Strategic Finance Management

Strategic finance management refers to the procedures, systems, and practices established by an institution to aid in reaching its goals, such as expansion, stakeholder’s wealth maximization, and corporate social responsibility. The executives develop insights from business activities, its capabilities, stakeholder expectations, as well as the available opportunities. Hence, the strategies have to be based on a well-formulated game-plan, which has a clear vision (Deloitte, 2019).

An appropriate strategic finance management scenario defines an elaborate picture of the organization’s target, lays down the courses of action to lead the entity there, brings work satisfaction and morale, as well as brings together finance officials through fast communication, and timely decision making (Deloitte, 2019).

Ratio Computation and Analysis for Redding and Neaves Companies – Using Strategic Finance Management Techniques

1. Profitability Ratios

This refers to financial computations that investors and business advisers apply while determining an institution’s revenue (Clear Tax, 2018). To get the profit realized, the metrics asses the difference between the receipt and payments made within a particular financial period, such as a year. For the two competing manufacturers, returns on investment and returns on capital employed are used.

a. Return on Investment

It is a ratio used to compute the gains of an investor concerning the amount of their investment. A high ratio, the more the benefits to be earned by the investor (Schmidt, 2019). With this ratio, investors can eliminate the projects promising low profits and focus on those that have a likelihood of raising higher returns.

Return on Investment Redding Co. = Revenue after Tax  × 100

Capital Employed 

ROI = 49 × 100 = 40.49%

121

ROI Neaves Co.

= 379 × 100 = 65.34%

580

Conclusion: Neaves has a higher ROI, hence is earning more revenue compared to Redding by 24.84%. Thus, Neaves is more appealing to an investor.

b. Return on Capital Employed

It is a ratio that is used in determining a company’s profitability due to its efficiency in capital utilization. A company with a higher ROCE means that it had a more economical use of capital that realized maximum gains (Daniel, 2018).            

ROCE = Earnings before Interest and Tax × 100

Capital Employed

Redding: =      80   × 100 = 66.11%.

121      

Neaves ROCE = 503 × 100 = 104.79%

480

Conclusion: both organizations have a significant amount of returns on the capital they have put to use. However, with Neaves having a higher return, investors can prefer it as their investment of choice because it will utilize their funds better.

2. Efficiency Ratios Strategic Finance Management

They are financial metrics that inform on a company’s ability to utilize its assets while keeping an eye on its liabilities in both the short and long terms (Peavler, 2019). It is the efficiency ratios that ensure an organization is not experiencing over investment or under investments. Fixed assets turnover and inventory turnover are the ratios to be used in this analysis.

a. Fixed Assets Turnover

It looks into how a form utilizes the available fixed assets like plants and equipment to increase sales. A firm that has a low number of fixed assets turnover in under utilizing its assets and should work towards optimizing the usage of fixed assets (Peavler, 2019). 

Fixed Assets Turnover = (Sales ÷ Fixed Assets)

Redding Co.

FAT = (195 ÷ 255) = 0.764

Neaves Co.

FAT = (1050 ÷ 1026) = 1.033

Conclusion: Neaves Company has a higher fixed assets turnover, meaning that it utilizes its fixed assets in making sales, better compared to Redding Company.

b. Inventory Turnover

Also known as stock turnover, inventor turnover is a financial metric that is used in determining the number of times that a business has ordered a new batch of inventory after selling a previous batch (Nicasio, 2019). It is computed on pre-determined periods such as semiannually, annually, monthly, or weekly.  

Inventory Turnover = Cost of Sales.

Average Stock 

Redding Co. = 78 = 5.2 Times

15

Neaves Co. = 273 = 8.03 Times  

34

Conclusion: Neaves Co. has a higher inventory turnover ratio than Redding Co. it implies that Neaves has more sales; hence, more promising returns or revenue.

Strategic-Finance-Management
Strategic-Finance-Management

3. Liquidity Ratios

They are ratios used in measuring the ability of an organization to settle its short-term liabilities when they are due without necessarily having to raise capital from lenders (Kenton, and Hayes, 2019). The quick ratio and Current ratio are used in this analysis and commonly found in strategic finance management.

a. Quick Ratio

It is a financial ratio used in determining the ability of an entity to meet its current liabilities using its liquid assets only. In this case, the stock is eliminated from the liquid assets category because it is time-consuming to convert it into cash (Eliodor 2014, P. 5). A company that is at optimal performance should have a quick ratio of 1:1, which shows its ability to pay for the liabilities due using its liquid assets. 

Quick ratio = Current Assets – Stock

   Current Liabilities  

Redding Co. = 65 – 15 = 1.67

  30

Neaves Co. = 198 – 34 = 1.07

153

Conclusion: Since the optimal quick ratio should be 1:1, and both have a quick ratio of more than 1, they can readily service their obligations when due. However, Redding Co has a higher quick ratio and is, therefore, better positioned to convert its liquid assets faster compared to Neaves Co.

c. Current Ratio

It is a liquidity ratio, which is used in measuring an entity’s ability to pay for its short-term liabilities that is the debts due within a year. It informs the investors about how well a company realizes optimal benefits from its current assets so that it can meet its current debts and other payables (Kenton, 2019).  The optimal current ratio should be 2:1 that is two current assets for one current liability

Current Ratio = Current Assets

Current Liabilities

Redding Co.

Current Ratio = 65 = 2.167

30

Neaves Co.

Current Ratio= 198 = 1.294

153

Comparison: Redding Company has a higher current ratio of 2.17:1, while Neave’s Company’s current ratio is 1.29:1. It implies that Redding can quickly pay for its current liabilities while Neaves is going to experience challenges paying for the obligations because it has not met the optimal current ratio.

4. Gearing Ratios.

It is a business assessment ratio that is concerned with the business’s capital structure. The ratio determines the amount and impacts of financing contributed by the stakeholders compared to external funding, such as the use of debt (Bragg, 2019). If a company has a high gearing ratio, it implies that the company has used more of debt capital and less of equity capital. Besides, low gearing means that the company has employed more equity and less of debt in its capital. A highly leveraged/geared company uses debt capital to meet daily obligations, which poses a threat of bankruptcy to the organization (Bragg, 2019). In this comparison, the equity ratio and debt ratio will be used to assess the gearing of the two companies.

a. Equity Ratio/ Net worth to total assets ratio

It is a financial arithmetic that indicates the relative amount of equity that is used in paying for a company’s assets. It informs shareholders about their funds compared to the institution’s total assets, thereby showing the businesses’ solvency position in the future (Ready ratios, 2013).  

Equity ratio = Equity ÷ Total Assets

Redding Co.

Equity ratio = 121 ÷ 320 = 0.378 or 37.8 %.

Neaves Co.

Equity ratio = 480 ÷ 1214 = 0.395 or 39.5 %

Comparison: both companies have an equity ratio of less than 51%. It means that their equity has funded a low amount of their assets, while a significant amount is funded using borrowed funds. The two companies are leveraged and are going to pay a significant amount of interest on the borrowed funds.

b. Debt Ratio

It is a financial leverage arithmetic that is used to measure the amount of a company’s assets that have been purchased using debt capital. If a company has a debt ratio of more than 1, it implies that it has a higher number of liabilities compared to its assets. Conversely, a ratio that is less than 1 indicates that the company has a high proportion of its assets purchased using equity (Investors answers, 2019).

Debt Ratio = Debt

Total Assets

Redding Co.

Debt ratio = 199 = 0.62 or 62%

320

Neaves Co.

Debt ratio = 634 = 0.52 or 52%

1214

Comparison: Redding Co. has a higher debt ratio, meaning that a significant proportion of its assets are acquired using debt capital other than equity. Therefore, Redding Company is more leveraged compared to Neaves Company.

5. Ratios by Investors to Determine Performance

They are financial arithmetic ratios that are used in determining the amount of returns an investor expects if they obtain a company’s stock at the current market prices. The ratio help in determining whether the shares are under priced or overpriced (Peavler, 2019). The ratios to be used are the interest coverage ratio and preference dividend coverage ratio. 

a. Interest Coverage Ratio

It is used in determining the ease of a business in servicing the interest of its borrowed funds from the realized revenue (Ready Ratios, 2013). The higher the ratio, the better the financial stability of an institution. If a company has a ratio of less than 1.0, it is facing challenges in making ales to raise revenue.

Interest Coverage Ratio = Earnings Before Interest and Tax 

Interest Expense

Redding Co.

ICR = 80 ÷ 19 = 4.21

Neaves Co.

ICR = 503 ÷ 29 = 17.34

Comparison: Both companies have an ICR of more than 1. Therefore, they can pay their interest expenses quickly from the revenue realized. Neaves Company is better positioned to pay for interest expenses because it has a higher ICR compared to Redding Co.

b. Preference Dividends Coverage Ratio

It is a financial ratio used in determining the organization’s ability to for its preference dividends.  A company that has issued preference dividends determines its ability to pay the dividends on such shares using this ratio.

Preference dividends coverage ratio = Profits After Tax.

Preference Dividends

Redding Co.

= 49 ÷ 0 = 0

Neaves Co.

379 ÷ 100 = 3.79

Comparison: Redding Company has not issued any preference shares; hence, it doesn’t pay any preference dividends. Neaves Co. has issued preference shares and has a preference dividends coverage ratio of 3.79. The latter company can, therefore, pay for the preference easily when they are due.

References – Strategic Finance Management Essential Reading

Bragg, S. (2019) Gearing ratio, Accounting Tools

Clear tax, (2018) Profitability Ratio Formula with Examples

Daniel, E. (2018) Return on Capital Employed

Deloitte (2019) Finance Strategy solutions

Eliodor, T. (2014)  Financial Statement Analysis, Journal of Knowledge Management, Economics, and IT.

Investing Answers (2019). Debt Ratio

Kenton, W. (2019) Current ratio Analysis – Strategic Finance Management

Kenton, W. (2019)  Strategic Financial Management

Nicasio, F. (2019) Inventory Turnover Definition and How to get it Right

Peavler, R. (2019). Asset Management ratios in Financial Analysis

Ready Radios, (2013) The definition and application of equity ratio – Strategic Finance Management

Schmidt, M. (2019) Returns on Investment Metric for measuring profitability

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Cryptocurrency Financial Operations

Consumer Perception of the Effectiveness of Cryptocurrency in Day To Day Financial Operations – Dissertation

Cryptocurrency has not received that much attention from IS (Information Systems) and as a consequence of this, there is still a gap in the literature with a great potential for research, specifically how the technology fares within the consumer context. Most notably, this dissertation is interested at the traction Cryptocurrency is gaining in today’s economy and how consumers are responding to this innovation. This dissertation will broadly present the evolution of Cryptocurrency, its financial characteristics, and what factors influence its value formation. The focus will then shift at the underlying models that are used both in a practical and academic setting to illustrate the factors that contribute to the acceptance and diffusion of a new technology. The conceptual model will be based on the Innovation Diffusion Theory of Everett Rogers.

Using a specifically designed questionnaire, consumer opinions are quantified in order to ascertain current attitudes and beliefs. Furthermore, after examining specifically designed hypothesis that deal with technology adoption, it was discovered that pivotal factors such as complexity, relative benefits and education play a distinct role in the uptake of Cryptocurrency. This is important because as a new technological instrument, Cryptocurrency opens the door to a number of opportunities for consumers, but only after overcoming a number of challenges and limitations that might prevent it to be accepted.

Cryptocurrency Dissertation
Cryptocurrency Dissertation

Thus, the aim is to investigate the monetary characteristics of a financial innovation in conjunction with the sociological component. This will lead to a better understanding of the constructs that influence the decision to adopt a novel technology by looking at a number of social and psychological factors. An overview of the leading technology adoption theories is provided that will address a number of cognitive, effective and contextual factors. While the study could potentially draw from all these theories, the Innovation Diffusion Theory of Everett Rogers will serve as a foundation, and all the assumptions will be based on this particular model.

Dissertation Objectives

  • What is the consumer response regarding the use of cryptocurrencies in day to day financial operations?
  • The main objective of this dissertation is to determine the level of consumer awareness, perception and degree of utilisation.
  • What are the main factors that influence the consumer intention to adopt cryptocurrencies?

Dissertation Contents

1 – Introduction
Background and Context
The Rationale for the Research
Research Objectives

2 – Literature Review
The Evolution of Cryptocurrency
What Is Cryptocurrency And What Is It Based On?
What Gives Cryptocurrencies Value?
Difference between Cryptocurrency and Traditional FIAT Currency
Cryptocurrency Nomenclature
Advantages and Disadvantages in using Cryptocurrency
Advantages
Disadvantages
Technology Adoption Theories
Hypothesis

3 – Methodology
Research Philosophy
Research Approach
Research Design and Strategy
Sample Size and Population
Ethical Considerations
Data Analysis

4 – Results
Demographics
Familiarity
Adoption Factors

5 – Research Findings and Discussion

6 – Conclusion

References

Appendix
Questionnaire

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Corporate Tax Avoidance Project

According to Christensen et al. (2015), corporate tax avoidance means using the legal strategies to adjust the financial circumstances of an individual to lower the amount of tax the said individual is owing to the state. Corporate tax is achieved through claiming permissible credits and deductions. Most often, corporate tax avoidance is usually confused with tax evasion. Although the two phrases could sound similar, however, Armstrong et al. (2015) believe that tax evasion applies illegal techniques like under reporting the income of an individual to make him or her avoid paying the taxes. According to Sikka (2010) tax avoidance strategy of a given corporation is an ‘organized hypocrisy.’

Avoidance Strategy as an Organized Hypocrisy

I agree with Sikka’s Term that tax avoidance is an organized hypocrisy. Just to mention, companies tend to excel at speaking on social responsibilities when at the same time they devising structures to enable them evade paying taxes. The tenacity of corporate tax avoidance as well as the evasion lures a devotion to organized hypocrisy which can be properly comprehended as the gaps that exist between the decision, the action and the corporate talk, (Brunsson, 1989, 2003). Corporate tax avoidance is indeed an organized hypocrisy. In particular, a case of WorldCom, which is a US telecommunications organization, collapsed amid of allegations of fraud in the year 2002. Consequently, the second reason why I agree with Sikka’s claim that corporate tax avoidance is an organized hypocrisy is the case of KPMG that was borrowed in 1997 considering the initial fee of three million dollars. Later, KPMG recouped a half a million dollars fee which meant to carter for the feasibility study. Notably, the organization proceeded to earn the bonuses of performance totaling to extra two million dollars.

Main Costs of Tax Avoidance

According to Koester, Shevlin, and Wangerin, tax avoidance will keep on inflicting and results to costly consequences to millions of individuals as long as the leaders of low-income countries are excluded from the tax avoidance solution (2016). Notably, in July 2014 at Los Angeles College, President Obama proclaimed loudly that those who employed creative measures to ensure their taxes were reduced were merely corporate deserters renouncing their citizenship to shield profits. Gaertner (2014) reveals that such strategies by individuals to avoid corporate tax have severe costs. There are five main cost types which are generated by companies and individuals vigorously avoid tax.

First, the authorities handling tax collection attempt to counter ingenious tax avoidance practice and institute new opinions and regulations which in turn become supplementary to the tax code. Although the purpose of this measure is to increase certainty, however, the end results is a convoluted tax which leads to the second cost of tax avoidance which is corporate compliance cost.

The third cost of corporate tax avoidance is increasing the cost of administration. Forth, tax avoidance encourages the formation of lobbyists and tax specialist industries which are created to exploit the system. The last main cost of tax avoidance is the loss of the government revenue. According to Hanlon (1994) and Sikka (2003), the federal government of the United States losses fifty to one hundred and seventy billion dollars annually due to tax avoidance.

Key Issue Surrounding Tax Avoidance

According to the Guardian on 30th March 2009, developing countries often receives approximately one hundred and twenty billion dollars from G20 countries in the foreign aid in which the said developing countries are losing an approximate amount of between eight billion and one trillion dollars from the unlawful financial outflow every year to the countries of the west (Kar & Cartwright-Smith, 2008). As Baker (2005) and Cobham (2005), about five hundred billion dollars is lost over a variety of corporate tax avoidance structures in which a substantial amount is attributed to price practices which shifts profits from the developing countries to already developed countries.

Tax is a major cost to many companies and they formulate strategies which ensure that such costs are minimized thus causing tax avoidance. According to Finch (2004), although rules still remain to be rules, nevertheless, they are prone to be broken and thus no matter which legislations are in place, the lawyers and the accountants will always find a way around the game of tax avoidance. Multinational is the leading case studies of tax avoidance since they have multiple locations which allow them to organize profits in those countries which are favorable tax regimes (Bowler, 2009).

Moral and Economic Implications of Corporate Tax Avoidance

In my own thoughts, corporate tax avoidance has negative moral and economic implications. The company which avoids tax uses the definition of CSR and also relies on a set of moral principles to assess their taxpaying behaviors using the lens of morality and ethics. However, moral reasoning is more complex than one can imagine. Following the thoughts of KMPG (2006), tax payment forms a key responsibility in the contemporary corporation. Some people usually consider paying corporate tax as a moral problem although others find it as being moral while a good portion will find the payment of corporate tax as an immorality. On the other hand, economic implication of corporate tax is that it makes accounting companies be capitalist and thus cannot buck the system pressure to raise their own profits thus creating new tax avoidance schemes and reducing the contribution to the government (Sikka, 2005). When the tax is not collected fully, the accumulated tax compels the government to stop spending in critical areas like welfare and schools which leads to underdevelopment.

Ways in Which Corporate Tax Avoidance can be Restricted

I think that there are ways that can be used to restrict corporate tax avoidance. First is through legislation. Legislation can be achieved through standardizing corporate reporting systems to make the government process information and also compare taxes across firms to see who is avoiding the corporate tax. The legislation should aid in the detection of fraud and strictly monitor a company’s insiders on the matters of tax.

Corporate Tax Avoidance Project
Corporate Tax Avoidance Project

The legislation on the tax avoidance can be enforced through well-functioning courts through playing the central importance of law enforcement of the contracting parties. The other way in which tax avoidance can be restricted is through ensuring proper accounting standards. Leuz et al report that proper accounting standards bring about a global reporting coverage than often thought (2003). Single sets of accounting cannot sufficiently compare reporting and disclose any malpractice.

Harmonization of Accounting Standards- Implementation and Challenges

It is argued that there should be standardization of the accounting policy among nations to fully realize the global economy. Harmonization of accounting standards facilitates international transactions as well as minimizing the costs of exchange through the provision of standardized information to the world’s economy. The harmonization is done by the International Accounting Standards Committee (IASC), the International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS). The said bodies are mandated to implement the accounting standards across the world. However, there are challenges faced during the implementation. First is the challenge of comparability. Comparability can be achieved through like things looking alike as well as unlike things looking unlike (Trueblood, 1966). According to Truebold, “things” in the accounting include the regulatory culture, the culture of auditing, the culture of account as well as the financial and business culture. The other challenge is associated with the problem of interpretation in which language is a problem when translating IFRS from English or to English.

Most accounting standards are limited in bringing convergence. It should be noted that adopting a single set of accounting cannot be sufficient to allow comparability as well as disclose relevant practice even if the said principles are compulsory to all the countries. However, the idea of adopting common sets of accounting standards cause more comparable reporting techniques as well as high-quality accounting standards like the IFRS (Leuz et al. 2003). Adopting IFRS requires that the party countries must have the asset pricing market which provides accounting values.

High accounting standards cause high quality and transparent reporting to most companies. In addition, IFRS causes economic benefits as well as cost saving. When harmonizing the accounting standards, there is a challenge of public versus private owned enterprises which includes the related party transactions. Following the observation above, the issue of comparability in accounting becomes a problem because tricky auditing problems arises (Leuz et al. 2003).

The harmonization of accounting standards requires the implementation guidance. According to Baker (2005), the IFRS have the implementation guidance to the accounting standards either through the non-authoritative guides or being standard themselves. For instance, IFRS issued the share-based guidance which is made up of forty four paragraphs relating to the application guidance. Similarly, the body issued non-authoritative guidance which guides the implementation of IFRS to guide the harmonization of the accounting standards. The IASB body on the other hand created the international financial reporting interpretation committee which oversees the share-based payment guidance. However, Trueblood (1966) believes that the countries and enterprises which apply the IFRS in their accounting standards will become more heterogonous in terms of the size, the jurisdiction, the ownership structure as well as the structure of the capital and there will be an increase the degree of accounting sophistications.

According to Brunsson (1989), the international convergence on the harmonization of standards demands that the implementation of IFRS policies and guidance must be increased in order to achieve the intended accounting standards. The scholar adds that if the IASB committee fails to respond to the demands concerning the detailed implementation guide of the accounting standards, then the preparers of the harmonized standards must look for the implementation guidance from elsewhere. The preparers can turn to EITF consensus to obtain answers to the questions concerning the application of IFRS. On the contrary, the form of convergence generated above is not as a result of cooperative behavior or the joint decision but as a result of auditors and preparers who seek guidance from a non-IASB credible source.

The implementation of the harmonization of the accounting standards exhibits a challenge in which the individual party countries’ financial reporting outcomes which are partly determined by the requirements of the accounting standards and partly by the incentives. The premise of the financial reporting outcome is that the accounting standards requires sufficient judgment by the preparers and auditors so that the figures reported are materially affected by the incentives of the financial reporting outcomes and the requirements of the accounting standards. Nevertheless, the typical relationship between the accounting standards and the incentives of the financial reporting outcomes is not well understood which forms part of the challenges in the implementation of accounting standards.

Leuz et al. (2003) institute that allowing the adoption of the IFRS will allow for the test of incentives that interacts with two or more standard regimes within the accounting standards. Warfield et al (1995) reveals that the financial reporting outcome is majorly affected by the ownership structure of the international accounting structure. The evidence which is available on the above claim reveals the marked specific jurisdiction differences in the ownership structure that affects the harmonization of the accounting standards.

La Porta et al. (1999) have analyzed the ultimate ownerships of the mid and large size firms in the twenty seven wealthy countries and identified four types of ultimate owners who play a key role in the accounting standards. The types include the public held non-financial institutions, the public owned financial institutions, the families and individuals as well as the state. The ownership structure of an enterprise needs to be considered before making implementations on the harmonization of the accounting standards.

Harmonization of the accounting standards requires the globalization of the trends involving the technology as well as globalization of finance. In the United States comparability of the financial data is one of the major driving forces behind the accounting standards. The comparability has been within the companies of the United States until 1980s where they began focusing on the capital markets. Some countries prefer comparability while others do not (Leuz et al. 2003). In 1991 the FASB board was challenged to become more actively involved in globalizing trends and the internationalization of the accounting standards. The plan published by FASB instituted the objectives for achieving comparability between the accounting standards of the United States and the major national standards-setting bodies.

References

Armstrong, Christopher S., Jennifer L. Blouin, Alan D. Jagolinzer, and David F. Larcker. “Corporate governance, incentives, and tax avoidance.” Journal of Accounting and Economics 60, no. 1 (2015): 1-17.

Avoidance: Some Evidence and Issues. Accounting Forum, Vol. 29(3), 325-343.

Baker, R.W. (2005), Capitalism‘s Achilles Heel, New Jersey: John Wiley.

Beresford, D.R., Katzenbach, N. and Rogers Jr., C.B. (2003). Report Of Investigation by The Special Investigative Committee of the Board Of Directors Of WorldCom, Inc. Washington DC.

Bowler, T. (2009, February). Countering tax avoidance in the UK: Which way forward? Institute for Fiscal Studies. Discussion Paper No. 7.

Brunsson. N. (1989), ―The Organization of Hypocrisy: Talk, Decisions and Actions in Organizations‖, John Wiley, Chichester.

Christensen, D. M., Dhaliwal, D. S., Boivie, S., & Graffin, S. D. (2015). Top management conservatism and corporate risk strategies: Evidence from managers’ personal political orientation and corporate tax avoidance. Strategic Management Journal36(12), 1918-1938.

Christensen, J. and Murphy, R. (2004), ―The Social Responsibility of Corporate Tax Avoidance: Taking CSR to the Bottom Line‖, Development, Vol. 47 No. 3, pp. 37-44.

Cobham, A. (2005). ―Working Paper 129: Tax Evasion, Tax Avoidance, and Development Finance‖. The University of Oxford Finance and Trade Policy Research Centre.

Gaertner, F. B. (2014). CEO After‐Tax compensation incentives and corporate tax avoidance. Contemporary Accounting Research31(4), 1077-1102.

Hanlon, G., (1994). The Commercialisation of Accountancy: Flexible Accumulation and the Transformation of the Service Class, London: Macmillan.

Kar, D. and Cartwright-Smith, D. (2008). Illicit Financial Flows from Developing Countries: 2002—2006. Washington DC: Global Financial Integrity.

Koester, A., Shevlin, T., & Wangerin, D. (2016). The role of managerial ability in corporate tax avoidance. Management Science63(10), 3285-3310.

KPMG, (2005). ―KPMG International Annual Review 2005, KPMG.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1998) Law and finance, Journal of Political Economy, 106, pp. 1113–1155.

 La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (1999) Corporate ownership around the world, Journal of Finance, 54, pp. 471–517.

Leuz, C., Nanda, D. and Wysocki, P. (2003). ‘Earnings management and investor protection: an international comparison’. Journal of Financial Economics, 69: 505– 527.

Sikka, P. and Hampton, M.P. (2005). The Role of Accountancy Firms in Tax.

Trueblood, R.M., 1966. Accounting principles: the board and its problems, in Empirical Research in Accounting: Selected Studies 1966, The Institute of Professional Accounting, Graduate School of Business, The University of Chicago, Chicago, pp. 183–191.

US Bankruptcy Court Southern District of New York, (2004). Third and Final Report of the Insolvency Examiner: In re WORLDCOM, INC., et al, Chapter 11, Case No. 02-13533 (AJG), Kirkpatrick & Lockhart LLP, Washington DC.

Werther Jr., W.B., and Chandler, D., (2005). Strategic Corporate Social Responsibility: Stakeholders in a Global Environment. London: Sage.

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Fiscal Policy Effectiveness within the European Union

The issue of monetary and fiscal policy within the EU is strongly debated at this moment in time. This is particularly true with the unconventional monetary policies being put in place for the first time by the European Central Bank such as quantitative easing; as the economy looks to recover from the sovereign debt crisis of 2008. This dissertation seeks to answer the following research questions: (1) Was the lack of a fiscal union a key contributing factor to the crisis? (2) Can a monetary union be effective without a unified fiscal policy to support it? (3) Has there been increased conformity in these key indicators since the crisis?

With these questions in mind, a literature review is undertaken to discuss and analyse the key issues within the European Union and beliefs and approaches regarding fiscal and monetary policy, including the heavily debated topic of whether or not a fiscal union is required. This dissertation also carries out a study of income and corporate taxation rates and expenditure figures for seven key EU countries in order to answer the above research questions.

A clear pattern of convergence is seen in the taxation rates and allows us to conclude that there has been increased conformity in key fiscal indicators since the sovereign debt crisis of 2008. We then link these findings back to the literature review and show that they fit with the beliefs of a large amount of previous academic work in the field. Our findings suggest that there has been increased fiscal conformity since the crisis and also that the lack of fiscal conformity (not necessarily achieved through the presence of a fiscal union) was a key contributing factor to the crisis.

Finally we also find that there can be an improved level of fiscal conformity without a fiscal union within a monetary union however we are unable to say conclusively that a monetary union can be effective without a unified fiscal policy.

This finance dissertation aims to establish the answer to a number of questions that stem from the 2008 European sovereign debt crisis:

  • Was the lack of a fiscal union a key contributing factor to the crisis?
  • Can a monetary union be effective without a unified fiscal policy to support it?
  • Has there been increased conformity in key fiscal indicators since the crisis?
Fiscal Policy EU
Fiscal Policy EU

Fiscal Policy Dissertation Contents

1 – Introduction
Overview of Research Aims and Strategy
Research Motivation
Introducing Monetary and Fiscal Policy
The Maastricht Treaty and the Stability and Growth Pact
Overview of Structure

2 – Literature Review
Can a monetary union be effective without the support of a fiscal union?
A monetary union can be effective without the support of a fiscal union
A monetary union cannot be effective without the support of a fiscal union
Was the lack of fiscal union a key reason behind the 2008 sovereign debt crisis?
The lack of a fiscal union was not a key reason behind the crisis
The lack of a fiscal union was a key reason behind the crisis
Shortcomings in the literature: Has there been increased fiscal conformity since the sovereign debt crisis hit?
Changing Role of the European Central Bank
Summarising the Literature
Anti Fiscal Union
Pro Fiscal Union
Lack of Fiscal Union was not key to Sovereign Debt Crisis
Lack of Fiscal union was key to Sovereign Debt Crisis

3 – Research Methodology
Sample Selection Criteria
Hypotheses Development and Reliability
Data
Top Band Personal Income Tax Rates (%)

4 – Findings
Income Tax Data
Corporate Tax Data
Total Tax Data
Government Expenditure Data
Implications of Findings

5 – Conclusion
Summary of the Results and their Implications
Limitations
Suggested Areas for Future Research

References

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International Financial Management

International Financial Management – Evaluate the extent to which the bargaining model can be viewed as a practical implementation of the law of comparative advantage?

International financial management is a coined term in today’s world, and it is also known as International Finance. In simple words, it means financial management in an International business environment. International Financial Management is, however, different countries and regions due to the different currencies, government situations, political situations, deficient markets, varied opportunity sets (Susan, & Anil 2009, pp. 381–399)

It is said that international financial management came into the limelight when countries started opening up their borders due to the liberation and globalization policies that came with capitalism. Because of the open borders and increased freedom to conduct business in any country around the world. Entrepreneurs started to source for raw materials and establish their business in different countries provided that the state met the preferences of the entrepreneur (Wissam & Ellen 2014). The development of liberalization was further enhanced by the swift move towards development of telecommunication and transport technologies. Financial innovations such as currency derivatives, multi-currency bonds, cross-border stock listing and International mutual funds further catalyzed the development of international financial management (Frederic et al. 2010, pp. 395-427).

Globalization and Multi-national Firm

Globalization has manifested itself in today’s world through the relationship of financial markets, increasing roles of the multinational corporations, the dependence of the local economies on foreign trade, transfer of technologies. This type of relationship has led to demands for harmonization of the world statically standards (Susan, & Anil 2009, pp. 381–399). Harmonization and standardization include updating the National Accounts System and the Balances of payment among other systems that would make the exchange of capital easier. Multinational firms have contributed a lot towards international financial management, in fact, MNCs are the focal point for the studies of International Financial Management. Globalization has enabled companies to expand their territories to different countries and regions. For example countries like NIKE, Nescafé, and Shell Oil among others are present in almost the whole world.

According to Frederic et al. (2010, pp. 395-427), the structure of the global industry has experienced great changes especially in the 1990s due to the cross-border mergers and acquisitions; this is evident since most companies committing their affairs freely with stakeholders in different parts of the world is becoming standard. A massive increment by $200 billion to more than $500 billion in cross-border mergers was recorded in a span of only 2years i.e. from 1995 to 1999. This lead to the healthy of business especially to the advanced developing countries like Taiwan and Hong Kong who are currently leading in investing in China and other South East Asia countries. In South America Brazilian and Chilean firms have dominated the region. In the same sense, Brazil and Argentina based companies have reciprocated. Korean companies overseas are roughly one-third of the massive domestic investments during 1999.

Due to this traffic foreign investment and trade have developed to become inter-wined. There are exports of foreign affiliates in developing states to the parent organizations overseas. This accounts for one-third of all the exports that originate from developing countries while two-thirds of the developing states involve a multinational buyer or seller. In the least developed countries, these ratios are probably higher because of the advantage that Multinational Corporations take over the cheap labor available in these countries. The rise of Multinational companies and foreign ownership has given various opinions about their effects on the developing countries.

International Financial Management and International Monetary Systems

Chiara et al. (2010, pp. 42-65), outlines that the international monetary system involves the management of money flows in conjunction with institutions that are government related that keep track of vast bulk of money including supporting currency needs and it also ensures payment obligations within and across countries are met accordingly. Various institutions that are responsible and are part of the international monetary system include the central banks international financial institutions, commercial banks, and some monetary market funds.

International Financial Management Dissertations
International Financial Management Dissertations

Wissam and Ellen (2014), adds that one distinguishing factor that makes IMS different from other financial institutions is that IMS is not interest bearing. Instead, money is considered as a unit of account and also means of exchanging goods and service and capital flows across borders in order to facilitate and ensure a perfect environment for exchange of financial assets and the excellent of financial markets. The commonly known definition of money since time immemorial is that it’s an asset in addition to its storage of value.

The USD has incurred changes that have been unheard of especially the one noted in 1985 where the dollar had hit a peak of USD 100 Billion a year. According to most economists was far much beyond the equilibrium level that has ever been attained. This record was due to the high exchanging rate which was a sign of confidence in the US economy, the high rate of exchange was due to the sticker hypothesis of the Dornbusch to fiscal irresponsibility. It was then decided that the dollar value be lower without considering much what took it high by intervening in the foreign exchange markets, this was done for the protectionist sentiment that conducted the US Congress that was mounting trading deficit

A plaza agreement that was formed by the big five countries i.e. united states France Japan great Britain and West Germany, a coordinated program to reach the target of forcing down the enormously shooting US dollar value against other currencies, the program worked perfect was successful in the end. It lost 11 percent of its SDR in 1986, the decrement of the US dollar was steady when Italy and Canada joined the group 5, forming a new group known as the G-7.The policies worked like a charm, and the US promised to cut the budget deficit and ultimately lower the rate at which the dollar was growing. To achieve this further Japan and Canada promised to stimulate their economies, although they achieved the reduction of the dollar value the budget cuts weren’t forthcoming and so Germany and Japan never succeeded in their mission to stimulate their economies (Arthur 2003, pp. 979-992).

Trade is among the factors in addition to inequities that balances out countries in todays world. These fluctuations in a system of a freely floating exchange of goods and services gives the adjustment system to bring trade back to balances. A country that has both trade and account deficit could get back to balance through devaluing its currency which will increase its exports and lessen the amount of imports (Chiara et al. 2010, pp. 42-65).

In reality the existence of chronic trade deficits in country have consequences to the economy through the systems of flexible exchange rate. One of the main reason for the failure in adjustment of exchange rates is deficit for incentives for various states to keep their currency strong in order to attract foreign investments. But according to the reports by the World Bank over valued currencies only impairs trade more while calling for more inflow of foreign currencies. Finally the game reaches the end and the investors run away and the deficit country have a fall in their currency that erodes even the domestic savings and ushers in inflation and these leads to the international financial management emergency assistance that is directed towards economic austerity.

World Bank statistics recognizes the fact that a mechanism of semi-fixed exchange rates that provides for flexibility in a narrow range and orderly mechanism for adjustments for such ranges. In 1994 the former chairman of the Bretton Woods Commission Volcker Paul openly condemned the liberation of the exchange rates and advocated for the semi-fixed exchange rate regime (Jean et al. 2005, pp. 1-43). In exchange for the Bretton Woods Institution (World Bank and IMF) the countries suffering from deficits are expected to implement a range of deflationary fiscal and deflationary policies, in the late 1990s they were known as Structural Adjustment Program and mostly implemented through letters of intent. The process is usually refer to us loan conditionality’s since IMF financial assistance are conditioned when implementing policy reforms (Xiaoying & Xiaming 2005, pp. 393-407).

Foreign Direct Investments

The rise of foreign Direct Investment started over tree decades ago. From 1980s when the FDI flow was estimated to be 50 billion US Dollars per year OFD has grown up to 2.1 trillion US Dollars in 2007. Due to the economic recession in 2008 FDI fell down to 1.9 trillion US Dollars that is -10% (James & Mark 2000). Foreign direct Investments from developed countries have increased due to the high growth in economies and high performance from the corporate world of these countries.

OFDI particularly flows from the European Union and The United States of America who take up to 84%, the remaining 16% is represented by the transitional economies (BRIC countries).

International financial management, the distribution of emerging market OFDI has evolved considerably changed over the past years. Asia overtook Latin America and Caribbean America has become leading region for Foreign Direct Investment. While MNCs have become fundamental investors in many developing countries, they have also invested in developed countries. The general number of Multinational Corporations has been growing in tandem, with FDI (Caroline 2004, pp. 20-29). This rise does not only show the increasing ownership benefits of these firms but also the pressure for the companies to get a portfolio locality assets as foundation for International competitiveness (Arthur 2003, pp. 979-992).

The Bargaining Model

According to the theory of bargaining, governments yearn for development and a stability payment balance. These goals can be achieved through attracting foreign investments. On the other hand, MNCs are in constant look for sources of raw materials and strategic manufacturing points near their targeted markets. These objectives can be satisfied when MNCs deal successfully with governments of host countries because it is through the sovereignty of the states that the MNCs can achieve these Governments seek economic development and balance-of-payments stability, for example, and both goals can be pursued by attracting and channeling the activities of foreign TNCs. TNCs seek inexpensive sources of raw materials and manufacturing sites (Chiara et al. 2010, pp. 42-65). According to Jean et al. (2005, pp. 1-43).The bargaining process is enhanced by the relative resources that each country has.

The government has its high points from the control over the two most fundamental requirement of the MNCs which are raw materials and intensive labor. On the other hand, the MNCs have goodies that the government desires that they use to influence the government with some of these goodies include helping in lowering the unemployment rate in the country, improving the host countries balance of payments through providing access to the International Markets (Arthur 2003, pp. 979-992). The relevance of these factors during the bargaining process substantially determines the expected outcome of negotiation between an MNC and the national government. Another factor that greatly influences the negotiation process is the situation between the firm and the government. The relative stakes that each party offers give a situation affecting the bargaining outcome.

Lastly the degree of similarity of interests that both the government and the multinational corporation have. The Similarity of interests makes negotiation more natural and smooth while different and parallel interests among the principles will make decision making very hard (Arthur 2003, pp. 979-992).

The Balance of Payments in International Financial Management

According to Wissam and Ellen (2014) defines this as an account records the payments and receipts of transactions of the citizens of that particular country with residents living in another country. Ones the payments and receipts of each country will include equally only if the operations are also included, neutrality will only favor one state at the expense of the other by allowing it acquire more assets from the not so preferred country. (Xiaoying & Xiaming 2005, pp. 393-407). An evident example is if Americans purchase automobiles from the Japanese, and don’t engage further in other transactions chances are the Japan will end up holding dollars either in the form of bank deposits or engage in other investments in the US. These payments are then balanced depending on the transactions made for the acquisition of the dollar assets (Jean et al. 2005, pp. 1-43).

However much the balancing is done deficits must occur as a result of inequalities and excess payments, therefore leading to a surplus in particular forms of transactions including the service trade merchandise trade (James & Mark 2000). The balance of payments in any country must refer to some class of operations.

Various definitions have been given to the balance of payments surplus and deficits in the past. Every definition had its distinct implications and purposes. It is until 1973 that there was a focus on the definition of balance-of-payments which had the intentions of measuring the ability of a country to meets its responsibilities of exchanging its currency for other currencies or for tagging it to the Gold system at a fixed rate exchange like the Great Britain did (Maurice 2010, pp. 1–23).

So as to meet the newly formed obligations countries strived to maintain a stock of official reserves, in the form of foreign country currencies or gold that they would use to in supporting their local currencies. The decline in this stores stock was seen as crucial balance-of-payment deficit since it threatened a country’s ability to meet its responsibilities (Arthur 2003, pp. 979-992).

This type of debt was not a good indicator at all when looking at the financial position of a state. The reason being that it never looked at the likelihood that the state would be called upon to meet its delegated duties and the willingness of the international monetary institution to provide assistance (James & Mark 2000).

Caroline (2004, pp. 20-29), points that after 1973, official reserves unit of measuring a country’s ability to meet its obligations diminished as various economic giants gave up their responsibility of converting their currency at a fixed exchange. The made reserves look more meaningless, and there was no longer any concern about the changes in a country’s reserves (Ngaire 2000, pp. 82-841).

Xiaoying and Xiaming (2005, pp. 393-407), purports that after the 1973 talks on the balance of payment surplus or deficits now refer to current accounts. This account has a trade in goods, investment incomes earned abroad and the unilateral transfers. It doesn’t include the capital account, which includes the sales of securities or property. Since the current account and the capital account sum up to the total account, which is necessarily balanced, debt in the current account always comes with an equal surplus in the capital account and vice versa (Maurice 2010, pp. 1–23). Deficit or surplus present in the current account cannot be evaluated without different explanations and the evaluation of an equal surplus or deficit in the capital account.

A State is considered to be in deficit when in its current account is higher its price level. When the Gross National Product is greater the interests rates are also higher and the lesser the barriers towards imports and more attractive it’s to international investors, compared to other countries (Barry 1999).

Kenneth (1996, pp. 647-668), argues that the impacts of any change in one of these factors on the country’s current account balance cannot be predicted without looking at the effects of the other international financial management factors. For instance, if the government increases tariffs, citizens are likely to import fewer goods, therefore, decreasing the current account deficit. In this case, where this decline will occur only when one of other factors changes to bring about a reduction in the capital account surplus.

According to Axel and James (2015, pp.120-148), if none of these factors changes then the decrease in imports due to an increase in tariffs will lead to a decline in the demand for the country’s foreign currency, this, in turn, will raise the local value of the respective country. The increase in the value of any countries increase makes that individual country exports more expensive and imports cheaper, therefore offsetting the implications of the growth in Tariffs. The overall result is that the increase in tariff will bring no change to the current account (Caroline 2004, pp. 20-29)

Contrary to the thoughts of most people, the existence of a deficit in the present account in itself is not a signal towards a recessing economy or irrational economic policies. If a country has a deficit in its current account, it can sometimes mean that the country is importing capital. Importing capital is no more a peculiar system it is just like importing coffee or tea.

References

 Arthur, C 2003. “The euro: faith, hope and parity, International Affairs.” pp. 979-992.

 Axel, D 2009. “IMF conditionality: theory and evidence, Public Choice.” pp. 233-267.

 Axel, D, Jan, E, S & James Vreeland 2015. “Politics and IMF Conditionality”. Journal of Conflict Resolution. Vol. 59, Vol. 1, pp.120-148.

 Barry, E 1999. “Kicking the Habit: moving from pegged exchange rates to greater exchange rate flexibility”. The Economic Journal C1 – C14 Equator Principles III.

 Caroline, M 2004. “Managing Exchange Rates: Achievement of Global Rebalancing or evidence of global co-dependency.” Business Economics, pp. 20-29.

 Chiara, F, Francesco, R & Giuseppe, M 2010. “Why do Firms Invest Abroad? An Analysis of the Motives Underlying Foreign Direct Investments.” The IUP Journal of International Business Law. Vol. 9, No. 1 & 2, pp. 42-65

 Frederic, B, Melika, B, S & Marine C 2010. “Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR model.” Annals of Economics and Statistics, pp. 395-427.

 James, R, L & Mark, P, T 2000. “Purchasing power parity over two centuries: strengthening the case for real exchange rate stability A reply to Cuddington and Liang.” Journal of International Money and Finance. Vol. 19, No.1, pp. 759–764.

 Jean, I, Haroon, M, Morten R & Helene Rey 2005. “PPP Strikes Back: Aggregation and the Real Exchange Rate.” The Quarterly Journal of Economics. Vol.34, No 1, pp. 1-43.

 John, H, D 2000. “The eclectic paradigm as an envelope for economic and business theories of MNE activity”. International Business Review 9, pp. 163–190.

 Kenneth, R 1996. “International Financial Management The Purchasing Power Parity Puzzle.” Journal of Economic Literature. Vol. 45, pp. 647-668.

 Maurice, O 2010. “Does the Current Account Still Matter?” American Economic Review. Vol.102, No. 3, pp. 1–23.

Ngaire, W 2000. “The Challenge of Good Governance for the IMF and the World Bank Themselves.” World Development. Vol. 28, No. 5, pp. 82-841.

Shaun, F & Andrew L 2004. “International Financial Management, new financial system? Towards a conceptualization of financial reintermediation.” Review of International Political Economy. Vol. 11, No.2, pp. 263-288.

 Susan, F & Anil G 2009. “Subsidiaries and Country Risk: internalization as a safeguard against weak external institutions.” Academy of International Financial Management, Vol. 52, No. 2, pp. 381–399.

 Wissam, H & Ellen, M 2014. “Hong Kong’s Currency Crisis: A Test of the 1990s.” Washington Consensus’ View, International Finance. Vol. 17, No.3, pp. 273–296.

Xiaoying, L & Xiaming, L .2005. “Foreign Direct Investment, International Financial Management and Economic Growth.” An Increasingly Endogenous Relationship World Development. Vol. 33, No. 3, pp. 393-407.

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