Question

How do financial markets and related institutions contribute to the overall economic health of the economy? Imagine a CFO who believes her job is to focus exclusively on company-level issues and assumes the markets run smoothly and will provide the company with capital as it is needed, assuming it has a good justification for the capital. Is this an advisable strategy? Why or why not?

Answer 1

Financial market and related institutions are contributing to the overall growth of economy as it is leading to increase in the liquidity as well as credit availability of various organisations into the economy. These Financial institutions are also related to acting as the financial intermediaries which will encourage the flow of money and help the economy to prosper and they will also attract foreign direct investment into the country.

His assumption about market is completely wrong because market does not always run smoothly and there are problems in association with the market at the time of the adverse economic cycle, when there will be a risk related to lending of the money to the borrower's because there will be a reluctance on the part of managers to lend more money to the borrower's as they are finding it difficult to realise the money from them in adverse economic cycle because they will be having a higher risk of default associated with borrowers, so lender will be always trying to reduce their lending strength at the time of of adverse and unfavourable economic cycles.

Hence, the company may not get the adequate capital when it is required to get the capital because it is not always provided when it is needed because it is also dependent upon the Macro situations rather than just micro situation, Hence, the perception of manager is completely false.