Efficient market hypothesis is a hypothesis that was introduce by Fama in1970. The hypothesis postulates that business people who seek to make profits exploits whatever is at their disposal till it’s no more. In real business practices, there can not be markets that are 100% efficient or inefficient. It is therefore correct to say that markets in cooperate the two aspects of efficiency and inefficiency presenting a situation of only one choice, i.e. the mixture of both. Changes that occur due to various decisions and events can not influence the markets immediately. In such a situation the, none can outdo the market by expert timing and stock selection hence presenting only one choice of making higher returns, that is purchase of riskier investments. This means that one cannot obtain above average gains without above average risks in the investments. The hypothesis exists in three versions: the weak, semi-strong and strong. The weak version holds that assets traded already reflect all past information publicly available. Semi-strong version hold that prices reflects all past information and changes instantly to reflect all new public information. The strong version claims that prices even in reflect hidden information. The working principle of the efficient market hypothesis is therefore based on the availability of public information. If information is flow without impediments and is reflected in the stock prices, tomorrow’s price will change to reflect only tomorrow’s information and will be independent of today’s price changes. Stock markets’ efficiency will entirely depend on available public information concerning the economical, political and social factors.
Mostly the economic factor tents to dominate. Taking for example the increased cost of oil leads to high cost in the travel industry. This leads to the drop of the prices of shares in the relevant industries. E.g. RadioShack shares have been on the downward trend in the stock market as associated operating costs increase due to increased oil prices. The oil price has been affected by unrest in Egypt and Libya.
References
Palan, S., 2007. The efficient Market Hypothesis and its Validity in Today’s Markets. Norderstedt, Germany: Auflage.
Bullis, G. R., 1983. The efficient market Hypothesis. Bismarck, ND: North Dakota state university Press.
Fama, E. F., 2000. Market Efficiency, Long-Term Returns, and Behavioural Finance, working paper series, Chicago, IL: Center for Research in Security Prices, Graduate School of Business, University of Chicago.
The Fundamentals of Raising "Finance for Multinational Enterprises"
There are various ways that a multinational company may use to increase its finances. One of these ways is to cut down the amount of taxes the company pays to the governments of the location of the business. This can be achieved by investing in countries whose tax rates are lowest. A good example is that currently, Montenegro charges 9% corporate tax compared to Tunisia’s 30% (worldwide-tax.com). Investing in Montenegro would be more economical than in Tunisia. This means that the corporate remains with some money that could have been used for payment of taxes. This money can be used for the expansion of the corporation.
A company may also increase its funds by saving its profits. Since most of the corporation are owned by shareholders, a certain percentage can be retained while the rest is shared out to the share holders as dividends. For example a power company may decide to share 50% as dividends and retain the rest for expansion and operations of the company. Kinder Morgan Partners in the U.S has been paying a dividend of about 6.5% and has seen a sustained increase in its revenue and total earnings for the last ten years.
A corporation can also sell common stock to increase its finance, commonly referred to as share floatation. The floatation involves many people like sponsors, brokers etc and also relevant institutions and should be properly timed. This selling should be done to attract investors to invest in the company and the funds obtained are use for the benefit of the company. This is what commonly referred to as share repurchasing. It involves the corporation repurchasing the shares to avoid accumulation of excess cash and hence makes the company attract investors. For example a communication corporate may decide to sell up to 40% of the shares to the public. E.g. Safaricom Corporation in Kenya sold its share to the public worth Ksh. 50 billion in March 2008. It is also splitting the shares to attract investors.
Another means of increasing finances of a company is borrowing. This in most cases is used to raise short term finances for the corporation. Although borrowing is quick and reliable it has critical challenge in that the loans so acquired will be paid at an interest and this can be a difficult thing for the corporation. For example a telecommunication corporate may approach a certain bank within its locality to secure itself a loan $10 million.
References
Levi, M. D., 2009. International Finance. New York, NY: Routledge.
Pilbeam, K., 2006. International Finance. London: Palgrave Macmillan.
Moosa, I. A., 2009. International Finance: An Analytical Approach. New York, NY: McGraw-Hill Education.
Corporate Risk Management & Multinational Tax Management
This involves the handling of the changes in exchange rates and markets. It deals with such issues as the economic, transaction and translation exposure. The multinational task management takes into considerations varying taxes in various places to determine the locations the company’s headquarter. This is because such a location will have a major effect on the overall tax the company pays. Many companies for example have moved their headquarters to Dublin to benefit from the low corporation taxes charged. Companies may use offshore tax havens and hence pay low taxes. In such a situation the company uses tax loopholes to pay low taxes. Although this may be considered a violation of the ethics in business it is necessary to cut down the costs.
Hedging is a risk management strategy that multinational corporations may use. Hedge instruments come in pairs of specific risks. Some of the risks may include risk of property damage, changes in foreign exchange rates, demand changes etc.
Leverage can be used to manage risks in multinational corporations. This involves reduction of the agency cost between the residual claimants and creditors and this reduces the expected cost of bankruptcy. This also helps the company to come up again in case of sudden losses by approaching capital markets for refunding. Post-loss financing is another strategy used to manage risks in multinational corporations. This involves the raising of funds after a loss. This will enable the company to continue with its operations and investments despite the sudden loss. Some times to raise these funds after a sudden loss is a difficult activity since the terms attract some penalties.
Risk assessment can also be used in the management of the risks. This involves research on all possible risks the company is exposed to. This type of research can be done continuously to ensure that any impending risk is notice early enough to take action. The results of the risk assessment are therefore used to lay down strategies to mitigate the risks. This practice makes the company to be dynamic in all aspects and hence remain in operations with least challenges.
The corporate governance process should also actively monitor and review all the risks that are possible and continuously offer responses. This means that any risk that has been identified can be addressed continuously over time until it is no more of a risk. This will ensure that no any impending risk catches up with the operations of the company.
References
Dobson C., 2007. 'Managing tax risk - A framework approach' in 'Tax Risk Management', London: Lexis Nexis Butterworths.
Mills A., 2007, 'Introduction to tax risk Management' in 'Tax Risk Management', London: Lexis Nexis Butterworths.
Sercu, P., 2009. International Finance: Theory into Practice. Princeton, NJ: Princeton University Press.
