the company (Gustavo, Michaely & Swaminathan 2002, p. 389).
Therefore, there is need to put in place appropriate mechanisms so as to effectively deal with the potential conflicting issues in the organization. Research attributes the ignorance of the management to offer advisory opinion about looming financial crisis depicts the pursuit for personal interests, other than that of the company.
The conflict of interest among the stakeholders of the company might make the shareholders to pass a vote-of-no-confidence on some of the board members during the members’ board meetings (Gustavo, Michaely & Swaminathan 2002, p. 397). The presidents of the company are awarded bonuses due to their hard work so as to motivate them.
However, when the performance is dwindling as witnessed in the Coca-Cola Company, the stakeholders might be forced to terminate the contracts of the top management team of the corporation, if assumed that their roles would compromise the productivity in the company.
Indeed, the dividend policy of any firm can be regarded as irrelevant owing to the fact that the corporations that often pay a lot of dividends to the shareholders give little price appreciation (Gustavo, Michaely & Swaminathan 2002, p. 389).
However, but must offer the same sum of revenue returns to the investors, depending on their risk characteristics as well as the cash-flows generated from the investment ventures (Jackall 1988, p. 55). In fact, since there are lack of taxes, but, if there is any, both the capital gains as well as the dividends are often taxed under a similar rate.
Therefore, the investors ought to be indifferent to get their expected returns in both the price appreciation as well as in dividends, under such circumstances. Importantly, some assumptions must be incorporated in this argument for it to be true.
First, it must be assumed that the transaction costs are lacking, thus making it impossible to convert price appreciation into some cash (Jackall 1988, p. 58). In such cases, the entrepreneurs are disadvantaged and the company may find itself in the crisis.
Second, it has been assumed that companies, which offer a lot of dividends, are capable of issuing their stock, without both the transaction costs and the floatation costs (Jackall 1988, p. 61). As a result, this implies that the stocks are priced fairly.
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Third, the management may not direct the stakeholders to take a leading role in minimizing the dilemma (Gustavo, Michaely & Swaminathan 2002, p. 389). Finally, it has been assumed that the management members of the company just pay few dividends, and do not waste the free cash-flows allocated to them so as to pursue their own personal interests and gains (Jackall 1988, p. 65).
Contrary to the former statement, dividend policy may matter in the real word owing to several imperfections that are eminent. Some of these imperfections can be attributed to conflict of interests among the stakeholders, information asymmetries, and taxes levied (Sunder & Myers 1999, p. 219). Under these circumstances, the dividend policy matters.
For instance, when the corporation’s management team members tend to waste the resources of the company, then the shareholders would prefer to have large sums of dividends, though this will eventually raise the taxes to be paid by the company (Sunder & Myers 1999, p. 219).
According to Lyandres and Zhdanov, the information and signaling content in dividend announcements can be defined as the way the dividend announcements present information to the investors/shareholders about the future prospects of the company (Lyandres & Zhdanov 2007, p. 54). The fact that the company might declare dividend is itself an indication that it is responsive to changes in the financial market.
The empirical validity of this concept can be ascertained under the fact that stock prices often increase when there is some increase announced on the dividends or when the dividends (Sunder & Myers 1999, p. 220).
On the contrary, the stock prices often fluctuate when there is decrease in the prices of dividends announced or when no dividend has been declared and may have its impacts on the financial aspects of the organization (Lyandres & Zhdanov 2007, p. 60). As a result, many investors will shy away from investing in such companies. In fact, this is caused by the dividends information content.
In situation whereby the cost of new equity capital is more than the retained earnings it would mean that the company lacked sufficient funds to compensate its shareholders (Sunder & Myers 1999, p. 220). In such a case, the firm might be forced to source for more equity funds.
However, when many new investors are brought on board the company’s ownership and control might be diluted in the process, as a result of the new investors. On the other hand, it is not a worthy venture for the company to issue new stocks so as to pay dividends in the same financial year or accounting period during, and immediately after the financial crisis (Sunder & Myers 1999, p. 221).
In addition, the performance of the stock market is not accurately predictable in the sense that it is pegged on so many factors such as history of the firm, the management of the firm, its liquidity, and credit worthiness among other factors (Sunder & Myers 1999, p. 222). Therefore, before the company declares and pays dividends to the investors, it is not likely to sell many of its stock in the market.
Therefore, the decision of a company to pay dividends using the new issue of stocks during the same year is not a rational one and could lead to more problems during financial crisis (Lyandres & Zhdanov 2007, p. 61).
The free cash flow hypothesis ascertains that the financial performance of a company is always calculated on its operating cash flow, once the capital expenditures have been subtracted (Thompson & McHugh 2002, p. 48). This helps in predicting a possible financial crisis so that the management can put in measures to reduce the affects.
Therefore, the free cash-flow is the sum of money that the company is left with after putting aside the money required for the maintenance and expansion of assets. This is important for both the company and the investors since it is able to pursue its goals as well as to enhance the shareholder value (Lyandres & Zhdanov 2007, p. 63).
In essence, the free cash flow can help in understanding the motives behind the mergers and acquisition by availing the sufficient amount of cash to carry out such business transactions (Thompson & McHugh 2002, p. 52).
This will be important for the company in the sense that it does not necessarily need to source for capital from the outsiders since there is sufficient funds for expansion. These activities are aimed at strengthening the performance of the company as well as expanding to other geographical areas, and this will help in acquiring more customers.
In addition, the cash flow hypothesis helps in understanding the leverage buy-outs since the company that does not have sufficient funds is likely to be sold out to other investor companies (Timmer 2011, p. 102). The leverage buy-outs will make the firms, which are in big debts to have sufficient funds for settling their outstanding debts.
Under the leverage buy out arrangement, the acquiring company would use collateral from the company that it is intending to purchase so as to secure loan. Though, this often comes with some interests, it is beneficial in the sense that the company is able to get cash from the secured loans so as to carry out some of its intended activities during and after the financial crisis (Timmer 2011, p. 103).
Basing the arguments on the empirical evidence, financial crisis could halt the operations in a given company, thus has to be merged with other organizations to make it viable. Therefore, once the company collapses, the acquiring group of company is likely to benefit more than the acquired group in the mergers and acquisition arrangements (Timmer 2011, p. 104).
This is because the assets of the company, including its customers and the goodwill are transferred to the acquiring company. Under many arrangements, the debts of the company are just partially settled by the acquiring firm, thus much of the profitability and gains are transferred to the firm that acquiring the other.
Indeed, debt can always be regarded as a cheaper option since the equity is more expensive than it. This is so because equity involves partnership with the shareholders who share the company’s profitability (Watson 2001, p. 224). However, in case of losses the business bears it alone since the investors are only involved in sharing the returns, which are given in the form of dividends.
These groups of the investors do not offer some technical expertise and knowledge in running the business since their work is to contribute capital to the business alone (Watson 2001, p. 225). Therefore, this can be regarded as a cost to the company.
Focusing on the debts, it is evidenced that the interest paid on the money borrowed is always periodic and has a time limit to complete the loan repayments (Watson 2001, p. 225). However, the dividends paid on the equity do not have the time limit since they are paid to the shareholders once the business is still in operation, and making profits. This compels the board of directors to declare dividends to the investors.
Bankruptcy costs play crucial roles on the firm’s capital structure and its response to financial crisis since they are the basic foundations upon which the financing policies of the firm are based (Watson 2001, p. 226). These bankruptcy costs act as the counterweight to those taxes that have been deducted on the interest payments.
Therefore, bankruptcy costs are very relevant in determining the optimal capital structure of the firm (Thompson & McHugh 2002, p. 53). The costs associated with the bankruptcy such as the reorganization costs, and tax credit losses, directly impact on the capital structure of the firm since they are borne by the failing company.
The agency cost impacts directly on the optimal debt ratio of the firm since the equity holders often have the incentives that make them to under-invest in those projects that have negative net present value (NPV), in situations whereby the leverage of the company is on the upward trend (Watson 2001, p. 227).
This happens due to the fact that the equity holders are mainly interested in the net benefits of the project, when they bear the investment costs. The rests of the cots are passed on to the bond holders.
On the other hand, the debt holders are aware of this incentive enjoyed by the equity holders of shifting the risks as well as under-investing (Thompson & McHugh 2002, p. 55). As a result of this, the debt holders price their debts accordingly as well as demanding for the higher rates of return. This agency cost problem puts much pressure on the optimal debt ratio of the firm.
The capital structure theories have several uses that facilitate the understanding of the capital structure of various companies, as outlined in the following discussion. Capital structure is the way corporation finances its own assets through combining equity, debt, or through hybrid securities (Baker & Jeffrey 2002, p. 4).
Here, the organization assets could be off-set during such an eventuality. In essence, these agency problems are related to the corporate finance in the sense that they help in understanding and analyzing the stockholder’s equity, corporate governance, and agency costs.
If external financing is a requirement, equity would imply issuing of shares bringing about external ownership inside the company (Baker & Jeffrey 2002, p. 5). This theory is made popular by Myers (1984) when he argued that equity not a preferred method of raising capital that could help the company during financial crisis and in the post crisis period.
This is because when managers who are understood to have a better knowledge of the true condition of the company than investors floats new equity, investors supposedly think that the managers are of the opinion the company is overvalued, and that the managers are taking benefit from the of this over-valuation (Baker & Jeffrey 2002, p. 7).
Consequently, the company shares might be very low after the crisis. The Study of capital structure is a significant part of a typical introduction to a finance course (Baker & Jeffrey 2002, p. 8).
The traditional approaches, which are used preempting financial crisis use inappropriate hypothesis of financial distress, and agency overheads up to when the conventional form of optimal capital structure appears (Baker & Jeffrey 2002, p. 9).
It is an organized approach which is known as the “Trade-Off” form which simply understood under the basic primary perception of optimizing worth and therefore shareholder wealth by choosing a capital organization combination which has the lowest probable cost of capital for the company. S
ometimes, managing the company before the financial crisis might be uneasy, thus creating a barrier between the previously made decisions and the actual occurrence when the financial problem finally comes (Baker & Jeffrey 2002, p. 15).
Scholarly study observes three world real phenomena difficult to explain using the agency cost and tax shield trade-off form (Myers & Majluf 1984, p. 188). These are in various industries the most profitable companies habitually do have the smallest debt ratios completely opposite what trade-off model would predict.
Huge positive and abnormal returns for a company’s stockholders are linked with leverage-increasing actions like stock repurchases and debt-for-equity interactions other leverage-decreasing events like issuing stock (Myers & Majluf 1984, p. 192).
Very few companies in America issue new stock once in a decade in the aftermath of the financial crisis. Therefore, management before and after crisis are two different aspects of the company progress (Myers & Majluf 1984, p. 194).
A company’s capital structure basically is a function brought about by its internal currency flows and the sum of positive NPV asset opportunities present (Knights & Willmott 2006, p. 14). Focused management has been cited as the appropriate way of controlling future financial crisis (Knights & Willmott 2006, p. 22).
In sum, the practical monetary managers will try to retain financial flexibility while making sure the long-term survival of their companies even after financial crisis. This will also help the company in planning for the possible financial problems.
The research indicates that though improved and effective administrations of the organisation, the managers have to dedicate their time to work involving long-term thinking and vigilant consideration of the company changes.
In this regard, many corporations are perceived to be unable to make alterations of the business setting so that the organization could implement most of the fiscal strategies prior to, or after a monetary crisis. This shows that only the practice of objective and focused management that such financial problems could effectively realized.
The justification was that since the global monetary crisis reaches at an untimely situation, thus not quite practical for a number of companies to realign their manufacturing and administrative processes to match the predicted financial positions and the global trends, which might be in order with their operations. Such attempts might help the companies cope with such financial challenges.
Regardless of the realism that the fiscal challenges have had gross affects on global business operations in a number of ways, and at different instances, the magnitude at which the entities operate have not been so hands-on, to deal with increasing affects of financial crises.
For instance, large business finance and organization tribulations have resulted to monetary short-fall that exist and affect the link between the management of the company, customer base and the suppliers. This situation has really compromised the choices, which the corporation could arrive at.
Finally, the stand-off could be relevant to corporate changes since the management of the entity that should make the decision in the best interest of the entire parties involved in its management often, fail to execute their duties.
Literally, these managers, who should act on behalf of the board as a watchdog of the financial alterations in the company, end up disappointing the shareholders. In fact, they are meant to make choices, which should be in favor of the shareholders. Basically, the managers fail to act appropriately, owing to their mixed interest and desire to maximize their own gain.
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