HOLY ANGEL UNIVERSITY
Module 01 Assignment: The Goals and Activities of Financial Management
In Financial Markets
Group Members:
Arreola Lliyah Grainne O.
David, Rom Joseph C.
Fernando, Christine B.
Liscano, Sandra Marie B.
Shimizu, Aimee M.
Section:
A-223
Professor:
Mrs. Shaila Mae Marcelo
COMPARISONS:
Functions of Financial Management to Agency Theories and Issues
The authors of the two articles focus on practical functions of financial
management, such as financial planning, investment decision-making, financing
decisions, and dividend policy, which can help an organization become financially
healthy and stable. Fundamental functions focus on financial management, such as
financial planning, investment decision-making, financing decisions, and dividend policy,
providing a comprehensive overview for financial managers (Nobanee, 2021). The
Review of Theory and Evidence on Problems and Perspectives highlights the
importance of each function especially in ensuring financial stability and growth and
focuses on the complexity agency theory that examines the relationship between
owners and managers.
The authors provided review and explanation that managers should practice.
Examples of these are budgeting capital for profitable projects and matching and
connecting financial activities with their strategic goals. On the other hand, to lessen
agency issues, governance frameworks and incentive programs are made.
The work by Alnaqabi and Nobanee has profound implications since it closes the
gap between theory and practice that upholds the fundamental concepts of financial
management and the work by Panda and Leepsa made important theoretical
implications that points out gaps in the body of knowledge and offers directions for
further investigation. By addressing both practical and theoretical aspects, both articles
promote and enhance the discipline of financial management and help businesses
implement more effective and efficient financial procedures.
COMPARISONS:
Functions of Financial Management to Primary and Secondary Markets.
Financial management is primarily concerned with a company's internal financial
activities. This entails determining the amount of capital required for growth and
continuing operations, deciding which financing methods, such as debt or equity, will
reduce risks and cut expenses, and managing and allocating funds among various
divisions. Financial management is in charge of deciding whether to distribute earnings
to shareholders or reinvest revenues back into the business. They are also responsible
for monitoring financial performance over time to make sure that it adheres to budgets
and strategic objectives.
In addition, the primary and secondary markets permit the issuance and trading
of securities on an external front. Businesses directly contact investors in the main
market to raise non-repayable money for expansion by offering additional shares or
bonds. This market, which is tightly regulated to guarantee transparency, enables
companies to choose the issue price in response to investor demand and market
circumstances.
Unlike the primary market, secondary market trading is continuous during market
hours, enabling investors to transact frequently. Secondary market pricing is influenced
by factors like supply and demand, investor sentiment, and economic conditions. It is a
convenient way for investors to buy and sell assets that have already been issued
without having an impact on the original issuer's finances (Finserv, 2024).
Basically, the primary market is for capital raising through the issuing of new
securities, while the secondary market maintains investor liquidity by providing a trading
platform for existing securities. Financial management, on the other hand, is essentially
the supervision of an organization's internal finances.
COMPARISONS:
Agency Theories and Issues to Functions of Financial Management
Financial management is a vital aspect of organizational management. It
involves various functions such as financial planning, forecasting, cash management,
and capital structure establishment. The goal is to ensure financial health and strategic
decision-making (Sharma, 2023). On the other hand, the Agency Theory and Issues
addresses issues in firms due to the separation of owners and managers. It focuses on
reducing this problem and implementing governance mechanisms to control agents'
actions in jointly held corporations. The model highlights the conflict between principal
and agent, who have different goals and interests, leading to the agency problem. Over
time, the agency problem has expanded to include creditors, major share-holders, and
minor shareholders .
In financial management, a company's financial health depends on its ability to
manage its finances, which includes a number of tasks such as capital expenses, cash
management, forecasting, financial planning, capital structure establishment, funding
source selection, strategic investment, and excess profit management. While
forecasting entails anticipating annual revenue and spending, analyzing cash needs,
and identifying financing sources, financial planning involves determining future values
of variables to establish an operational roadmap.Making choices about how to use
money, including paying off debts or allocating funds for stock maintenance, is a key
component of cash management. Cash flow forecasting is crucial for both expansion
and maintaining liquidity. When defining the ideal debt to equity ratio for financing
operations and growth, capital structure takes viability, sustainability, financial flexibility,
and other aspects into account.
In Agency Theory, the separation of ownership and control in large corporations
where owners delegate responsibilities to managers in the hopes that they would serve
their interests gives rise to the principal-agent dilemma. Managers, meanwhile, are
more concerned about maximizing their pay. The absence of appropriate monitoring
brought on by dispersed ownership arrangements and the mismatch of interests
between principal and agent are the causes of this conflict. The conflict of interest
between large and minor owners, big owners having more voting power and
undermining the interests of minor shareholders, is the foundation of the
principal-principal problem. The funding decisions made by shareholders, who engage
in high-risk initiatives with little return for creditors, give birth to the principal-creditor
dilemma.
Agency Theories and Issues to Primary and Secondary Markets.
The primary market serves as the initial platform for companies to issue new
securities, enabling them to raise capital directly from investors. This market is
characterized by the issuance of new stocks or bonds, strict regulatory compliance, and
the company's ability to determine the issue price based on various factors. In contrast,
the secondary market is where securities previously issued in the primary market are
traded among investors. This market is marked by continuous trading, the absence of
direct impact on the issuing company's financials, the provision of liquidity for investors,
and the determination of security prices through the forces of supply and demand.
Agency Theory and Issues play a significant role in both markets. In the primary
market, agency issues arise when the interests of the company's management (agents)
may not align with those of the new investors (principals) who purchase securities
(Panda & Leepsa, 2017). The theory emphasizes the importance of governance
mechanisms to ensure that the management acts in the best interest of the investors. In
the secondary market, agency problems can manifest between different types of
investors, such as majority and minority shareholders, or between shareholders and
management regarding the use of the company's assets.
The efficiency of both markets is influenced by agency considerations. In the
primary market, the effectiveness of the issuance process and the accuracy of the
information provided to investors are crucial for maintaining market efficiency. In the
secondary market, the availability of information, the speed of price adjustment to new
information, and the absence of manipulation by agents are key factors contributing to
market efficiency.
Regulatory environments in both markets are designed to address agency
concerns. The primary market is heavily regulated to ensure that all material information
is disclosed to investors and that the issuance process is fair and transparent. The
secondary market is also subject to regulation to prevent fraud, ensure fair trading
practices, and protect investors from manipulation by agents.
Agency Theories and Issues to Primary and Secondary Markets.
Agency theory and issues focuses on managing and solving internal conflicts
within the company, specially between the owners and managers. The main concern is
that conflicts can result from separation since managers may act in their own interests
instead of the owners’. This theory uses governance methods to reduce these conflicts.
Behavioral agency theory was developed in response to criticism that classic agency
theory frequently ignores the incentives and risk preferences of agents (Panda &
Leepsa, 2017).
Primary markets where securities such as equity shares and bonds are issued to
raise capital. This market, companies can directly raise non-repayable funds from
investors, which could have an impact on the capital structure of the issuing company.
Companies are free to decide the price of these securities, however the procedure has
strict regulation to protect investors and assure ethical behavior. Secondary Market is
where the investors can freely trade securities that were previously issued in the
primary market. Unlike the primary market, exchange in the secondary market has no
impact on the issuing company's financials (Finserv, 2024).
The primary and secondary markets have different functions in finance, where
agency theories and issues handle internal conflicts in business and seek to bring
together the interests of owners, managers and other stakeholders. The primary market
is focused on capital formation for companies, whereas the secondary market provides
a platform for liquidity and continuous trading of securities. The primary market enforces
strict regulations on the issuing of securities, the secondary market ensures the fairness
in trading among investors, and agency theory shows the governance processes within
organizations. It shows that each topic has a different priority in regulation.
REFERENCES:
Panda, B., & Leepsa, nm. (2017, June). (PDF) Agency Theory: Review of Theory and evidence
on problems and perspectives.
https://www.researchgate.net/publication/317321830_Agency_theory_Review_of_Theor
y_and_Evidence_on_Problems_and_Perspectives
Finserv, B. (2024, June 17). Difference between Primary and Secondary Market.
www.bajajfinserv.in.
https://www.bajajfinserv.in/primary-and-secondary-market#:~:text=The%20primary%20
market%20is%20where,bought%20and%20sold%20by%20investors.
Nobanee, H. (2021, September). (PDF) main functions of Financial Management.
https://www.researchgate.net/publication/354654640_Main_Functions_of_Financial_Ma
nagement
Sharma, J. (2023, December 31). Learning the important functions of financial management -
shiksha online. Study in India.
https://www.shiksha.com/online-courses/articles/functions-of-financial-management/
