Intl Financial Environment

PART I: THE INTERNATIONAL FINANCIAL ENVIRONMENT

I. Multinational Financial Management: An Overview (Chapter 1)

1. Chapter Objectives

* Identify the management goal and organizational structure of the Multinational Corporation (MNC).

* Describe the key theories that justify international business.

* Explain the common methods used to conduct international business.

* Provide a model for valuing the MNC.

2. Managing the MNC

* Managers are expected to make decisions that will maximize the stock price.

* Focus of this text: MNCs whose parents fully own foreign subsidiaries (U.S. parent is sole owner of subsidiary.)

* Finance decisions are influenced by other business discipline functions:

* Marketing

* Management

* Accounting and information systems

a. Agency Problems

* The conflict of goals between managers and shareholders

Agency Costs

* Definition:

* Cost of ensuring that managers maximize shareholder wealth

* Costs are normally higher for MNCs than for purely domestic firms for several reasons:

* Monitoring managers of distant subsidiaries in foreign countries is more difficult.

* Foreign subsidiary managers raised in different cultures may not follow uniform goals.

* Sheer size of larger MNCs can create large agency problems.

* Some non-U.S. managers tend to downplay the short-term effects of decisions.

Control of Agency Problems

* Parent control of agency problems

* Parent should clearly communicate the goals for each subsidiary to ensure managers focus on maximizing the value of the subsidiary.

* Corporate control of agency problems

* Entire management of the MNC must be focused on maximizing shareholder wealth.

* Sarbanes-Oxley Act (SOX)

* Ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

* SOX Methods to Improve...