Multinational Business Finance ELEVENTH EDITION Chapter 1 Financial Goals and Corporate Governance David K. Arthur I. Michael H. EITEMAN·STONEHILL·MOFFETT Copyright 2007 Pearson Addison-Wesley.All rights reserved
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. Chapter 1 Financial Goals and Corporate Governance
兰The MuinioEris(MNg） A multinational enterprise (MNE)is defined as one that has operating subsidiaries,branches or affiliates located in foreign countries. The ownership of some MNEs is so dispersed internationally that they are known as transnational corporations. The transnationals are usually managed from a global perspective rather than from the perspective of any single country. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-2
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-2 The Multinational Enterprise (MNE) • A multinational enterprise (MNE) is defined as one that has operating subsidiaries, branches or affiliates located in foreign countries. • The ownership of some MNEs is so dispersed internationally that they are known as transnational corporations. • The transnationals are usually managed from a global perspective rather than from the perspective of any single country
Multinational Business Finance While multinational business finance emphasizes MNEs,purely domestic firms also often have significant international activities: -Import export of products,components and services Licensing of foreign firms to conduct their foreign business Exposure to foreign competition in the domestic market Indirect exposure to international risks through relationships with customers and suppliers Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-3
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-3 Multinational Business Finance • While multinational business finance emphasizes MNEs, purely domestic firms also often have significant international activities: – Import & export of products, components and services – Licensing of foreign firms to conduct their foreign business – Exposure to foreign competition in the domestic market – Indirect exposure to international risks through relationships with customers and suppliers
Global Financial Management There are significant differences between international and domestic financial management: -Cultural issues -Corporate governance issues Foreign exchange risks Political Risk -Modification of domestic finance theories Modification of domestic financial instruments Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-4
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-4 Global Financial Management • There are significant differences between international and domestic financial management: – Cultural issues – Corporate governance issues – Foreign exchange risks – Political Risk – Modification of domestic finance theories – Modification of domestic financial instruments
The Goal of Management Maximization of shareholders'wealth is the dominant goal of management in the Anglo-American world. In the rest of the world,this perspective still holds true (although to a lesser extent in some countries). In Anglo-American markets,this goal is realistic;in many other countries it is not. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-5
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-5 The Goal of Management • Maximization of shareholders’ wealth is the dominant goal of management in the Anglo-American world. • In the rest of the world, this perspective still holds true (although to a lesser extent in some countries). • In Anglo-American markets, this goal is realistic; in many other countries it is not
The Goal of Management There are basic differences in corporate and investor philosophies globally. In this context,the universal truths of finance become culturally determined norms. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-6
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-6 The Goal of Management • There are basic differences in corporate and investor philosophies globally. • In this context, the universal truths of finance become culturally determined norms
Shareholder Wealth Maximization In a Shareholder Wealth Maximization model (SWM),a firm should strive to maximize the return to shareholders,as measured by the sum of capital gains and dividends,for a given level of risk. Alternatively,the firm should minimize the level of risk to shareholders for a given rate of return Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-7
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-7 Shareholder Wealth Maximization • In a Shareholder Wealth Maximization model (SWM), a firm should strive to maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a given level of risk. • Alternatively, the firm should minimize the level of risk to shareholders for a given rate of return
Shareholder Wealth Maximization The SWM model assumes as a universal truth that the stock market is efficient. An equity share price is always correct because it captures all the expectations of return and risk as perceived by investors,quickly incorporating new information into the share price. Share prices are,in turn,the best allocators of capital in the macro economy. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-8
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-8 Shareholder Wealth Maximization • The SWM model assumes as a universal truth that the stock market is efficient. • An equity share price is always correct because it captures all the expectations of return and risk as perceived by investors, quickly incorporating new information into the share price. • Share prices are, in turn, the best allocators of capital in the macro economy
Shareholder Wealth Maximization The SWM model also treats its definition of risk as a universal truth. Risk is defined as the added risk that a firm's shares bring to a diversified portfolio. o Therefore the unsystematic,or operational risk, should not be of concern to investors (unless bankruptcy becomes a concern)because it can be diversified Systematic,or market,risk cannot however be eliminated. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-9
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-9 Shareholder Wealth Maximization • The SWM model also treats its definition of risk as a universal truth. • Risk is defined as the added risk that a firm’s shares bring to a diversified portfolio. • Therefore the unsystematic, or operational risk, should not be of concern to investors (unless bankruptcy becomes a concern) because it can be diversified. • Systematic, or market, risk cannot however be eliminated
Shareholder Wealth Maximization Agency theory is the study of how shareholders can motivate management to accept the prescriptions of the SWM model Liberal use of stock options should encourage management to think more like shareholders. If management deviates too extensively from SWM objectives,the board of directors should replace them. If the board of directors is too weak (or not at "arms- length')the discipline of the capital markets could effect the same outcome through a takeover. This outcome is made more possible in Anglo- American markets due to the one-share one-vote rule. Copyright 2007 Pearson Addison-Wesley.All rights reserved. 1-10
Copyright © 2007 Pearson Addison-Wesley. All rights reserved. 1-10 Shareholder Wealth Maximization • Agency theory is the study of how shareholders can motivate management to accept the prescriptions of the SWM model. • Liberal use of stock options should encourage management to think more like shareholders. • If management deviates too extensively from SWM objectives, the board of directors should replace them. • If the board of directors is too weak (or not at “armslength”) the discipline of the capital markets could effect the same outcome through a takeover. • This outcome is made more possible in Anglo- American markets due to the one-share one-vote rule