REASONS TO STUDY INTERNATIONAL FINANCE

1.

To understand a global economy in terms of:

a b c

The end of cold war Industrialization and growth of the developing world Increased globalization.

2.

To understand the effect of global finance on business

3.

To make intelligent personal decisions

COMPANY GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT

1.

MNC's goal is to maximize stockholder wealth (stock price) on a global basis.

2.

Functions of international financial manager:

a b c

Financial planning and control Allocation of funds (investment) Acquisition of funds (financing)

MULTINATIONAL COMPANIES AND THEIR PERFORMANCE

1.

MNC is a company that produces a product, sells a product, and provides a service in two or more countries. Global company is a generic term used to describe an organization that attempts to standardize and integrate operations worldwide in all functional areas.

2.

MNCs have performed better than domestic performs due to:

a b c d e f g

Higher risk-return tradeoff Market imperfections Portfolio effect Comparative advantage Internationalization advantages Larger economies of scale Larger valuation.

AGENCY THEORY AND CORPORATE GOVERNANCE

1.

MNC's value is subject to larger agency cost.

2.

Agency theory is a theory that deals with the conflict of interest between managers and stockholders. Managers as agents of the owners are monitored and rewarded with incentives.

Incentives (carrot) include stock options, bonuses, and perquisites.

Monitoring (stick) includes reviewing management perquisites, auditing financial statements, and limiting management power.

Agency costs (costs for both incentives and monitoring) are greater for MNCs.

These agency costs are then compared with management performance (profits and stock price).

3.

Corporate governance refers to the way in which major stakeholders exert control over operations of a company. Today large institutional investors actively encourage effective corporate governance practices to maximize their returns. Shareholder activism is any activity of an investor who tries to change the status quo through voice without the control of the company. "Voice" covers a shareholder proposal for proxy fight, direct negotiation with management, and public targeting of a corporation.

Recent changes in the US corporate governance include the threat of a hostile takeover for inefficient companies, the linkage between executive compensation and share price performance, and institutional investors' activism.

US corporate governance is market, arm's-length transaction oriented, while Japan's corporate governance is bank, close personal-relation oriented.