Long-Term Investment Decisions
Government Regulations in the Market Economy
In a market economy, there are many malpractices that may hinder investors from receiving full benefits of their investments. Fraudulent behaviors and withholding of information are practices that can hurt investments (Goldin and Libecap, 2008). Therefore, government regulation is essential to facilitate fair play among investors. In a market with no regulations, investors may be forced to base their decisions on limited information, since market players may not be willing to disclose vital information. Many organizations have restrictive rules that prohibit them from disclosing information to others. Regulation by the government can compel both individuals and organizations in the market economy to disclose vital information to investors to facilitate their investment decisions.
Manipulation of prices and fraud deny investors a fair share of their investment. This discourages them from further investing. Consequently, the whole economy suffers due to selfish behaviors of individual investors. Having government regulation can curb such behaviors, encourage investors to invest and promote the growth of the entire economy. Government regulations, therefore, create a favorable business environment where different investors can compete fairly.
Government regulation is important because when a firm takes a certain risk, there is imminent harm to that firm and others in the economy. When a business fails due to risks it took individually, the failure affects other stakeholders such as employees, creditors, clients and vendors. For instance, when a big bank collapses, many people are likely to suffer. These people include shareholders, creditors and those whose mortgages are financed by the bank.
Rationale for the United States Government Intervention
Balanced and adequate regulations provide optimum conditions for an economy to thrive. Changes in the market such as globalization require regular updates of government regulations to ensure that the market can work efficiently in different scenarios. When the government fails to update and enforce these regulations, the economy may suffer as it did in the United States during the recent economic meltdown. To save major financial institutions from total collapse, the government had to intervene through various means. The intervention mechanisms used by the government included funding the institutions, nationalizing them and making new monetary policies. However, these interventions were not accepted fully by people since they were at the expense of the taxpayers. Despite of the interventions being a burden to the citizens in terms of taxes, it was justified.
To understand the rationale for government intervention in the United States market processes, it is important to understand that depression and recession are part of market economic cycles. Moreover, during recession, consumption decreases, leading to fall in demand. Consequently, there is reduced spending power and increase in unemployment. The reduced spending power and demand leads to a fall in prices and consequently, negative net growth rate. These events lead to harsh economic conditions that warrant the government to intervene.
The reasons that led the United States government to intervene were justifiable and rational. First, the government wanted to restore public confidence with regard to financial institutions (Bezdecheck, 2010). This confidence was required to halt people from running to the banks and withdrawing all their savings. Secondly, the government realized that failure to intervene would lead to loss of investments and savings, which included retirement income. To prevent these losses, the government had to intervene. Moreover, Small, medium and large businesses were being affected negatively by the economic down turn. To save them from filing for bankruptcy, they government deemed it necessary to intervene using various measures. Finally, loss of jobs and collapse of the real estate industry could cause instability in the country. To avert such problems, the government was justified to intervene.
Complexities under the Self-Expansion Strategy
A merger has several advantages compared to self-expansion, especially if the investment involved requires high costs of investment (Buono and Bowditch, 2003). Moreover, a merger provides a company with a quick means of growth since the investment does not have to start from scratch. Organizations involved in a merger share their resources, technologies and research, thereby reducing the cost of investment. These are some of the benefit the company would have gained by getting into a merger. However, since the merger is not viable to some threats, self-expansion remains the possible option. The self-expansion strategy involves several complexities that were absent in the case of a merger. First, the company has to source for capital required to expand its ventures. The processing of securing capital is usually difficult because financial institutions must be convinced that the investment has a chance of succeeding. This is a genuine concern because the institutions need assurance that once they lend the money to the company, it will pay it back with interest.
The other complexity associated with the self-expansion strategy is the cost of failure. Incase the self-expansion strategy fails; the company will shoulder all the losses. This would have been different in the case of a merger where both profits and losses are shared among the companies in the merger. Under a merger, the same project undertaken under the self-expansion strategy costs less due to the efficiency in sharing resources. However, the new strategy will have to commit large sums into securing technology, research and other materials that are shared under the merger strategy.
In many organizations, the interests of the stockholders are in the value of shares. Stockholders benefit when earnings per share are high. On the other hand, managers are concerning with the amount of revenues generated. When a company earns large amounts of revenues, the company is able to make some expenses. These expenses include perks for managers and other benefits such as personal jets. Managers are, therefore, likely to hold more money so that the company can spend for their sake. Therefore, managers are not usually motivated to increase the amount of earnings per shares since this would reduce the company’s profitability and by extension, their benefits. The interests of the managers and those of the shareholders are constantly conflicting. For a company to run smoothly, there need to be harmony between the two groups’ interests. There are several forces that force the convergence of these interests.
One force would involve paying managers depending on their performance. This will motivate managers to meet their financial targets so that they can be paid more. Secondly, managers should be encouraged to own shares of the company. This mechanism will motivate them to ensure that the value of shares rises since they also benefit from the rise. This force tends to bring the interests of the two groups together. Moreover, constant evaluation of organization’s performance by shareholders to identify shortfalls in performance should be conducted. If the performance is not up to standard, shareholders may threaten to initiate a takeover. This would lead to loss of employment by the management and an increase in earnings per share by shareholders. These will force managers to increase profitability through performance.
Bezdecheck, B. (2010). Bailout!: Government Intervention in Business. New York: The Rosen Publishing Group.
Buono, A.F., & Bowditch, J.L. (2003). The Human Side of Mergers and Acquisitions: Managing Collisions between People, Cultures, and Organizations. New Jersey: Beard Books.
Goldin, C., & Libecap, G.D. (2008). The Regulated Economy: A Historical Approach to Political Economy. Chicago: University of Chicago Press.
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