Organisational strategy(in report format) Essay

Organisational strategy(in report format) - Essay Example (Innocent, 2008b; MySpace News, 2007; Hickman, 2007; Scott, 2007) For the purpose of this study, the researcher will apply some of the available strategic models in examining the internal and external factors that has contributed to he success of Innocent Drinks. First, the researcher will apply the PESTLE, Porter’s Five Forces, Opportunities and Threats model to critically analyze the external factors within the period of 1999 – 2007 that made Innocent Drinks able to grab the biggest market share from its competitors. Using the Strength model, the researcher will critically evaluate the effectiveness of the business strategies used by Innocent Drinks between the period of 2002 – 2007. Eventually, the researcher will assess and discuss the impact of Innocent Drinks’ stakeholder pressure on the organization in terms of how Adam Balon, Richard Reed and Jon Wright might have affected the strategies they have chosen followed by analysing the relative power and interest of the three business owners. Using the Options Matrix, the researcher will also evaluate and discuss whether the future strategies of Innocent Drinks should either be based on fit or stretch strategies. As part of discussion, the researcher will discuss the impact of external factors and its direct effects to the changes on the competitive behaviour within the same industry. PESTLE, which stands for ‘Political, Economic, Social, Technological, Legal, and Environmental analysis’ (TVU, 2007), will be used in illustrating the macro-environmental aspects of Innocent Drinks. UK food and drink industries are highly regulated by several government agencies. In line with this matter, food and drink industry in the United Kingdom is highly regulated by Food Standard Agency in order to protect the health and consumers’ interests when it comes to food safety, nutrition,

Introduction to management Essay Example | Topics and Well Written Essays - 1000 words

Introduction to management - Essay Example Basically, the company is owned by the employees since every partner’s main responsibility is to help and succeed in every endeavour that is set within its course. With the complex structure of the corporation, it is important to study and to analyze the corporate social responsibility which is often neglected but can be considered one of the most important aspects of a company (John Lewis Partnership, 2011b, About Us). In terms of CSR, the company believed in the importance of achieving goals while being a good corporate citizen. Their goal in terms of CSR is sustainability through civic responsibility as a method of establishing long term relationship with customers and suppliers. Specifically, JLP is employing environmentally sound policies, local community participation, and responsible sourcing and trading (JLP, 2011b, Our Responsibilities). One of the boldest moves undertaken by the company towards its CSR objectives is the implementation of CSR governance which is defin ed as the Partnership-wide action. In this project, Workplace Steering Group was established to concentrate solely on the planning, implementation and assessment of the CSR programs of the company. Also, the most important duty of the group is to mobilize the different departments and committees within the company to implement and to inculcate CSR perspective in every business practices. Thus, there are four major departments within JLP structure namely: the Employment Working Groups or the workplace composed of the people; the Divisional Steering and/or Working Groups or the marketplace steering group composed of customers, products and suppliers; the Divisional Community Investment Committees which are composed of the different communities; and the Environmental Steering Group which is composed of the company’s environment (JLP, 2011a, p.4). Tesco Plc and Its Views Telco Plc is a company focused in the retail service. It has a chain of groceries and general merchandise outl ets. The company is focused on the goal of creating value for the customer to achieve lifetime loyalty from them. Thus, the different aspects of the company is focused on the improvement of the retail business specifically the increase in number of branches, the expansion to international sites and the inclusion of different marketing interface such as online selling (Tesco Plc., 2011, About Us). In terms of CSR, Tesco Plc have clear objectives and path to achieve them. Included in the CSR aspect of the company are: the focus on the environment, the communities, the responsible buying and selling of products, the provision of healthy choices to the clients, and the people comprising the whole company structure (Tesco Plc., 2011). Comparison between John Lewis Partnership and Tesco Plc. Based on the study on the CSR policies of the two companies, there are similar and varying policies and views. Both companies have clear focus on the importance of CSR in the business operation. But t here are significant differences in the process of implementation of the policies. One of the main different between the two companies is the structure for CSR implementation. In JLP, an independent department

To what extent does the media assist or limit the conduct of military operations Essay Example for Free

To what extent does the media assist or limit the conduct of military operations Essay Some form of controversy has been regularly generated between the press and the military especially the question of media access to the battlefield. Conflict between reporter and the military is not new. As war correspondents became of age in the Civil War, the military began its determination to protect its operations. The media have often called this determination â€Å"censorship. † The military/media relationship is seriously degraded because of mistrust between the two entities. Sources of this mistrust are analyzed, to include: cultural differences; the perception of biased reporting; misunderstanding and ignorance; and speculation. In any operation there are many aspects of military/media relations which include operational security, the press pool system, logistics, public opinion, etc. However, there has been animosity between journalists and the military. The military frequently views press as offering only potential harm not benefit (Carruthers, 2000). The press, on the other hand, has a history of being critical of the military. For instance, U.  S. media and professional associations insist that the military must accommodate the press in wartime situations, for three good reasons which include: the press has always been present when troops have been involved; the public has a fundamental right to know; and restrictions put violate the First Amendment. Yet on some ground between the military operational requirement for information to be made available only on a basis of needing to know, and the right of the citizens of a democracy to know about what their military is doing, lies a middle ground (Dandeker, 1995). Generally, soldiers understand fighting and journalists understand communicating, yet none of them knows that the political impact of combat depends on how the fighting is communicated. Hence both sides need one another. Key civilian and military leaders have now embraced the fact that successful inclusion of the press to ensure adequate coverage is not an optional luxury, but rather is a necessity in todays information age and the expectations of the citizens. The benefits gained from the news media coverage of military operations outweigh the drawbacks, and therefore press coverage should be permitted. There is no set solution appropriate for every situation, since every war is unique. But improvements in military planning, officer training, and press indoctrination will help solve some of the current problems in the military/media relationship. How media assist the conduct of military operations In todays technology-driven world, the media is a fourth dimension added to air, land, and sea and the operational commander must contend with this potent entity to be relevant. Moreover, the media is an accelerator of immense importance in todays world in respect to the operational factors of time, space, and force affecting the operational commander decision-making. The reason why the military should engage the media is probably best stated by General (Ret) Dennis J.  Reimer in a 1997 memorandum to his senior Army leaders. â€Å"Our success, as an institution, depends on the degree to which all senior leaders communicate clearly to the people. It is in fact part of your METL [Mission Essential Task List],† said Reimer. To begin with, the military has the need for improved defense related public relations. The media is an important force multiplier, and it must be harnessed to win the battle of the hearts and minds of the people and keep them fully abreast of developments at home and abroad. This will ensure that they are not misled by rumors, propaganda and dis-information; this could happen if they do not have access to a truthful and speedy account of the facts and the progress of events. Secondly, the media is important in projecting the operations to the remotest parts of the country and arousing nationalism and patriotic fervour in the nation. Thirdly, having a media team at each level of command down to the battalion level is of great help to project the activities of the armed forces through films and other means. The procedure evolved provide for regular operational briefings by the operational/intelligence staff at headquarters or by the concerned corps/divisional commanders. Fourthly, training selected service officers and men in media work by running suitable courses for them on a regular basis and also media personnel need to understand the organisation, role, ethos and fighting capabilities of the armed forces and the characteristics of its various units is most beneficial (that is , media-military interface). Fifthly, limiting journalists access to a war can also work against the military. Galloway pointed to the Persian Gulf War as an example. When the war was over you had no proof of the efficacy of your efforts and your soldiers efforts to take up on [Capitol] Hill at a very difficult time when troop cuts, budget cuts, drawbacks are all under way, he said. Despite the constant tension and sometimes opposing goals of the military and the media, the militarys primary role is to support and defend the Constitution of the nation, the First Amendment of which is freedom of speech and of the press. Finally, having media-military interface there is hope for prompt and timely information in an age when news is increasingly being transmitted and used instantly, with TV news being broadcast on the hour, every hour (Krishna, 2000). How media limit the conduct of military operations The longstanding conflict between the news medias need for access and the militarys need for secrecy has continued during the war on terrorism, journalists agree. If anything, the tension between th e two groups has gotten worse. For instance, during the war in Afghanistan, Pentagon senior spokesman Bryan Whitman said the military understands reporters concerns but that the top priority must be troop safety. Ensuring †¦ that what we do with the news media in the Pentagon or in the field doesnt do anything to jeopardize the success of the operation or endanger the personnel that are participating in the military operation †¦ has to be balanced all the time with †¦ how much reporting can be taking place at any given moment, he said. (Wilcox Jr, 2002) But author and former war correspondent Joe Galloway, whose book We Were Soldiers Once †¦ and Young documents the first major U. S. ground battle of the Vietnam War, said that Vietnam changed the mindset of the military because of the open and unrestricted reporting done by journalists. Most of the times, the military is willing to learn, the journalists are not; pointed out by Galloway as evidenced by the numerous invitations he has received from the military to speak about the subject. He has not received any invitations to speak to news organizations or journalism schools. The media is also believed by them reporting from the battlefield turn the people against the military and against the war. Galloway also adds that, while Vietnam remains a model for him in terms of military/media relations, U. S. led military operations in Grenada and Panama were disastrous in terms of the medias ability to cover those conflicts because of military restrictions. Also, keeping the media at a greater distance from combat operations than security requires would contribute to a bitterly adversarial military-media relationship. This, in turn, would likely hurt the war effort in the long run by inviting relentlessly negative coverage and fanning public distrust. Furthermore, the media are a fact of military operations and here to stay as well as being vital to all democratic governments seeking to discharge their duty to explain. Military control of information during war time is also a major contributing factor to propaganda, especially when the media go along with it without question. The military recognizes the values of media and information control very well. The military often manipulates the mainstream media, by restricting or managing what information is presented and hence what the public are told. For them it is paramount to control the media. This can involve all manner of activities, from organizing media sessions and daily press briefings, or through providing managed access to war zones, to even planting stories. Over time then, the way that the media covers conflicts degrades in quality, critique and objectiveness. As one military puts it,† Information is the currency of victory. † From a military’s perspective, information warfare is another front on which a battle must be fought. However, as well as needing to deceive adversaries, in order to maintain public support, information to their own public must no doubt be managed as well. That makes sense from a military perspective. Sometimes the public can be willing to sacrifice detailed knowledge. But that can also lead to unaccountability and when information that is presented has been managed, propaganda is often the result. Finally, the military have had to adapt since 1982 is the speed of reporting made possible by modern communications. Today, a reporter with a digital camera, a laptop and a satellite phone, all of which can fit in a day sack, can file stories minutes after events and even live if they have a bit more by way of equipment. Control is much more difficult if reporters dont need military’s help to file a story. Because they can act so quickly, and are expected to do so by their editors or newsrooms, military dont have the time to ponder at length our response to events, we must respond quickly whilst still, crucially, maintaining accuracy. For instance, this happened on TELIC 1 (Iraq) but, it was not a great success. Conclusion Throughout history, no matter the time or war, there has always been a conflict between the military and the media. The media’s right to a free press conflicts with the military’s concern for operational security. It serves no constructive purpose, however, to ignore this conflict nor does it serve a purpose by adding to it. Therefore, it is time for the military to accept the media as part of the battlefield of the 21st century, and to understand and prepare for the media as it does for other battlefield elements. Commanders should ensure that their troops receive not only the equipment, but also the training to survive in adverse battlefield environments. The point here is to point out that no matter whether the military likes or dislikes the media, the media will be a part of the battlefield environment just as the weather. As is the case with inclement weather, the better the commander plans and prepares his or her troops, as well as themselves for the media, the better they and their troops will do when faced with a reporter. If we are going to get this right, the military must not resort unnecessarily to secrecy or to lightly tarring independent journalists as disloyal. The media should not frivolously cry censorship. And each should work harder to understand the views and accommodate the needs of the other.

Impact of Financial Leverage on Investment

Impact of Financial Leverage on Investment The term Investment is frequently used in jargon of economics, business management and finance. According to economic theories, investment is defined as the per-unit production of goods, which have not been consumed, but will however, be used for the purpose of future production. The decision for investment, also referred to as capital budgeting decision, is regarded as one of the key decisions of an entity. Leverage is a method of corporate funding in which a higher proportion of funds is raised through borrowing than stock issue. It is measured as the ratio of total debt to total assets; greater the amount of debt, greater the financial leverage. Financial Leverage is the ability of a company to earn more on its assets by taking on debt that allows it to buy or invest more in order to expand. Nowadays financial leverage is viewed as an important attribute of capital structure alongside equity and retained earnings. Financial leverage benefits common stockholders as long as the borrowed funds generate a return greater than the cost of borrowing, although the increased risk can offset the general cost of capital. In the past years, a large body of the literature has provided robust empirical evidence that financial factors have a significant impact on the investment decisions of firms. While traditional research on investment was based on the neoclassical theory of optimal capital accumulation (where under the assumption of perfect capital markets, the cost of financing does not depend on the firms financial position), more recent literature has increasingly incorporated frictions such as asymmetric information and agency problems as a source behind the relevance of the degree of financial pressure faced by the firm in determining the availability and the costs of external financing This chapter will seek to enclose literature on the impact of financial leverage on investment and other factors that may affect investment in firms. 1.1 Modigliani Miller (MM) 1958 theory with no taxation In what has been hailed as the most influential set of financial papers ever published, Franco Modigliani and Merton Miller addressed capital structure in a rigorous, scientific fashion, and their study set off a chain of research that continues to this day. Modigliani and Miller (1958) argued that the investment policy of a firm should be based only on those factors that will increase the profitability, cash flow or net worth of a firm. The MM view is that companies which operate in the same type of business and which have similar operating risks must have the same total value, irrespective of their capital structures. It is based on the belief that the value of a company depends upon the future operating income generated by its assets. The way in which this income is split between returns to debt holders and returns to equity should make no difference to the total value of the firm. Thus the total value of the firm will not change with gearing, and therefore neither will its Weighted Average Cost of Capita (Pandey, 1995). Many empirical literatures have challenged the leverage irrelevance theorem of Modigliani and Miller. The irrelevance proposition of Modigliani and Miller will be valid only if the perfect market assumptions underlying their analysis are satisfied Under the original MM propositions, leverage and investment were unrelated. If a firm had profitable investment projects, it could obtain funding for these projects regardless of the nature of its current balance sheet. 1.2 Modigliani Miller 1963 theory with tax M M (1963) found that the corporation tax system carries a distortion under which returns to debt holders (interest) are tax deductible to the firm, whereas returns to equity holders are not. They therefore concluded that geared companies have an advantage over ungeared companies, i.e. they pay less tax and will have a greater market value and a lower WACC. Following this research, the consensus that emerged was that tax is positively correlated to debt (Graham 1995, Miller 1977) and is considered a major influence in the debt policy decision. Modigliani et al (1963) argued that we should not waste our limited worrying capacity on second-order and largely self correcting problems like financial leveragingà ¢Ã¢â€š ¬Ã… ¸. That is firms should not be worried about growth as long as they have good projects in hand, since they will always be able to find means of financing those projects. 1.3 The Trade-Off Models Some of the assumptions inherent in the MM model can be relaxed without changing the basic conclusions as argued by Stiglitz (1969) and Rubenstein (1973). However, when financial distress and agency costs are considered, the MM models are altered significantly. The addition of financial distress and agency costs to the MM model results in a trade-off model. In such a model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shield) and the costs of debt (financial distress and agency costs) as presented by Myers (1997) The trade-off models have intuitive appeal because they lead to the conclusion that both no-debt and all-debt are bad, while a moderate debt level is good. However, the trade-off models have very limited empirical support, Marsh (1982), suggesting that factors not incorporated in this model are also at work. Jensen and Meckling (1976) invoked a moral hazard argument to explain the agency costs of debt, proposing that high levels of debt will induce firms to opt for excessively risky investment projects. The incentive for such a move is that limited liability provisions in debt contracts imply that risky projects will provide higher mean returns to the shareholders: zero in low states of nature and high in good states. However, the higher probability of default will induce investors to demand either interest rates premiums or bond covenants that restrict the firms future use of debt. 1.4 Pecking-Order Theory Initiated by Donaldson (1961), the Pecking-Order theory argues that firms simply use all their internally-generated funds first, move down the pecking order to debt and then lastly issue equity in an attempt to raise funds. Firms follow this line of least resistance that establishes the capital structure. Myers noted an inconsistency between Donaldsons findings and the trade-off models, and this inconsistency led Myers to propose a new theory. Myers (1984) suggested asymmetric information as an explanation for the heavy reliance on retentions. This may be a situation where managers have access to more information about the firm and know that the value of the shares is greater than the current market value. If new shares are issued in this situation, there is a possibility that they would be issued at a too low price, thereby transferring wealth from existing shareholders to new shareholders. 1.5 Investment and Leverage One of the main issues in Corporate Finance is whether financial leverage has any effects on investment policies. The corporate world is characterized by various market imperfections, due to transaction costs, institutional restrictions and asymmetric information. The interactions between management, shareholders and debt holders will generate frictions due to agency problems and that may result in under-investment or over-investment incentives. Whenever we refer to investment, it is essential to distinguish between over- investment and under-investment. In his model, Myers (1977) argued that debt can create an overhang effect. His idea was that debt overhang reduces the incentives of the shareholder-management coalition in control of the firm to invest in positive net-present-value investment opportunities, since the benefits accrue, at least partially, to the bondholders rather than accruing fully to the shareholders. Hence, highly levered firms are less likely to exploit valuable growth opportunities as compared to firms with low levels of leverage. Underinvestment theory centers on a liquidity effect in that firms with large debt commitment invest less, no matter what their growth opportunities (Lang et al, 1996). In theory, even if debt creates potential underinvestment incentives, the effect could be attenuated by the firm taking corrective action and lowering its leverage, if future growth opportunities are recognized sufficiently early (Aivazian Callen, 1980). Leverage is optimally reduced by management ex ante in view of projected valuable ex post growth opportunities, so that its impact on growth is attenuated. Thus, a negative empirical relation between leverage and growth may arise even in regressions that control for growth opportunities because managers reduce leverage in anticipation of future investment opportunities. Leverage simply signals managements information about investment opportunities. The possibility that leverage might substitute for growth opportunities is referred to as the endogeneity problem. Over-investment theory is another problem that has received much attention over the years. It is described as investment expenditure beyond that required to maintain assets in place and to finance positive NPV projects. In these kind of situations, conflicts may arise between managers and shareholders (Jensen,1986 Stulz,1990). Managers seek for opportunities to expand the business even if that implies undertaking poor projects and reducing shareholder worth in the company. Managers abilities to carry such a policy is restrained by the availability of cash flow and further tightened by the financing of debt. Issuing debt commits the firm to pay cash as interest and principal, forcing managers to service such commitments with funds that may have otherwise been allocated to poor investment projects. Thus, leverage is one mechanism for overcoming the overinvestment problem suggesting a negative relationship between debt and investment for firms with weak growth opportunities. Too much debt also is not considered to be good as it may lead to financial distress and agency problems. Cantor (1990) explains that highly leveraged firms show a heightened sensitivity to fluctuations in cash flow and earnings since they face substantial debt service obligations, have limited ability to borrow additional funds and may feel extra pressure to maintain a positive cash flow cushion. Hence, the net effect would be reduced levels of investment for the firm in question. Accordingly, Mc Connell and Servaes (1995) have examined a large sample of non financial United States firms for the years 1976, 1986 and 1988. They showed that for high growth firms the relation between corporate value and leverage is negative, whereas that for low growth firms the relation between corporate value and leverage is positively correlated. This trend tends to indicate that to maximise corporate value, it is preferable to keep down leverage to a low level and to increase investment. Lang, Ofek and Stulz (1996) used a pooling regression to estimate the investment equation. They distinguish between the impact of leverage on growth in a firms core business from that in its non-core business. They argue that if leverage is a proxy for growth opportunities, its contractionary impact on investment in the core segment of the firm should be much more pronounced than in the non-core segment. They found that there exists a negative relation between leverage and future growth at the firm level. Also they argued that debt financing does not reduce growth for firms known to have good investment opportunities. Lang et al document a negative relation between firm leverage and subsequent growth. However, they find that this negative relation holds only for low q firms, i.e. those with fewer profitable growth opportunities. Thus, their findings appear to be most consistent with the view that leverage curbs overinvestment in firms with poor growth opportunities. Myers (1997) has examined possible difficulties that firms may face in raising finance to materialize positive net present value (NPV) projects, if they are highly geared. Therefore, high leverages may result in liquidity problem and can affect a firms ability to finance growth. Under this situation, debt overhang can contribute to the under-investment problem of debt financing. That is for firms with growth opportunities, debt have a negative impact on the value of the firm. Peyer and Shivdasani (2001) provide evidence that large increases in leverage affect investment policy. They report that, following leveraged recapitalizations, firms allocate more capital to business units that produce greater cash flow. If leverage constrains investment, firms with valuable growth opportunities should choose lower leverage in order to avoid the risk of being forced to bypass some of these opportunities, while firms without valuable growth opportunities should choose higher leverage to bond themselves not to waste cash flow on unprofitable investment opportunities. Ahn et al. (2004) document that the negative relation between leverage and investment in diversified firms is significantly stronger for high Q segments than for low Q business segments, and is significantly stronger for non-core segments than for core segments. Among low growth firms, the positive relation between leverage and firm value is significantly weaker in diversified firms than in focused firms. Their results suggest that the disciplinary benefits of debt are partially offset by the additional managerial discretion in allocating debt service to different business segments within a diversified organizational structure. Childs et al (2005) argued that financial flexibility encourages the choice of short-term debt, thereby dramatically reducing the agency costs of under-investment and over-investment. However the reduction in the agency costs may not encourage the firm to increase leverage, since the firms initial debt level choice depends on the type of growth options in its investment opportunity set. Aivazian et al (2005) analysed the impact of leverage on investment on 1035 Canadian industrial companies, covering the period 1982 to 1999. Their study examined whether financing considerations (as measured by the extent of financial leverage) affect firm investment decisions inducing underinvestment or overinvestment incentives. They found that leverage is negatively related to the level of investment, and that this negative effect is significantly stronger for firms with low growth opportunities than those with high growth opportunities. These results provide support to agency theories of corporate leverage, and especially to the theory that leverage has a disciplining role for firms with weak growth opportunities 1.6 Investment, Cash Flow and Tobins Q It was traditionally believed that cash flow was important for firms investment decisions because managers regarded internal funds as less expensive than external funds. In the 1950s and 1960s, this view led to numerous empirical assessments of the role of internal funds in firm investment behaviour. These studies found strong relationships between cash flow and investment. Considerable empirical evidence indicates that internally generated funds are the primary way firms finance investment expenditures. In an in-depth study of 25 large firms, Gordon Donaldson (1961) concludes that: Management strongly favoured internal generation as a source of new funds even to the exclusion of external funds except for occasional unavoidable bulges in the need for new funds. Another survey of 176 corporate managers by Pinegar and Wilbricht (1989) found that managers prefer cash flow over external sources to finance new investment; 84.3% of sample respondents indicate a preference for financing investment with cash flow. Researchers have also discovered the impact of cash flow on investment spending in Q models of investment. Fazzari, Hubbard, and Petersen (1988) find that cash flow has a strong effect on investment spending in firms with low-dividend-payout policies. They argue that this result is consistent with the notion that low-payout firms are cash flow-constrained because of asymmetric information costs associated with external financing. One reason these firms keep dividends to a minimum is to conserve cash flow from which they can finance profitable investment expenditures. Fazzari and Petersen (1993) find that this same group of low-payout firms smooths fluctuations in cash flow with working capital to maintain desired investment levels. This result is consistent with the Myers and Majluf (1984) finding that liquid financial assets can mitigate the underinvestment problem arising from asymmetric information. Whited (1992) also extended the Fazzari, Hubbard, and Petersen (1988) results in a study of firms facing debt financing constraints due to financial distress. She found evidence of a strong relationship between cash flow and investment spending for firms with a high debt ratio or a high interest coverage ratio, or without rated debt. Himmelberg and Petersen (1994) in a study of small research and development firms find that cash flow strongly influences both capital and R D expenditures. They argue that the asymmetric information effects associated with such firms make external financing prohibitively expensive, forcing them to fund expenditures internally, that is by making use of cash flows. An alternative explanation for the strong cash flow/investment relationship is that managers divert free cash flow to unprofitable investment spending. One study assessing the relative importance of such an agency problem was performed by Oliner and Rudebusch (1992), who analysed several firm attributes that may influence the cash flow/investment relationship. They find that insider share holdings and ownership structure (variables that proxy for agency problems) do little to explain the influence that cash flow has on firm investment spending. Carpenter (1993) focused on the relationships among debt financing, debt structure, and investments pending to test the free cash flow theory. He finds that firms that restructure by replacing large amounts of external equity with debt increase their investment spending compared to non-restructured firms. He sees these results as inconsistent with free cash flow behavior, because cash flow committed to debt maintenance should be associated with reductions in subsequent investment spending. Findings by Strong and Meyer (1990) and Devereux and Schiantarelli (1990) support the free cash flow interpretation. Strong and Meyer (1990) disaggregate the investment and cash flow of firms in the paper industry into sustaining investment (i.e., productive capacity maintaining) and discretionary investment, and total cash flow and residual cash flow (i.e., cash flow after debt service, taxes, sustaining investment, and established dividends). Residual cash flow and discretionary investment are found to be positively and strongly related. This evidence suggests that residual cash flow is often used to fund unprofitable discretionary investments pending. Devereux and Schiantarelli (1990) find that the impact of cash flow on investment spending is greater for larger firms. One explanation they provide for this result is that large firms have more diverse ownership structures, and are more influenced by manager/shareholder agency problems. The Q model of investment relates investment to the firms stock market valuation, which is meant to reflect the present discounted value of expected future profits, Brainard and Tobin (1968). In the case of perfectly competitive markets and constant returns to scale technology, Hayashi (1982) showed that average Q, the ratio of the maximised value of the firm to the replacement cost of its existing capital stock, would be a sufficient statistic for investment rates. Tobins Q, further assumes that the maximised value of the firm can be measured by its stock market valuation. Under these assumptions, the stock market valuation would capture all relevant information about expected future profitability, and significant coefficients on cash-flow variables after controlling for Tobins Q could not be attributed to additional information about current expectations. However if the Hayashi conditions are not satisfied, or if stock market valuations are influenced by bubbles or any factors other than the present discounted value of expected future profits; then Tobins Q would not capture all relevant information about the expected future profitability of current investment. If that is the case, then additional explanatory variables like current or lagged sales or cash-flow terms could proxy for the missing information about expected future conditions. The classification of q ratios into high and low categories is based on a cut-off of one Lang, Stulz, and Walkling (1989). The latters motivation for this cut-off is partially based on the fact that under certain circumstances firms with q ratios below one have marginal projects with negative net present values (Lang and Litzenberger, 1989). However, q is also industry specific and one may argue that managers should not be held responsible for adverse shocks to their industries. As such, the industry average may be a useful alternative cut-off point to separate high q firms from low q firms. Hoshi, Kashyap, and Scharfstein (1991) regressed investment on Tobins q, other controlling variables, and cash flow. They interpreted differences in the importance of cash flow between different groups of firms as evidence of financing constraints. Results obtained by Vogt (1994) indicate that the influence of cash flow on capital spending is stronger for firms with lower Q values. This result suggests that cash flow-financed capital spending is marginally inefficient and provides initial evidence in support of the FCF hypothesis. The stronger the influence cash flow had on capital spending in this group, the larger the associated value of Tobins Q. After the results presented by Kaplan and Zingales (1997 and 2000), several studies have criticised the empirical test based on the cash flow sensitivity as a meaningful evidence in favour of the existence of financing constraints. The significance of the cash flow sensitivity of investment, it was argued, may then be the consequence of measurement errors in the usual proxy for investment opportunities, Tobins Q, and may provide additional information on expected profitability rather than being a signal of financing constraints. Gomes (2001) showed that the existence of financing constraints is not sufficient to establish cash flow as a significant regressor in a standard investment equation, while Ericson and Whited (2000) demonstrate that the investment sensitivity to cash flow in regressions including Tobins Q is to a large extent due to a measurement error in Q. Likewise, Alti (2003) shows that investment can be sensitive to changes in cash flow in the benchmark case where financing is frictionless. 2.3 Investment and Profitability The idea that investment depends on the profitability of a firm is amongst the oldest of macroeconomic relationships formulated. The sharp fluctuations in profitability in the average cost of capital since the 1960s revived interest in this relationship (Glyn et al, 1990). However the evidence for the impact of profitability on investment remains sketchy. Bhaskar and Glyn (1992) concluded that profitability must be regarded as a significant influence on investment, though by no means the overwhelming one. Their results indicated that enhanced profitability is not always a necessary, let alone a sufficient condition for increased investment. However, years later Glyn (1997) provided an empirical study that examined the impact of profitability on capital accumulation. He tested the impact of profitability in the manufacturing sector on investment for the period 1960-1993 for 15 OECD countries. His findings suggested that the classical emphasis on the role of profitability on investment wass still highly significant and had a very tight relationship. Korajczyk and Levy (2003) investigated the role of macroeconomic conditions and financial constraints in determining capital structure choice. While estimating the relation between firms debt ratio and firm-specific variables, they found out that there was a negative relation between profitability and target leverage, which was consistent with the pecking order theory. This indicated that if leverage of the firm is low, profitability will be high and the entity will be able to invest in positive NPV projects i.e. increase investment. Bhattacharyya (2008) recently provided an empirical study where he examined the effect of profitability and other determinants of investment for Indian firms. He found that Short-run profitability does not have consistent influence on investment decisions of firms, implying that one should concentrate on the long-run profitability of a firm. This indicates that profitability is still regarded as one of the major determinants underlying investment decisions of firms. However, he suggested that liquidity is relatively more important than profitability when it comes to firms investment decisions. 2.3 Investment and Liquidity Under the assumptions of illiquid capital and true uncertainty, management can never be sure that investment projects will produce sufficient liquidity to cover the cash commitments generated by their financing. Yet failure to meet these commitments may result in a crisis of managerial autonomy or even in bankruptcy. Thus, capital accumulation is a contradictory process. Investment is inherently risky, while the failure to invest will ultimately lead to the firms marginalization or demise. Crotty and Goldstein (1992) Chamberlain and Gordon (1989) used the annual domestic investment of all nonfinancial corporations in the United States between 1952 and 1981 in an attempt to determine the impact of liquidity on the profitable investment opportunities available to the corporation. They have put forward that in their long-run survival model, liquidity variables play an essential role as it captures the firms desire to avoid bankruptcy. It was also noted that there was a significant improvement in the explanation of investment when liquidity variables were added to the profitability variables of their regression, thereby supporting the view that liquidity is a pre-dominant determinant of investment and that they are positively related. Hoshi, Kashyap and Scharfstein (1991) attempted to find the relationship between investment and liquidity for Japanese firms. They found that high current profits increase current liquidity, thereby generating further investment from the firm to ensure future profitability and increased output to meet demand. Myers and Rajan (1998) suggested that liquid assets are generally viewed as being easier to finance and therefore, asset liquidity is a plus for nonfinancial corporations or individual investors. However, Myers and Rajan argued that although more liquid assets increase the ability to invest in projects, they also reduce managements ability to commit credibly to an investment strategy that protects investors. Johnson (2003) found that short debt maturity increases liquidity risk, which in turn, negatively affects leverage and the firms investment. Jonson also suggested that firms trade off the cost of underinvestment problems against the cost of increased liquidity risk when choosing short debt maturity 2.4 Investment and Sales Sales growth targets play a major role in the perceptions of top managers. Using surveys, Hubbard and Bromiley (1994) find sales is the most common objective mentioned by senior managers. Additional explanatory variables like current or lagged sales are very important in the investment equation as they can act as proxy for the missing information about expected future conditions in case such information has not been captured by Tobins Q. Kaplan and Norton (1992, 1993, 1996) argue that firms must use a wide variety of goals, including sales growth, to effectively reach their financial objectives. They suggested that Sales growth influences factorsà ¢Ã¢â€š ¬Ã‚ ¦..all the way to the implied opportunities for investments in new equipment and technologiesà ¢Ã¢â€š ¬Ã‚ ¦.. According to this study of 396 corporations, Kopcke and Howrey (1994) found that the capital spending of many of the companies corresponds very poorly with their sales and profits. These divergences suggest that sales and profits do not represent fully an enterprises particular incentives for investing. Consequently, these findings do not support generalizations contending that companies with more debt are investing less than their sales and cash flows would guarantee. Athey and Laumas (1994) using panel data over the period 1978-86, examined the relative importance of the sales accelerator and alternative internal sources of liquidity in investment activities of 256 Indian manufacturing firms. They found that when all the selected firms in the sample were considered together, current values of changes in real net sales and net profit were all significant in determining capital spending of firms. Azzoni and Kalatzis (2006) considered the importance of sales for investment decisions of firms. They found that sales presented a positive and significant relationship with investment in all cases. Impact of Financial Leverage on Investment Impact of Financial Leverage on Investment The term Investment is frequently used in jargon of economics, business management and finance. According to economic theories, investment is defined as the per-unit production of goods, which have not been consumed, but will however, be used for the purpose of future production. The decision for investment, also referred to as capital budgeting decision, is regarded as one of the key decisions of an entity. Leverage is a method of corporate funding in which a higher proportion of funds is raised through borrowing than stock issue. It is measured as the ratio of total debt to total assets; greater the amount of debt, greater the financial leverage. Financial Leverage is the ability of a company to earn more on its assets by taking on debt that allows it to buy or invest more in order to expand. Nowadays financial leverage is viewed as an important attribute of capital structure alongside equity and retained earnings. Financial leverage benefits common stockholders as long as the borrowed funds generate a return greater than the cost of borrowing, although the increased risk can offset the general cost of capital. In the past years, a large body of the literature has provided robust empirical evidence that financial factors have a significant impact on the investment decisions of firms. While traditional research on investment was based on the neoclassical theory of optimal capital accumulation (where under the assumption of perfect capital markets, the cost of financing does not depend on the firms financial position), more recent literature has increasingly incorporated frictions such as asymmetric information and agency problems as a source behind the relevance of the degree of financial pressure faced by the firm in determining the availability and the costs of external financing This chapter will seek to enclose literature on the impact of financial leverage on investment and other factors that may affect investment in firms. 1.1 Modigliani Miller (MM) 1958 theory with no taxation In what has been hailed as the most influential set of financial papers ever published, Franco Modigliani and Merton Miller addressed capital structure in a rigorous, scientific fashion, and their study set off a chain of research that continues to this day. Modigliani and Miller (1958) argued that the investment policy of a firm should be based only on those factors that will increase the profitability, cash flow or net worth of a firm. The MM view is that companies which operate in the same type of business and which have similar operating risks must have the same total value, irrespective of their capital structures. It is based on the belief that the value of a company depends upon the future operating income generated by its assets. The way in which this income is split between returns to debt holders and returns to equity should make no difference to the total value of the firm. Thus the total value of the firm will not change with gearing, and therefore neither will its Weighted Average Cost of Capita (Pandey, 1995). Many empirical literatures have challenged the leverage irrelevance theorem of Modigliani and Miller. The irrelevance proposition of Modigliani and Miller will be valid only if the perfect market assumptions underlying their analysis are satisfied Under the original MM propositions, leverage and investment were unrelated. If a firm had profitable investment projects, it could obtain funding for these projects regardless of the nature of its current balance sheet. 1.2 Modigliani Miller 1963 theory with tax M M (1963) found that the corporation tax system carries a distortion under which returns to debt holders (interest) are tax deductible to the firm, whereas returns to equity holders are not. They therefore concluded that geared companies have an advantage over ungeared companies, i.e. they pay less tax and will have a greater market value and a lower WACC. Following this research, the consensus that emerged was that tax is positively correlated to debt (Graham 1995, Miller 1977) and is considered a major influence in the debt policy decision. Modigliani et al (1963) argued that we should not waste our limited worrying capacity on second-order and largely self correcting problems like financial leveragingà ¢Ã¢â€š ¬Ã… ¸. That is firms should not be worried about growth as long as they have good projects in hand, since they will always be able to find means of financing those projects. 1.3 The Trade-Off Models Some of the assumptions inherent in the MM model can be relaxed without changing the basic conclusions as argued by Stiglitz (1969) and Rubenstein (1973). However, when financial distress and agency costs are considered, the MM models are altered significantly. The addition of financial distress and agency costs to the MM model results in a trade-off model. In such a model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shield) and the costs of debt (financial distress and agency costs) as presented by Myers (1997) The trade-off models have intuitive appeal because they lead to the conclusion that both no-debt and all-debt are bad, while a moderate debt level is good. However, the trade-off models have very limited empirical support, Marsh (1982), suggesting that factors not incorporated in this model are also at work. Jensen and Meckling (1976) invoked a moral hazard argument to explain the agency costs of debt, proposing that high levels of debt will induce firms to opt for excessively risky investment projects. The incentive for such a move is that limited liability provisions in debt contracts imply that risky projects will provide higher mean returns to the shareholders: zero in low states of nature and high in good states. However, the higher probability of default will induce investors to demand either interest rates premiums or bond covenants that restrict the firms future use of debt. 1.4 Pecking-Order Theory Initiated by Donaldson (1961), the Pecking-Order theory argues that firms simply use all their internally-generated funds first, move down the pecking order to debt and then lastly issue equity in an attempt to raise funds. Firms follow this line of least resistance that establishes the capital structure. Myers noted an inconsistency between Donaldsons findings and the trade-off models, and this inconsistency led Myers to propose a new theory. Myers (1984) suggested asymmetric information as an explanation for the heavy reliance on retentions. This may be a situation where managers have access to more information about the firm and know that the value of the shares is greater than the current market value. If new shares are issued in this situation, there is a possibility that they would be issued at a too low price, thereby transferring wealth from existing shareholders to new shareholders. 1.5 Investment and Leverage One of the main issues in Corporate Finance is whether financial leverage has any effects on investment policies. The corporate world is characterized by various market imperfections, due to transaction costs, institutional restrictions and asymmetric information. The interactions between management, shareholders and debt holders will generate frictions due to agency problems and that may result in under-investment or over-investment incentives. Whenever we refer to investment, it is essential to distinguish between over- investment and under-investment. In his model, Myers (1977) argued that debt can create an overhang effect. His idea was that debt overhang reduces the incentives of the shareholder-management coalition in control of the firm to invest in positive net-present-value investment opportunities, since the benefits accrue, at least partially, to the bondholders rather than accruing fully to the shareholders. Hence, highly levered firms are less likely to exploit valuable growth opportunities as compared to firms with low levels of leverage. Underinvestment theory centers on a liquidity effect in that firms with large debt commitment invest less, no matter what their growth opportunities (Lang et al, 1996). In theory, even if debt creates potential underinvestment incentives, the effect could be attenuated by the firm taking corrective action and lowering its leverage, if future growth opportunities are recognized sufficiently early (Aivazian Callen, 1980). Leverage is optimally reduced by management ex ante in view of projected valuable ex post growth opportunities, so that its impact on growth is attenuated. Thus, a negative empirical relation between leverage and growth may arise even in regressions that control for growth opportunities because managers reduce leverage in anticipation of future investment opportunities. Leverage simply signals managements information about investment opportunities. The possibility that leverage might substitute for growth opportunities is referred to as the endogeneity problem. Over-investment theory is another problem that has received much attention over the years. It is described as investment expenditure beyond that required to maintain assets in place and to finance positive NPV projects. In these kind of situations, conflicts may arise between managers and shareholders (Jensen,1986 Stulz,1990). Managers seek for opportunities to expand the business even if that implies undertaking poor projects and reducing shareholder worth in the company. Managers abilities to carry such a policy is restrained by the availability of cash flow and further tightened by the financing of debt. Issuing debt commits the firm to pay cash as interest and principal, forcing managers to service such commitments with funds that may have otherwise been allocated to poor investment projects. Thus, leverage is one mechanism for overcoming the overinvestment problem suggesting a negative relationship between debt and investment for firms with weak growth opportunities. Too much debt also is not considered to be good as it may lead to financial distress and agency problems. Cantor (1990) explains that highly leveraged firms show a heightened sensitivity to fluctuations in cash flow and earnings since they face substantial debt service obligations, have limited ability to borrow additional funds and may feel extra pressure to maintain a positive cash flow cushion. Hence, the net effect would be reduced levels of investment for the firm in question. Accordingly, Mc Connell and Servaes (1995) have examined a large sample of non financial United States firms for the years 1976, 1986 and 1988. They showed that for high growth firms the relation between corporate value and leverage is negative, whereas that for low growth firms the relation between corporate value and leverage is positively correlated. This trend tends to indicate that to maximise corporate value, it is preferable to keep down leverage to a low level and to increase investment. Lang, Ofek and Stulz (1996) used a pooling regression to estimate the investment equation. They distinguish between the impact of leverage on growth in a firms core business from that in its non-core business. They argue that if leverage is a proxy for growth opportunities, its contractionary impact on investment in the core segment of the firm should be much more pronounced than in the non-core segment. They found that there exists a negative relation between leverage and future growth at the firm level. Also they argued that debt financing does not reduce growth for firms known to have good investment opportunities. Lang et al document a negative relation between firm leverage and subsequent growth. However, they find that this negative relation holds only for low q firms, i.e. those with fewer profitable growth opportunities. Thus, their findings appear to be most consistent with the view that leverage curbs overinvestment in firms with poor growth opportunities. Myers (1997) has examined possible difficulties that firms may face in raising finance to materialize positive net present value (NPV) projects, if they are highly geared. Therefore, high leverages may result in liquidity problem and can affect a firms ability to finance growth. Under this situation, debt overhang can contribute to the under-investment problem of debt financing. That is for firms with growth opportunities, debt have a negative impact on the value of the firm. Peyer and Shivdasani (2001) provide evidence that large increases in leverage affect investment policy. They report that, following leveraged recapitalizations, firms allocate more capital to business units that produce greater cash flow. If leverage constrains investment, firms with valuable growth opportunities should choose lower leverage in order to avoid the risk of being forced to bypass some of these opportunities, while firms without valuable growth opportunities should choose higher leverage to bond themselves not to waste cash flow on unprofitable investment opportunities. Ahn et al. (2004) document that the negative relation between leverage and investment in diversified firms is significantly stronger for high Q segments than for low Q business segments, and is significantly stronger for non-core segments than for core segments. Among low growth firms, the positive relation between leverage and firm value is significantly weaker in diversified firms than in focused firms. Their results suggest that the disciplinary benefits of debt are partially offset by the additional managerial discretion in allocating debt service to different business segments within a diversified organizational structure. Childs et al (2005) argued that financial flexibility encourages the choice of short-term debt, thereby dramatically reducing the agency costs of under-investment and over-investment. However the reduction in the agency costs may not encourage the firm to increase leverage, since the firms initial debt level choice depends on the type of growth options in its investment opportunity set. Aivazian et al (2005) analysed the impact of leverage on investment on 1035 Canadian industrial companies, covering the period 1982 to 1999. Their study examined whether financing considerations (as measured by the extent of financial leverage) affect firm investment decisions inducing underinvestment or overinvestment incentives. They found that leverage is negatively related to the level of investment, and that this negative effect is significantly stronger for firms with low growth opportunities than those with high growth opportunities. These results provide support to agency theories of corporate leverage, and especially to the theory that leverage has a disciplining role for firms with weak growth opportunities 1.6 Investment, Cash Flow and Tobins Q It was traditionally believed that cash flow was important for firms investment decisions because managers regarded internal funds as less expensive than external funds. In the 1950s and 1960s, this view led to numerous empirical assessments of the role of internal funds in firm investment behaviour. These studies found strong relationships between cash flow and investment. Considerable empirical evidence indicates that internally generated funds are the primary way firms finance investment expenditures. In an in-depth study of 25 large firms, Gordon Donaldson (1961) concludes that: Management strongly favoured internal generation as a source of new funds even to the exclusion of external funds except for occasional unavoidable bulges in the need for new funds. Another survey of 176 corporate managers by Pinegar and Wilbricht (1989) found that managers prefer cash flow over external sources to finance new investment; 84.3% of sample respondents indicate a preference for financing investment with cash flow. Researchers have also discovered the impact of cash flow on investment spending in Q models of investment. Fazzari, Hubbard, and Petersen (1988) find that cash flow has a strong effect on investment spending in firms with low-dividend-payout policies. They argue that this result is consistent with the notion that low-payout firms are cash flow-constrained because of asymmetric information costs associated with external financing. One reason these firms keep dividends to a minimum is to conserve cash flow from which they can finance profitable investment expenditures. Fazzari and Petersen (1993) find that this same group of low-payout firms smooths fluctuations in cash flow with working capital to maintain desired investment levels. This result is consistent with the Myers and Majluf (1984) finding that liquid financial assets can mitigate the underinvestment problem arising from asymmetric information. Whited (1992) also extended the Fazzari, Hubbard, and Petersen (1988) results in a study of firms facing debt financing constraints due to financial distress. She found evidence of a strong relationship between cash flow and investment spending for firms with a high debt ratio or a high interest coverage ratio, or without rated debt. Himmelberg and Petersen (1994) in a study of small research and development firms find that cash flow strongly influences both capital and R D expenditures. They argue that the asymmetric information effects associated with such firms make external financing prohibitively expensive, forcing them to fund expenditures internally, that is by making use of cash flows. An alternative explanation for the strong cash flow/investment relationship is that managers divert free cash flow to unprofitable investment spending. One study assessing the relative importance of such an agency problem was performed by Oliner and Rudebusch (1992), who analysed several firm attributes that may influence the cash flow/investment relationship. They find that insider share holdings and ownership structure (variables that proxy for agency problems) do little to explain the influence that cash flow has on firm investment spending. Carpenter (1993) focused on the relationships among debt financing, debt structure, and investments pending to test the free cash flow theory. He finds that firms that restructure by replacing large amounts of external equity with debt increase their investment spending compared to non-restructured firms. He sees these results as inconsistent with free cash flow behavior, because cash flow committed to debt maintenance should be associated with reductions in subsequent investment spending. Findings by Strong and Meyer (1990) and Devereux and Schiantarelli (1990) support the free cash flow interpretation. Strong and Meyer (1990) disaggregate the investment and cash flow of firms in the paper industry into sustaining investment (i.e., productive capacity maintaining) and discretionary investment, and total cash flow and residual cash flow (i.e., cash flow after debt service, taxes, sustaining investment, and established dividends). Residual cash flow and discretionary investment are found to be positively and strongly related. This evidence suggests that residual cash flow is often used to fund unprofitable discretionary investments pending. Devereux and Schiantarelli (1990) find that the impact of cash flow on investment spending is greater for larger firms. One explanation they provide for this result is that large firms have more diverse ownership structures, and are more influenced by manager/shareholder agency problems. The Q model of investment relates investment to the firms stock market valuation, which is meant to reflect the present discounted value of expected future profits, Brainard and Tobin (1968). In the case of perfectly competitive markets and constant returns to scale technology, Hayashi (1982) showed that average Q, the ratio of the maximised value of the firm to the replacement cost of its existing capital stock, would be a sufficient statistic for investment rates. Tobins Q, further assumes that the maximised value of the firm can be measured by its stock market valuation. Under these assumptions, the stock market valuation would capture all relevant information about expected future profitability, and significant coefficients on cash-flow variables after controlling for Tobins Q could not be attributed to additional information about current expectations. However if the Hayashi conditions are not satisfied, or if stock market valuations are influenced by bubbles or any factors other than the present discounted value of expected future profits; then Tobins Q would not capture all relevant information about the expected future profitability of current investment. If that is the case, then additional explanatory variables like current or lagged sales or cash-flow terms could proxy for the missing information about expected future conditions. The classification of q ratios into high and low categories is based on a cut-off of one Lang, Stulz, and Walkling (1989). The latters motivation for this cut-off is partially based on the fact that under certain circumstances firms with q ratios below one have marginal projects with negative net present values (Lang and Litzenberger, 1989). However, q is also industry specific and one may argue that managers should not be held responsible for adverse shocks to their industries. As such, the industry average may be a useful alternative cut-off point to separate high q firms from low q firms. Hoshi, Kashyap, and Scharfstein (1991) regressed investment on Tobins q, other controlling variables, and cash flow. They interpreted differences in the importance of cash flow between different groups of firms as evidence of financing constraints. Results obtained by Vogt (1994) indicate that the influence of cash flow on capital spending is stronger for firms with lower Q values. This result suggests that cash flow-financed capital spending is marginally inefficient and provides initial evidence in support of the FCF hypothesis. The stronger the influence cash flow had on capital spending in this group, the larger the associated value of Tobins Q. After the results presented by Kaplan and Zingales (1997 and 2000), several studies have criticised the empirical test based on the cash flow sensitivity as a meaningful evidence in favour of the existence of financing constraints. The significance of the cash flow sensitivity of investment, it was argued, may then be the consequence of measurement errors in the usual proxy for investment opportunities, Tobins Q, and may provide additional information on expected profitability rather than being a signal of financing constraints. Gomes (2001) showed that the existence of financing constraints is not sufficient to establish cash flow as a significant regressor in a standard investment equation, while Ericson and Whited (2000) demonstrate that the investment sensitivity to cash flow in regressions including Tobins Q is to a large extent due to a measurement error in Q. Likewise, Alti (2003) shows that investment can be sensitive to changes in cash flow in the benchmark case where financing is frictionless. 2.3 Investment and Profitability The idea that investment depends on the profitability of a firm is amongst the oldest of macroeconomic relationships formulated. The sharp fluctuations in profitability in the average cost of capital since the 1960s revived interest in this relationship (Glyn et al, 1990). However the evidence for the impact of profitability on investment remains sketchy. Bhaskar and Glyn (1992) concluded that profitability must be regarded as a significant influence on investment, though by no means the overwhelming one. Their results indicated that enhanced profitability is not always a necessary, let alone a sufficient condition for increased investment. However, years later Glyn (1997) provided an empirical study that examined the impact of profitability on capital accumulation. He tested the impact of profitability in the manufacturing sector on investment for the period 1960-1993 for 15 OECD countries. His findings suggested that the classical emphasis on the role of profitability on investment wass still highly significant and had a very tight relationship. Korajczyk and Levy (2003) investigated the role of macroeconomic conditions and financial constraints in determining capital structure choice. While estimating the relation between firms debt ratio and firm-specific variables, they found out that there was a negative relation between profitability and target leverage, which was consistent with the pecking order theory. This indicated that if leverage of the firm is low, profitability will be high and the entity will be able to invest in positive NPV projects i.e. increase investment. Bhattacharyya (2008) recently provided an empirical study where he examined the effect of profitability and other determinants of investment for Indian firms. He found that Short-run profitability does not have consistent influence on investment decisions of firms, implying that one should concentrate on the long-run profitability of a firm. This indicates that profitability is still regarded as one of the major determinants underlying investment decisions of firms. However, he suggested that liquidity is relatively more important than profitability when it comes to firms investment decisions. 2.3 Investment and Liquidity Under the assumptions of illiquid capital and true uncertainty, management can never be sure that investment projects will produce sufficient liquidity to cover the cash commitments generated by their financing. Yet failure to meet these commitments may result in a crisis of managerial autonomy or even in bankruptcy. Thus, capital accumulation is a contradictory process. Investment is inherently risky, while the failure to invest will ultimately lead to the firms marginalization or demise. Crotty and Goldstein (1992) Chamberlain and Gordon (1989) used the annual domestic investment of all nonfinancial corporations in the United States between 1952 and 1981 in an attempt to determine the impact of liquidity on the profitable investment opportunities available to the corporation. They have put forward that in their long-run survival model, liquidity variables play an essential role as it captures the firms desire to avoid bankruptcy. It was also noted that there was a significant improvement in the explanation of investment when liquidity variables were added to the profitability variables of their regression, thereby supporting the view that liquidity is a pre-dominant determinant of investment and that they are positively related. Hoshi, Kashyap and Scharfstein (1991) attempted to find the relationship between investment and liquidity for Japanese firms. They found that high current profits increase current liquidity, thereby generating further investment from the firm to ensure future profitability and increased output to meet demand. Myers and Rajan (1998) suggested that liquid assets are generally viewed as being easier to finance and therefore, asset liquidity is a plus for nonfinancial corporations or individual investors. However, Myers and Rajan argued that although more liquid assets increase the ability to invest in projects, they also reduce managements ability to commit credibly to an investment strategy that protects investors. Johnson (2003) found that short debt maturity increases liquidity risk, which in turn, negatively affects leverage and the firms investment. Jonson also suggested that firms trade off the cost of underinvestment problems against the cost of increased liquidity risk when choosing short debt maturity 2.4 Investment and Sales Sales growth targets play a major role in the perceptions of top managers. Using surveys, Hubbard and Bromiley (1994) find sales is the most common objective mentioned by senior managers. Additional explanatory variables like current or lagged sales are very important in the investment equation as they can act as proxy for the missing information about expected future conditions in case such information has not been captured by Tobins Q. Kaplan and Norton (1992, 1993, 1996) argue that firms must use a wide variety of goals, including sales growth, to effectively reach their financial objectives. They suggested that Sales growth influences factorsà ¢Ã¢â€š ¬Ã‚ ¦..all the way to the implied opportunities for investments in new equipment and technologiesà ¢Ã¢â€š ¬Ã‚ ¦.. According to this study of 396 corporations, Kopcke and Howrey (1994) found that the capital spending of many of the companies corresponds very poorly with their sales and profits. These divergences suggest that sales and profits do not represent fully an enterprises particular incentives for investing. Consequently, these findings do not support generalizations contending that companies with more debt are investing less than their sales and cash flows would guarantee. Athey and Laumas (1994) using panel data over the period 1978-86, examined the relative importance of the sales accelerator and alternative internal sources of liquidity in investment activities of 256 Indian manufacturing firms. They found that when all the selected firms in the sample were considered together, current values of changes in real net sales and net profit were all significant in determining capital spending of firms. Azzoni and Kalatzis (2006) considered the importance of sales for investment decisions of firms. They found that sales presented a positive and significant relationship with investment in all cases.

Benefits and Inconvenience of a Globalized World Essay -- Globalization

The world has had several changed as well as the economy, technology and everything that represent advancement to the humanity. All these things today are being led by the globalization which is, in turn, the free market capitalism with the purpose to create advancement and integration for the world. It is important to say that globalization is neither good nor bad, but it is an idea that has been created for the world’s best. The problem of this idea is that, although it has brought great benefits, the results have been devastating. In terms of firms, the little businesses have been affected by the big ones, bringing as results the closure of them. In environmental issues, it has replaced the recreational area by industrial parks, which has increased the pollution. Globalization has also increased poverty and slum population, exploitation, inequality around the world. One of the principal purposes of globalization is to help businesses to improve in the marketplace. However, how come something that is supposed to bring development has turned into a problem for firms? Let us make an example, if you go to China and you are planning to buy a Chinese Food, but on your way to buy it, you are hit by a typical American fast food known as McDonald. In that moment, perhaps, you will feel more attracted by your home-country food than the foreign one. There is when globalization starts because in that moment, the place where you were going to buy the Chinese Food lost you as a client because of the competition. It is positive that globalization has opened its arms and torn down their barriers allowing business from another country to sell overseas. However, this free market capitalism has brought serious consequences to foreign businesses.... ...t without industrialization, the sources of jobs are limited. As a consequence, the unemployed population increase and the economy decrease as well. Davis claimed that â€Å"the Third World now contains many examples of capital-intensive countrysides and labor-intensive deindustrialized cities. â€Å"Overurbanization,† in other words, is driven by the reproduction of poverty, not by the supply of jobs† (Davis 16). To sum up, the globalization is not either good or bad but just an idea for the best of the world. It has brought industrialization, technological advancement, employment and development to the cities as well. Although globalization has been a source of good development, it also has had its disadvantages such as increment in poverty and slum population, exploitation, environmental problems, shut down of little business, and inequality around the world.

The Theory and Testing of the Reconceptualization of General and Specif

The Theory and Testing of the Reconceptualization of General and Specific Deterrence   Ã‚  Ã‚  Ã‚  Ã‚  In the May 1993 issue of the Journal of Research in Crime and Delinquency, the introduction of the reconceptualized deterrence theory was presented, explaining that general and specific deterrence are both functions of crime. Mark C. Stafford, an Associate Professor of Sociology and Associate Rural Sociologist at Washington State University, and Mark Warr, an Associate Professor of Sociology at the University of Texas in Austin, introduced this theory. They argued that there is no reason to have multiple theories for general and specific deterrence. Rather, a single theory is possible that centers on indirect experience with legal punishment and punishment avoidance and direct experience with legal punishment and avoidance.1 General deterrence includes the knowledge of criminal acts performed by others and the consequences or absence of consequences from the activity. Specific deterrence relies upon personal experience of punishment and the avoidance of punishment for a criminal activity previously committed. Both Stafford and Warr theorized that people are exposed to both types of deterrents, with some people exposed to more of one type than the other. In addition both general and specific deterrence effects may coincide with each other and act as reinforcement.   Ã‚  Ã‚  Ã‚  Ã‚  In the May 1995 issue of the Journal of Research in Crime and Delinquency a preliminary test was conducted on Stafford and Warr’s deterrence theory. Raymond Paternoster and Alex Piquero, both professors in the Department of Criminology and Criminal Justice at the University of Maryland, attempted to elaborate on Stafford and Warr’s original findings. They, Paternoster and Piquero, argued that although they could find some support for the basic features of the deterrence theory, there was still a significant component that Paternoster and Piquero could not address. Without being able to measure the consequences of the illegal behavior of their respondents’ peers, they could not separate the effects of indirect punishment avoidance from indirect punishment.2 Furthermore, they claimed that the personal experience of punishment had a definite role in substance abuse, as well as leading to additional criminal activities because of formal sanctions.   &nbs... ...eory. Though further testing needs to establish if this theory is correct, it will provide a single theory for deterrence, eliminating the possibility of accidentally excluding essential issues, and provide more resources to those trying to distinguish between deterrence and defiance. 1 Mark Stafford and Mark Warr, â€Å"A Reconceptualization of General and Specific Deterrence,† Journal of Research in Crime and Delinquency 30 (1993): 133. 2 Raymond Paternoster and Alex Piquero, â€Å"Reconceptualizing Deterrence: An Empirical Test of Personal and Vicarious Experiences,† Journal of Research in Crime and Delinquency 32 (1995): 281. 3 Stafford and Warr 123. 4 R.F. Meier and W.T. Johnson, â€Å"Deterrence as a Social Control: The Legal and Extra Legal Production of Conformity,† American Sociological Review 42 (1977): 294-95. 5 Stafford and Warr 125. 6 Stafford and Warr 126. 7 Stafford and Warr 128. 8 Stafford and Warr 128. 9 Stafford and Warr 133. 10 Paternoster and Piquero 261. 11 Paternoster and Piquero 263. 12 Paternoster and Piquero 263. 13 Paternoster and Piquero 264. 14 Paternoster and Piquero 284. 15 Paternoster and Piquero 272. 16 Paternoster and Piquero 278. 17 Paternoster and Piquero 276.

Organizational behaviour Essay

An organization is a group of people who work independently towards a common goal. Organization achieves their goals by creating, communicating, and operating the system existing in every organization. To better organize and manage the organization, manager needs to understand the element of the social system, role and role conflict, as well as the culture of the organization. In this assignment, we were asked to study a case regarding the role conflict and culture that were faced by Amir as a management trainee at a well-established organisation which at the same time, he is a husband and a father of two children. Based on the study case, we found out that Amir is facing with inter-role conflict, personal-role conflict, role overloads and role ambiguity. All these role conflicts must be solved professionally as it can affect Amir’s work performance and the perception of the organizational members towards him. In order to resolve these problems, Amir has to study the changes t hat happen in the culture of the organization as he needs to adapt with the new environment. There are two types of cultural changes in organization, that are the cultural revolution and the cultural evolution. In Amir’s case, he is confronted with the cultural revolution. Thus, he needs to know the process of creating back the organizational culture so that he can create a good culture. Look more:  starbucks moorhead essay OBJECTIVE 1. To define organization culture. 2. To describe the factors shaping the organizational culture. 3. To know role and define role conflict in the study case. 4. To know how to resolve the role conflict in organizational. DISCUSSION Question 1 Do you think that Amir is facing the problem of role conflict? If yes, identify the kind of role conflict Amir is facing. Role is when someone understands the relative importance of those tasks, in other words, they know the priorities of their various responsibilities, while role conflict is a situation in which an individual encounters  deviating role expectations. In my opinion, yes, Amir is facing the problem of role conflict that consists of inter-role conflict, person role conflict, role overload and role ambiguity. Below is the explanation about these role conflicts in this case. I. Inter-role conflict Inter-role conflicts occur when an individual occupies more than one role with inconsistent expectations. In other words, certain role with expected of a person are in conflict with the other roles that the person holds. For example, Aminah has a class-mate that wants to lodge at their room for one day but the room-mate disagree because they have their own rule which is not outsiders are allowed to stay in the room. In this situation, Aminah has to faces the conflict on which role should be performed whether as a class-mate or a room-mate. In Amir’s case, Amir as a husband does not know how to manage time between the family and the company. Amir was required to do all kinds of work until he has become a workaholic. In the same time, Amir was not able to give sufficient time to his family as he devoted most of his time working even on Sundays. II. Person-role conflict Person-role conflicts may define when a role holder is required to perform a role that contradicts or violates the role holder’s attitudes, beliefs and behaviors. As an example, when a staff expected to punch card for his friend, indirectly it may contradicts the staff attitude and beliefs where by a staff in the company should not to punch card for the other staff except themselves. Throughout Amir’s case, Amir has to assign with various other roles and was required to coordinate and communicate with diverse groups of the workforce.  However, the team members do not want to give full cooperation in fulfilling the tasks. Indirectly, was scolded by the boss for errors committed by other team members. III. Role overload Role overload occurs when there is a lack of balance or reasonableness in the number or the extent of expectations from a role holder. It also happens when the expectations sent to a role holder are unmanageable and there is not enough time for the role holder to perform all the roles expected of him or her. For example, where a student is expected to study while at the same time expected to do part time job. As a student, they must expect to perform some other roles even though it is impossible to be done in the same time. In this case, it’s similar with Amir which is he was required to do all kinds of managerial task from conducting office correspondence and conducting business meetings to solving the complaints of customers and subordinates. As time passed, Amir became more efficient and performed various roles in increasing effective manner. IV. Role Ambiguity Role ambiguity occurs when there is lack of clarity in understanding what expectations or prescriptions exist for any given role. A role holder lacks sufficient information in performing the role. This results in the role holder feeling unsure on how to act in his or her role. As an example, a new student in second intake was entered in the university and they did not receive complete information regarding the subject or any related activities. Indirectly, the student’s do not sure how to act in his or her role. In this case, the first few months on job Amir have to faced on stress which  is he was entrusted with limited tasks related to his area of expertise as a management. It is because the organization did not explained to him regarding his role as a management trainee. Question 2 What could be done to resolve his problem? For every problem, there will be solutions and ways to overcome. Amir who deals with many types of role conflicts can handle the problems well if he knows how to deal with it. I. Inter-role conflict In solving Amir’s dilemmas of role conflict as a worker and as a head of family members, the best way in dealing with these problems is he must know how to manage his time well. He also needs to understand and distinguish his responsibilities in holding both roles. Amir should avoid working on weekends as that is the only time to have a good time with the family members. This is to make sure that at the same time of being a dedicated worker to the organization, he can spend his quality time with his family members as well. II. Person-role conflict As a former Management Executive, for sure Amir will expect the task of management trainee would involves his area of expertise that is, management. However, different roles were assigned to him. In solving this matter, Amir should confront with his superior and ask for a good explanation regarding his exact tasks that he needs to fulfill. He also should stand for his right if he was scolded for errors not committed by him. In my opinion, even though the tasks given are not in his area, Amir can take the tasks as a new thing to learn. III. Role overload As a worker, the tasks given by the superior is a must to do but, if Amir thinks there is a lot of work to be done in a time, he should suggests his superior an assistant if possible. Amir should not be stressful with the multi tasks given in order to maintain a good quality of work. If the superior could not fulfill his suggestion, maybe Amir could ask for higher pay. Even though money could not promise happiness and could not replace the time that he can be with his family, at least he would feel satisfied and appreciated for the job he done. IV. Role Ambiguity The transfer of information between the sender and the receiver is very important in an organization. Improper communication of information definitely will result misunderstanding between both parties. In solving Amir’s role ambiguity as he was not explained the role as a management trainee, what he should do is get a clear information on his role from his superior. Even though he has a strict taskmaster, he must be brave enough to ask and get the exact information from him. Or else, he should get the right information either from the seniors or other colleagues. Question 3 Comment on the culture of the organization that Amir work in.  Prior to comment further on the culture of the organization that Amir work in, it is necessary to explain briefly on what is the Organizational Culture. Organization are more than a workplace, they are place where people spend most of their time. Thus, the culture of the organization is important for employees to stay and work happily. Organization Culture according to Robbins and Judge is a system of shared meaning held by members that distinguishes the organization from other organization. Organization Culture is a set of assumption, beliefs, values, and norms shared by everyone in an organization. Organization Culture change in two ways, Cultural Revolution and Cultural Evolution. There are two main type of organization culture, and it is called dominant cultures and subcultures. It is appropriate to categories that the type of  culture that Amir works in is subcultures. Subcultures develop to reflect common problems, situations or consequences that are faced by members in a department. However, it is also includes the core values of the organization. Correspondence to Amir situation that can be seen from the case study article, it is said that his role as management trainee is not properly explain, and when he is assigned with various roles that required him to communicate to a different group of workforce, problem started to occurs and these problem starting to put pressure on Amir. A cooperation that is essential in completing a task was not given to him by other members, instead they act rudely to him. And if there is an error made by other members Amir was the person who will be scolded by his boss. We can see here that it is logical to categories that Amir working in a subcultures environment because Amir is facing a problem in his work, and he is the one who received the consequences of others mistakes, and it is clearly that the core values of the organization isn’t quite harmony because of the values and ethics that is being practice by other members in the organization.. Differ with dominant culture, dominant culture are the core values that are shared by everyone in an organization, which can be understand that everyone have a same work ethics that allow them to complete their work efficiently. Cultural change is influence or is shape by several factors, firstly is characteristic of people within the organization, the values, beliefs, and attitudes that is bring by the people inside are shared with each other. If most of them have good values it will influences other to do so and vice versa. Secondly, cultural change is being shape by the nature of employment relationship. This factor comes from human resources policies that is enforced in an organization, for example trying bonuses with performance levels. Employees may take these policies as motivating factors to work harder. Third factors is design of organizational structure, defines as primary reporting relationship that exists within an organization where a division of work can be seen clearly. Lastly, cultural change can be shape by the organizational ethics, it is a moral values, rules and principles outlined to employees on how they should act and behave when it comes to dealing with each other and also with people outside the organization. A suggestion could be shared here, as a top management in an organization, Amir’s boss should be a role-model to his subordinates, he should create an efficient organizational culture in order for them to achieve successfulness. In order to create a prosper organizational culture, Amir’s boss can follow the following steps. First step is formulae a strategic values, which is a basics beliefs about an organization’s environment. Secondly is, develop cultural values, which the values that the employees need to have and act upon in carrying out its strategic values. Third step is, create vision, vision is a picture of what the organization is going to be in the future. Fourth step is, initiate implementation strategies, which is develop action strategies to accomplish its vision. And last step which is the step five is, reinforce cultural behaviors, reinforcement may take various form such as reward system that acknowledged desired behaviors. CONCLUSION Organizational behaviour is concerned with people’s thoughts, feelings, emotions and actions in setting up work. Understanding individual behaviour is in itself a challenge but understanding group behaviour in an organization environment is a monumental managerial task. Role conflict is a situation in which an individual encounters divergent role expectations. This occurs due to different perception and expectations of a person’s role. As we work together in an organization, we should treat people in the organization as a family. In this way, it is easier for us to communicate and interact with each other. The organization itself needs to plant this input in the minds of the workers so that the people that work in the roof of the firm will work happily without any conflicts. REFERENCE 1. Organizational behaviour oxford Sarah Sabir Ahmad 2. Kamus Dwibahasa Oxford Fajar Joyce M. Hawkins