What Is Finance?
Finance is everywhere, and it seems that most people in the business world adore talking about finance. But what is finance? Finance has been described as a technology, as an innovative system to approach investment banking. Finance has also often been likened to accounting, although one soon notices the mathematics behind the two fields differ greatly (financial mathematics tend to be far harder than accounting fundamentals). Also, finance is a branch of economics, the social science aiming at reconciling the unlimited amount of human wants with the limited number of resources available in the world.
Golf is an upper-class sport often associated with businesspeople. Image: Megan Jorgensen (Elena)
Furthermore, microfinance usually refers to finance in developing countries, or nation states in the developing world. Microloans, the bread and butter of microfinance, refers to small loans which allow individual entrepreneurs in developing economies to embark on a new project. For example, people in the West may underestimate how much the life of an entrepreneur in a developing country can be changed with a CAN $1000, a sum which may mean the purchase of a complete running and operating business in some places in the world.
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| Magic world of finance. Photo by Elena |
Corporate Finance and Social Responsibility
The purpose of the present short entry is to discuss corporate social responsibility (CSR) in business as it applies to finance. Corporate social responsibility refers to companies integrating social and environmental matters into their core business model. Of course, arguments remain as to why firms choose to do so, many stemming from a more marketing-oriented approach point of view. For instance, from a neoclassical economics perspective, CSR raises costs unnecessarily, harming a firm’s competitiveness.
Caring for the environment may comprise part of CSR. Image: Megan Jorgensen (Elena)
CSR may also be defined as a luxury goods. Luxury good are distinct from convenience and necessity goods, in that they are acquired as a choice. Firms with better CSR may even face lower capital constraints, mediated through better stakeholder engagement and reduction of informational asymmetry between the firm and the market. The argument rests on the assumption that firms with better CSR have better reputations and thus attract more investors in the market.
Not unlike other industries, the world of finance is largely based on relationships. While insider trading is illegal and prohibited by the SEC, networks and relationships play important roles in who gets what and how successfully on the financial playing field. Investment banks make the bulk of their money through corporate finance, trading and asset management. The Lehman Brothers was the fifth largest investment bank in the world and collapsed on September 14, 2008 (Fernando et al., 2010).
When a firm first goes public (IPO – Initial Public Offering) actions are sold, and those acquiring them become the shareholders. Further, decisions are usually made by a Board of Directors.
By the same token, the controlling vote is customarily set at a minimum of 51% of shares or stocks. Stocks usually pay dividends and represent shares of the company. long these lines, the Board of Directors would appoint key top management positions, such as CEO (Chief Executive Officer) and CFO (Chief Financial Officer). Nonetheless, the agent-principal problem arises. Thus, while the firm’s managers ought to maximize profits for the corporation, and ultimately, investors, they may fail to do so for a variety of reasons.
Moreover, one of the fundamental theoretical constructs in this sub-field of economics, is Portfolio Theory, developed by Harry Markowitz in a 1952 paper.
Later in 1990, Markowitz received the Nobel Prize in Economics for his achievement. However, Sullivan (2006) asserts that credit for the development should also go to another economist – Andrew Donald Roy. Diversification is likewise an important principle in asset and resource allocation. Another valuable concept is the Pecking Order Theory, developed by Myers in 1984, stating that companies prefer internal rather than external financing when facing potential growth. Guo and Leinberger (2008) decided to test the postulate empirically, and found that practice seems to confirm theory, albeit to differing degrees depending on industry, organization size and other factors.
Real estate is likewise part of finance. Indeed, courses on real estate are often taught in university programs with a major in finance. Interestingly enough, transaction=based rather than appraisal-based research may be more fruitful to a greater understanding on the residential and commercial properties field, accordng to Geltner & Ling (2006). The researchers wrote a paper on the subject, which allows scientists and non-scientists alike to understand the subject matter.
Finance is a field of economics, the social science studying the production, distribution and consumption of resources. Naturally, like with all academic or scholarly endeavours, many theories attempt to explain and predict phenomena. Finance is no different and one of the most often cited arguments or theories, is the efficient market hypothesis. Further, economics is built on assumptions, such as the Latin phrase ‘ceteris paribus’ meaning all other factors being held constant. In a similar way, the efficient market hypothesis assumes that inviduals are rational agents seeking to maximize capital gain.
Many people see finance as a sort of gambling, because no matter what your investment strategy is, you cannot be right one hundred percent (100%) of the time. Thus, the sentence ridiculing financial theory, stating that a bunch of blindfolded monkeys throwing darts at a screen could outperform, or at least not underperform professional money managers and investors may hold some truth, at least to some people from a certain perspective. Furthermore, in certain financial calculations, the nature of the subject matter is such that even a genius would be right only fifty-one percent (51%) of the time. Quite discouraging for finance students, indeed.
Today, finance is among the most popular majors in undergraduate programs, such as Bachelor of Commerce or Bcomm. Indeed, many hopeful students choose to major in finance, dreaming of Wall Street glamour and perhaps of ways to get rich quick. But the truth of the matter is that higher education is not as bulletproof as it used to be. Indeed, BAs or Bachelor of Arts degrees are deemed almost completely useless by many employers. For instance, psychology, one of the most popular majors in the United States of America, leaves students with few alternatives aside from graduate school or working in completely unrelated fields, often at entry level jobs alongside individuals who have not completed any post secondary education. However, BComm degrees usually enjoy a better reputation.
An important topic in financial theory is, unsurprisingly, financial theory itself. For example, countless books and academic articles have been written on the subject, yet history shows that some finance professors are poorer than some obscure billionaire magnates who have yet to graduate from high school… Indeed, theory does not necessarily correspond to practice and the smart investors know their successful strategies not from books but from proven results.
Let’s admit that behavioral finance theory does marry finance to psychology. For example, behavioral and social science such as psychology, predicts that people will see the world in certain ways, and sometimes even imagine sense and connections where none exist. For example, a behavioral finance anecdote tells the story of the human factor playing its part in probability theory.
Thus, when participants were described a woman in her early thirties, artistic, with various musical and literary interests, a liberal with a slight feminist penchant; and then, asked to guess her profession from a multiple choice question, most chose artist over bank teller, while the latter is certainly more statistically probable than the former. The statement goes back to the deplored fallacy that a blindfolded monkey could pick stocks by throwing darts on Wall Street just as well as some of the best traders, brokers, investors and venture capitalists out there, because the stock market remains in economic equilibrium and is so unquestionably well priced.
However, while fatalistic minds would tend to agree that no one can actually beat the market, finance is a systematic, scientific inquiry and one needs only to pick up an entry in an academic journal on corporate finance to notice the rigorous and complex methodology. Thus, highly mathematical, financial theory fails to present itself to easy reading such as psychology would, to illustrate. However, this cannot be said with conviction of all social sciences. For instance, economics (of which finance happens to be a subdivision) is a social science also, but unlike psychology economics presents many more opportunities for calculations and equations, than psychology, quantitative or computational psychology aside, of course.
References:
Finance
Not unlike other industries, the world of finance is largely based on relationships. While insider trading is illegal and prohibited by the SEC, networks and relationships play important roles in who gets what and how successfully on the financial playing field. Investment banks make the bulk of their money through corporate finance, trading and asset management. The Lehman Brothers was the fifth largest investment bank in the world and collapsed on September 14, 2008 (Fernando et al., 2010).
When a firm first goes public (IPO – Initial Public Offering) actions are sold, and those acquiring them become the shareholders. Further, decisions are usually made by a Board of Directors.
By the same token, the controlling vote is customarily set at a minimum of 51% of shares or stocks. Stocks usually pay dividends and represent shares of the company. long these lines, the Board of Directors would appoint key top management positions, such as CEO (Chief Executive Officer) and CFO (Chief Financial Officer). Nonetheless, the agent-principal problem arises. Thus, while the firm’s managers ought to maximize profits for the corporation, and ultimately, investors, they may fail to do so for a variety of reasons.
Moreover, one of the fundamental theoretical constructs in this sub-field of economics, is Portfolio Theory, developed by Harry Markowitz in a 1952 paper.
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| Presumably, the lady is looking at fluctuating stock prices. Image: Copyright © Megan Jorgensen (Elena) |
Real estate is likewise part of finance. Indeed, courses on real estate are often taught in university programs with a major in finance. Interestingly enough, transaction=based rather than appraisal-based research may be more fruitful to a greater understanding on the residential and commercial properties field, accordng to Geltner & Ling (2006). The researchers wrote a paper on the subject, which allows scientists and non-scientists alike to understand the subject matter.
Finance Students
Finance is a field of economics, the social science studying the production, distribution and consumption of resources. Naturally, like with all academic or scholarly endeavours, many theories attempt to explain and predict phenomena. Finance is no different and one of the most often cited arguments or theories, is the efficient market hypothesis. Further, economics is built on assumptions, such as the Latin phrase ‘ceteris paribus’ meaning all other factors being held constant. In a similar way, the efficient market hypothesis assumes that inviduals are rational agents seeking to maximize capital gain.
Many people see finance as a sort of gambling, because no matter what your investment strategy is, you cannot be right one hundred percent (100%) of the time. Thus, the sentence ridiculing financial theory, stating that a bunch of blindfolded monkeys throwing darts at a screen could outperform, or at least not underperform professional money managers and investors may hold some truth, at least to some people from a certain perspective. Furthermore, in certain financial calculations, the nature of the subject matter is such that even a genius would be right only fifty-one percent (51%) of the time. Quite discouraging for finance students, indeed.
Today, finance is among the most popular majors in undergraduate programs, such as Bachelor of Commerce or Bcomm. Indeed, many hopeful students choose to major in finance, dreaming of Wall Street glamour and perhaps of ways to get rich quick. But the truth of the matter is that higher education is not as bulletproof as it used to be. Indeed, BAs or Bachelor of Arts degrees are deemed almost completely useless by many employers. For instance, psychology, one of the most popular majors in the United States of America, leaves students with few alternatives aside from graduate school or working in completely unrelated fields, often at entry level jobs alongside individuals who have not completed any post secondary education. However, BComm degrees usually enjoy a better reputation.
Theoretical Finance
An important topic in financial theory is, unsurprisingly, financial theory itself. For example, countless books and academic articles have been written on the subject, yet history shows that some finance professors are poorer than some obscure billionaire magnates who have yet to graduate from high school… Indeed, theory does not necessarily correspond to practice and the smart investors know their successful strategies not from books but from proven results.
Let’s admit that behavioral finance theory does marry finance to psychology. For example, behavioral and social science such as psychology, predicts that people will see the world in certain ways, and sometimes even imagine sense and connections where none exist. For example, a behavioral finance anecdote tells the story of the human factor playing its part in probability theory.
Thus, when participants were described a woman in her early thirties, artistic, with various musical and literary interests, a liberal with a slight feminist penchant; and then, asked to guess her profession from a multiple choice question, most chose artist over bank teller, while the latter is certainly more statistically probable than the former. The statement goes back to the deplored fallacy that a blindfolded monkey could pick stocks by throwing darts on Wall Street just as well as some of the best traders, brokers, investors and venture capitalists out there, because the stock market remains in economic equilibrium and is so unquestionably well priced.
However, while fatalistic minds would tend to agree that no one can actually beat the market, finance is a systematic, scientific inquiry and one needs only to pick up an entry in an academic journal on corporate finance to notice the rigorous and complex methodology. Thus, highly mathematical, financial theory fails to present itself to easy reading such as psychology would, to illustrate. However, this cannot be said with conviction of all social sciences. For instance, economics (of which finance happens to be a subdivision) is a social science also, but unlike psychology economics presents many more opportunities for calculations and equations, than psychology, quantitative or computational psychology aside, of course.
References:
- Guo, E. and Leinberger, G. (2008). Firm growth rates and financial choices in Pennsylvania firms – An empirical study about the Pecking Order Theory. In Eds. Belloit, J. D. and Johns, T. R. (2008). Northeastern Association of Business, Economics and Technology Proceedings of the 30th Annual Meeting October 30th and 31st: 87-94.
- Markowitz, H. M. (1952). Portfolio selection. Journal of Finance, 12: 71-91.
- Myers, S. C. (1984). The capital structure puzzle. Journal of Finance, 39 (3): 575-92.
- Sullivan, E. J. (2008). A. D. Roy: The forgotten father of portfolio theory. In Eds. Belloit, J. D. and Johns, T. R. (2008) Northeastern Association of Business, Economics and Technology Proceedings of the 30th Annual Meeting October 30th and 31st: 263-8.
- Fernando, C. S., May, A. D. & Megginson, W. L. (2010). The value of investment banking relationships: Evidence from the Collapse of Lehman Brothers: 1-55.
- Geltner, D. & Ling, D. C. (2006). Considerations in the design and construction of investment real estate research indices. JRER, 28 (4): 1-34.
