Essay on Finance Theory & Financial Strategy
By Stewart C Myers
How do firms integrate strategic planning and financial analysis? It appears to be somewhat haphazard in many cases. Senior management sets a direction, vision and mission statement based upon who the firm is now and how it has evolved. Then sets the firm’s course based upon their ideas of who they are and who they may wish to become. The finance department that handles the financial planning and analysis may support the strategic initiative in some manner, but not in an integrated, holistic approach.
The firm may evaluate projects based upon the net present value (NPV) of expected cash flows for that project. In a strategic sense, the financial planning deals with the …show more content…
It was cited in the article that some strategic managers work to diversify the holding and product mix/industry of the company. Yet there is not any favorable market response to being diversified. It may actually have a relatively high cost for a firm to diversify into another industry either through acquisition or start-up. Yet the stock holder seems to have a lower cost to diversify: he/she can buy stock of several companies or into a mutual fund or several mutual funds, thus reducing risk to this particular industry. Myers noted “that if the market were willing to pay extra for diversification, then closed-end funds would sell at a premium over their net asset value”(Myers, pg. 129). Previous article by Kaplan & Weisbach, titled The Success of Acquisitions: Evidence from Divestitures, notes that diversifying acquisitions were more likely to become divestitures than non-diversifying acquisitions. Also, diversifying acquisitions were three times as likely according to be considered unsuccessful as non-diversifying acquisitions (Journal of Finance, March 1992, pg 109).
One trend in the US vs. international is that the US companies may have a tendency to look at NPV more heavily as opposed to looking at their strategic plan. Another frequent