INTERNATIONAL FINANCIAL MANAGEMENT
INTRODUCTION TO INTERNATIONAL FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
Three sets of decisions:
1. Investment decision: In what does a firm invest?
2. Financing decision: How does a firm finances its operations?
3. Risk management decisions: How does a firm insure itself against risks?
One predefined objective: shareholder’s wealth maximization.
o Anglo-Saxon countries: generally accepted
o European countries: consider “stakeholders” overall welfare
o Japan: market share maximization
o …
GLOBALIZED WORLD
We are living in an increasingly globalized world. Gygli et al. (2019) distinguish between :
1. Economic globalization: “long distance flow of goods, capital and services…”
2. Social globalization: “spread of ideas, information, images and people”
3. Political globalization: “diffusion of government policies”, “ability to engage in international political
cooperation”
For OECD, economic globalization is “a process of closer economic integration of global markets: financial,
product and labour”
“At the global level, MNC and their foreign affiliates are estimated to produce 33% of the global output.”
Pagina 1 van 65
,A multinational corporation (MNC) consists of:
o A parent company in the firm’s originating country
o The operating subsidiaries, affiliates and branches it controls both at home and abroad
Firms become multinational when they undertake FDI, which means:
o Greenfield investments: the establishment of new production facilities in foreign countries
o Mergers with and acquisitions of existing foreign businesses
Firms obtain financing from many countries all over the world:
o Many major corporations of the world have their shares cross-listed on foreign stock exchanges
o At year-end 2014, international bonds accounted for 22% of outstanding bonds in the world:
financial and non-financial corporations were the main issuers.
“In 2016, US investors collectively invested $154 billion in foreign securities such as stocks and bonds,
whereas foreigners invested $276 billion in US securities”
WHY DO WE NEED TO STUDY IFM
o About 20% of companies listed on the NYSE in 2015 were from abroad.
o The Luxembourg SE has even more foreign than domestic listings
The world economy is not perfectly integrated (barriers to mobility)
o Trade barriers (e.g. tariffs, quotas, bans, transportation costs in the case of bulky products)
o Immigration barriers (e.g. documentation…)
o Barriers to cross-border capital flows (e.g. quality of corporate governance, capital inflows and
outflows restrictions, extra taxes for foreign securities…)
o It may not be equivalent to invest in country A rather than in country B
o It may not be equivalent to obtain financing from country A rather than from country B
Exchange rate fluctuations may in turn affect firm’s and financial investors’ cash flows → you need to
measure exchange risk exposures and manage them.
INTERNATIONAL FINANCIAL MANAGEMENT
How to maximize the benefits from the global opportunity set, while judiciously controlling currency and
political risks and managing various market imperfections?
o Investment decisions
o Financing decision
o Risk management
Pagina 2 van 65
,WHAT ARE CORPORATIONS AND WHO TAKES DECISIONS?
THE FOUR TYPES OF FIRMS
Sole proprietorship
o One owner
o Direct control of the firm, i.e., makes all decisions
o Unlimited personal liability for the contractual obligations of the business
o Their private property can be seized to pay off debts
Partnerships
There are different partnerships (general partnerships, limited partnerships…). General partnership:
o More than one owner, known as (general) partners
o Share direct control
o Unlimited personal liability for every partner
Corporations
o Multiple owners: shareholders / stockholders / equity holders
o Stocks/ shares: security, provides dividend right and voting rights
o Private corpo: limited number of shareholders
o Listed / public corpo: shares are traded on a stock market and anyone can acquire
ownership
o Ownership and control are separated
o The board of directors and the management team possess direct control
o Protection of shareholders’ rights depends on corporate governance
o Limited personal liability
o The obligations of a corpo are bounded by the assets of the corpo
Limited liability companies
hybrid between the parentship and the corporation
o One or more owners known as members
o Free to choose whether to keep or to delegate control
o Limited personal liability
You can see that the corporations are not the
most common type of firms (19%), but they
account for much sales revenue (84%)
Pagina 3 van 65
, THE CORPORATE MANAGEMENT TEAM
A typical organization chart:
Board of directors
o Makes rules, defines objectives, choose
managers and monitors them
o Elected by shareholders
CEO
o Runs the corporation
THE MAIN TASKS OF A FINANCIAL MANAGER
1. Investment decisions
2. Financing decisions
3. Cash (or working capital) management
a. Working capital= difference between a firm’s current assets and liabilities
4. Risk management
HOW DO WE ASSESS THE FINANCIAL PERFORMANCE OF A CORPORATION
Financial statements
= accounting reports that a firm produces periodically (either quarterly or annually or both)
Useful for who?
o Managers
o Suppliers of funds (existing and potential shareholders, creditors)
o …
Pagina 4 van 65
INTRODUCTION TO INTERNATIONAL FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
Three sets of decisions:
1. Investment decision: In what does a firm invest?
2. Financing decision: How does a firm finances its operations?
3. Risk management decisions: How does a firm insure itself against risks?
One predefined objective: shareholder’s wealth maximization.
o Anglo-Saxon countries: generally accepted
o European countries: consider “stakeholders” overall welfare
o Japan: market share maximization
o …
GLOBALIZED WORLD
We are living in an increasingly globalized world. Gygli et al. (2019) distinguish between :
1. Economic globalization: “long distance flow of goods, capital and services…”
2. Social globalization: “spread of ideas, information, images and people”
3. Political globalization: “diffusion of government policies”, “ability to engage in international political
cooperation”
For OECD, economic globalization is “a process of closer economic integration of global markets: financial,
product and labour”
“At the global level, MNC and their foreign affiliates are estimated to produce 33% of the global output.”
Pagina 1 van 65
,A multinational corporation (MNC) consists of:
o A parent company in the firm’s originating country
o The operating subsidiaries, affiliates and branches it controls both at home and abroad
Firms become multinational when they undertake FDI, which means:
o Greenfield investments: the establishment of new production facilities in foreign countries
o Mergers with and acquisitions of existing foreign businesses
Firms obtain financing from many countries all over the world:
o Many major corporations of the world have their shares cross-listed on foreign stock exchanges
o At year-end 2014, international bonds accounted for 22% of outstanding bonds in the world:
financial and non-financial corporations were the main issuers.
“In 2016, US investors collectively invested $154 billion in foreign securities such as stocks and bonds,
whereas foreigners invested $276 billion in US securities”
WHY DO WE NEED TO STUDY IFM
o About 20% of companies listed on the NYSE in 2015 were from abroad.
o The Luxembourg SE has even more foreign than domestic listings
The world economy is not perfectly integrated (barriers to mobility)
o Trade barriers (e.g. tariffs, quotas, bans, transportation costs in the case of bulky products)
o Immigration barriers (e.g. documentation…)
o Barriers to cross-border capital flows (e.g. quality of corporate governance, capital inflows and
outflows restrictions, extra taxes for foreign securities…)
o It may not be equivalent to invest in country A rather than in country B
o It may not be equivalent to obtain financing from country A rather than from country B
Exchange rate fluctuations may in turn affect firm’s and financial investors’ cash flows → you need to
measure exchange risk exposures and manage them.
INTERNATIONAL FINANCIAL MANAGEMENT
How to maximize the benefits from the global opportunity set, while judiciously controlling currency and
political risks and managing various market imperfections?
o Investment decisions
o Financing decision
o Risk management
Pagina 2 van 65
,WHAT ARE CORPORATIONS AND WHO TAKES DECISIONS?
THE FOUR TYPES OF FIRMS
Sole proprietorship
o One owner
o Direct control of the firm, i.e., makes all decisions
o Unlimited personal liability for the contractual obligations of the business
o Their private property can be seized to pay off debts
Partnerships
There are different partnerships (general partnerships, limited partnerships…). General partnership:
o More than one owner, known as (general) partners
o Share direct control
o Unlimited personal liability for every partner
Corporations
o Multiple owners: shareholders / stockholders / equity holders
o Stocks/ shares: security, provides dividend right and voting rights
o Private corpo: limited number of shareholders
o Listed / public corpo: shares are traded on a stock market and anyone can acquire
ownership
o Ownership and control are separated
o The board of directors and the management team possess direct control
o Protection of shareholders’ rights depends on corporate governance
o Limited personal liability
o The obligations of a corpo are bounded by the assets of the corpo
Limited liability companies
hybrid between the parentship and the corporation
o One or more owners known as members
o Free to choose whether to keep or to delegate control
o Limited personal liability
You can see that the corporations are not the
most common type of firms (19%), but they
account for much sales revenue (84%)
Pagina 3 van 65
, THE CORPORATE MANAGEMENT TEAM
A typical organization chart:
Board of directors
o Makes rules, defines objectives, choose
managers and monitors them
o Elected by shareholders
CEO
o Runs the corporation
THE MAIN TASKS OF A FINANCIAL MANAGER
1. Investment decisions
2. Financing decisions
3. Cash (or working capital) management
a. Working capital= difference between a firm’s current assets and liabilities
4. Risk management
HOW DO WE ASSESS THE FINANCIAL PERFORMANCE OF A CORPORATION
Financial statements
= accounting reports that a firm produces periodically (either quarterly or annually or both)
Useful for who?
o Managers
o Suppliers of funds (existing and potential shareholders, creditors)
o …
Pagina 4 van 65
