A financial system is defined as a mechanism that allows for the desynchronization of income and consumption streams of economic agents across different time periods and uncertain events, thereby influencing the growth of an economy and its business cycle properties.
Market Timing Theory
The Market Timing Theory suggests that companies make financing decisions based on current market conditions. They issue equity when stock prices are high and issue debt when interest rates are low.
Standard finance, also known as modern portfolio theory, has four foundation blocks: (1) investors are rational; (2) markets are efficient; (3) investors should design their portfolios according to the rules of mean-variance portfolio theory and, in reality, do so; and (4) expected returns are a function of risk and ...
The financial analysis aims to analyze whether an entity is stable, liquid, solvent, or profitable enough to warrant a monetary investment. It is used to evaluate economic trends, set financial policies, build long-term plans for business activity, and identify projects or companies for investment.
Finance theory refers to a body of knowledge that provides guidance for forecasting future interest rates by incorporating economic principles and restrictions. It aims to develop a dynamic model that is both parsimonious and consistent with observed behavior, but there is currently no consensus on how to achieve this.
portfolio selection and capital market theory, optimum consumption and intertemporal portfolio selection, option pricing theory, contingent claim analysis of corporate finance, intertemporal CAPM, and complete market general equilibrium.
“Classical finance theory suggests that in efficient markets, rational investors hold diversified portfolios. and security prices reflect the discounted value of expected cash flows.
The fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage-free, and for a market to be complete.
A total of 14 theories and models are synthesized in this work, organized in five tables with the same structure: Theories of capital structure; capital budgeting and cost of equity; asset valuation, financial behavior and international finances.
This famous theorem Franco Modigliani and Merton H. Miller (1958, 1963) can actually be thought of as an extension of the "Separation Theorem" originally developed by Irving Fisher (1930).
In subject area: Economics, Econometrics and Finance. use value is understood here as 'a good or service that could sustain any activity carried on by a person other than its producer—whether or not we approve of the activity' (Tilly 1998, p. 22–3).
Financial accounting theory focuses on the “why” of accounting – the reasons why transactions are reported in certain ways. The majority of introductory accounting courses cover the “what” and “how” of accounting.
The traditional theory of capital structure says that for any company or investment there is an optimal mix of debt and equity financing that minimizes the WACC and maximizes value. Under this theory, the optimal capital structure occurs where the marginal cost of debt is equal to the marginal cost of equity.
Behavioral finance theory suggests that the patterns of overconfidence, overreaction and over representation are common to many investors and such groups can be large enough to prevent a company's share price from reflecting economic fundamentals.
A: Theories in financial management are conceptual frameworks or models that provide explanations, principles, and guidelines for understanding and making decisions related to financial activities, investments, and corporate finance.
It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.
In subject area: Economics, Econometrics and Finance. Equity theory proposes that individuals in social exchange relationships compare each other the ratios of their inputs into the exchange to their outcomes from the exchange.
Financial statement is a formal record of the financial activities and position of a business, organization, or individual. It summarizes financial transactions, performance, and financial health over a specific period.
Standard finance the body of knowledge that is built on such pillars as the arbitrage principles of Merton Miller and Franco Modigliani, the portfolio construction principles of Harry Markowitz, the capital asset pricing theory of John Lintner and William Sharpe, and the option-pricing theory of Fischer Black, Myron ...
Traditional finance theory is normative because it indicates how investors should make decisions. By contrast, the be- havioral finance approach is to understand why investors make the observed decision. Behavioral decision theory incorporates evidence on how people actually behave into models of decision-making.
Finance functions cover Investment (allocating funds to assets for growth), Dividend (deciding on profit distribution to shareholders), Financing (raising capital through equity or debt), and Liquidity (ensuring sufficient cash flow for operations).
Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting. There are three main types of finance: (1) personal, (2) corporate, and (3) public/government.
Risk theory is a branch of economics and mathematics that deals with the quantification, assessment, and management of risk, primarily in the context of insurance and finance.