In the current market economy all companies that issue shares on the stock-market are linked. Investors make decisions to buy shares, which are a capital contribution to companies. This is the major reason why companies go to the stock-market: to raise capital.
Investors expect to make money in two ways, firstly from dividends which companies distribute to shareholders from their profits andsecondly from an increase in the value of their shares. Thus the shares’ value is determined by investors according to the confidence they have in the company. However they are also influenced by other investors’ behaviour. If shares are in high demand, their price will rise and vice versa.
The shareholders’ main objective is to maximise their profit, and this leads to short-term strategies. If acrisis appears on the stock- market, shareholders will stop buying and try to sell shares causing their value drop. That is why shareholders often sell their shares before they decrease in value. So if investors bought shares when prices are low they would make a profit if the demand grows and the more risky the investment, the higher the profit will be. In a credit crisis, investors loseconfidence, because they fear a recession, and they are unwilling to invest.
This shows that companies are dependent on the stock-market’s trends even if share values do not correspond to the companies’ well being.
The current financial crisis began with the sub-prime crisis, which took place in the United-States(US). Banks and mortgage companies granted loans to risky borrowers, who might not be able topay back their debt, and put the debts into financial packages on the stock-market to sell them. These risky packages were considered as assets as the interest rates were variable and often quite high. That is why investors took the risk to buy them and that is how the crisis was spread among the global economy when people realised that these financial packages could not be valued, because no-oneknew how much of the debt was recoverable.
To what extent are companies linked and how can they affect each other?
The financial crisis has affected the environment for all businesses because of the shares that have been traded on the stock-market and the subsequent failure of banks. It has reached their internal environment as their company strategies are not viable in the current situation.That is why companies have to face this issue by changing their strategies to limit the impact of the crisis on their growth.
I- The banking sector is the first affected by the crisis, indeed, as banks have incurred bad debts, governments had to finance them to avoid their collapse because the impact of collapse would be damaging to the global economy. That is why several banks have been“nationalized”, particularly in the United-States and in the United-Kingdom. The crisis began in Britain with the Northern Rock bank, which was affected by the current malfunctioning money market, and it was nationalised on February 17 2008. The next one was the United-States(US) investment bank, Bear Stearns that was bought by its competitor, JP Morgan. “The largest bankruptcy in history” was the LehmanBrothers’ one with a $613bn of debt, which has caused the panic on the stock-market. This bankruptcy was followed by the “biggest bail out-of a private company” as the US government has taken a 79.9% share in the insurer AIG. These measures, taken by governments aimed to buy up the bad assets to encourage banks to lend money to each other.
However, investors still reluctant to buy shares and soare banks to lend money because of their amount of debts and lack of confidence in the economy.
This involves companies having difficulties in raising capital, which affects their investments as well as consumers’ demands. Indeed the more affected companies are in the construction industry, because of the decline in mortgages granted to individuals (for example, employment could fall by 45%...
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