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Like any discipline, the field of finance has developed and changed over time. At the turn of the century, finance emerged as a field separate from economics when large industrial corporations in oil, steel, chemicals, and railroads were created by early industrialists such as Rockefeller, Carnegie, and Du Pont. In these early days, a student of finance would spend time learning about the financial instruments that were essential to mergers and acquisitions. By the 1930s, the country was in its worst depression ever and financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, reorganization of financially troubled corporations, and the bankruptcy process. By the mid-1950s finance moved away from its descriptive and definitional nature and became more analytical. One of the major advances was the decision-oriented process of allocating financial capitalCommon stock, preferred stock, bonds, and retained earnings. Financial capital appears on the corporate balance sheet under long-term liabilities and equity. (money) for the purchase of real capitalLong-term productive assets (plant and equipment). (long-term plant and equipment). The enthusiasm for more detailed analysis spread to other decision-making areas of the firm—such as cash and inventory management, capital structure theory, and dividend policy. The emphasis also shifted from that of the outsider looking in at the firm, to that of the financial manager making tough day-to-day decisions that would affect the firm’s performance. Recent Issues in FinanceMore recently, financial management has focused on risk-return relationships and the maximization of return for a given level of risk. The award of the 1990 Nobel prize in economics to Professors Harry Markowitz and William Sharpe for their contributions to the financial theories of risk-return and portfolio management demonstrates the importance of these concepts. In addition, Professor Merton Miller received the Nobel prize in economics for his work in the area of capital structure theoryA theory that addresses the relative importance of debt and equity in the overall financing of the firm. (the study of the relative importance of debt and equity). These three scholars were the first professors of finance to win a Nobel prize in economics, and their work has been very influential in the field of finance over the last 30 years. Since then, others have followed. Finance continues to become more analytical and mathematical. New financial products with a focus on hedging are being widely used by financial managers to reduce some of the risk caused by changing interest rates and foreign currency exchange rates. While the increase of prices, or inflationThe phenomenon of prices increasing with the passage of time., has always been a key variable in financial decisions, it was not very important from the 1930s to about 1965 when it averaged about 1 percent per year. However, after 1965 the annual rate of price increases began to accelerate and became quite significant in the 1970s when inflation reached double-digit levels during several years. Inflation remained relatively high until 1982 when the U.S. economy entered a phase of disinflationA leveling off or slowdown of price increases. (a slowing down of price increases). The effects of inflation and disinflation on financial forecasting, the required rates of return for capital budgeting decisions, and the cost of capital are quite significant to financial managers and have become more important in their decision making. The Impact of the InternetThe Internet craze of the 1990s created what was referred to as the “new economy.” With the crash of the stock market from its peak in March 2000, and the accompanying collapse of hundreds of dot.com Internet companies, many writers pronounced the new economy dead. The Internet has been around for a long time and only in the 1990s did it start to be applied to commercial ventures as companies tried to get a return on their previous technology investments. There never was a “new economy,” only an economy where companies were constantly moving through a technological transformation that continues to this day.
Ralph S. Larsen, former chairman and CEO of Johnson & Johnson said, “The Internet is going to turn the way we do business upside down—and for the better. From the most straightforward administrative functions, to operations, to marketing and sales, to supply chain relationships, to finance, to research and development, to customer relationships—no part of our business will remain untouched by this technological revolution.”1 So far he has been right. For a financial manager, e-commerce impacts financial management because it affects the pattern and speed with which cash flows through the firm. In the B2C model, products are bought with credit cards and the credit checks are performed by Visa, MasterCard, American Express, or some other credit card company, and the selling firm gets the cash flow faster than it would using its own credit channels. In the B2B model, orders can be placed, inventory managed, and bids to supply product can be accepted, all online. The B2B model can help companies lower the cost of managing inventory, accounts receivable, and cash. Where applicable we have included Internet examples throughout the book to highlight the impact of e-commerce and the Internet on the finance function. 1Johnson & Johnson 1999 Annual Report, p. 4. |
