Can Financial Management Decisions Influence Firm Value

Economy 2302
Monique Martin
Chu Nguyen

Financial management is a work plan that details the revenue and expenses of a company. Financial decisions are strategies that achieve the financial objectives of a company that include capital budgeting, capital structure, and working capital management. Modigliani and Miller (1958) received the Nobel Prize in economics for their study of the relationship between capital structure and corporate value, with and without corporate tax. Whether financial management decisions influence firm value is still debated daily because there are plenty of uncertain factors. In this paper, I intend …show more content…

Fama (1965) was the first to propose a concept know as Efficient Markets and put forward the Efficient Markets Hypothesis(EMH) in 1970 which include three forms of hypothesis: weak, semi strong and strong efficiency. A weak form market shows that share price reflects historical information and technical analysis is a none factor. A semi strong form of efficiency market states that share price reflects public information and both technical and fundamental analysis are none factors. A strong form efficiency market means all public and insider information is reflected in the share price and no access to obtain excess profit. Firth studied stock prices in the UK in 1977 and found that market to reflect the semi strong form efficient market. As stated in the above analysis , classical theories presume financial management decisions, especially capital structured decessions affect firm value. Besides, the stock market in the United Kingdom is Semi-Strong-Form Efficient so that any public information is reflected in the prices. In order to test whether classical theories correspond to the reality, I found a company listed in the London Stock Exchange and studied whether its prices reflect the noninformation discussed and the relationship between them. Hong Kong and Shanghai Banking Corporation was first set up in Hong Kong, China in 1865. In 1992, the company restructured itself to form HSBC Holdings PLC after it