Finance

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The financial sector (or financial sector ; English financial sector ) is in economics , a sector of the economy , which all companies includes, where finances or funding the core business represent. The economic counterpart is the real economy .

General

The most important subsector of finance is finance . Finance includes the financial markets and their market participants , namely financial services institutions , credit institutions and investment services companies ( banking ), insurance ( insurance ), mutual funds , pension funds and other institutional investors . The financial markets are made up of stock exchanges , money , foreign exchange , interbank and capital markets . Financial conglomerates do not belong to finance, but to finance .

While the goods market is part of the real economy, the financial markets are part of the financial economy. Their trading objects also differ from one another: goods can only be traded on the goods market, financial products / financial instruments / financial instruments only on the financial markets.

The use of the term financial management is not uniform in the specialist literature . Sometimes it is also used in business administration for the operational function of financing . The term financial management covers investment , financing and liquidity , i.e. all monetary-real processes such as payments . In order to be able to distinguish it from economic finance, the term “corporate finance” is used.

species

The economic finance consists of the economic subjects companies , private households and the state with its subdivisions ( public finance ). In the economic cycle, the flows of money and payments belong to the financial economy and the flows of goods to the real economy; both streams are combined as economic objects. If, for example, a private household buys an automobile, the purchase price payment is a payment transaction in the financial sector, while the delivery of the vehicle by a car dealership is part of the real economy. That is why the finance and real economy are interlinked.

The public finance covers all financial impact activities of the public sector , which the government revenues and government spending affect them. The procurement , administration and use of the financial resources required to fulfill public tasks are subject to regulation in public finance. The financial side of the state's fulfillment of tasks is a comprehensive cross-sectional task , because every state measure inevitably has financial consequences. The importance of public finance for the economy as a whole can be seen in the government ratio.

Functions

Raising capital

Investment decisions made result in, among other things, financing decisions as action parameters . A decision has to be made as to how to finance the proposed investment. Available which are equity and debt financing . In the case of self-financing, it is possible to acquire or increase equity in the context of external financing or to retain profits , the latter being part of internal financing . External financing is always external financing and takes place via a procurement or an increase in external capital . Investors include shareholders ( shareholder loans ) , credit institutions ( bank loans ) or suppliers ( supplier loans ).

All capital raising measures must take into account financing costs and scarcity / availability . The financing costs consist of the equity or borrowing costs. The shareholders' equity costs consist of a risk-free interest rate (opportunity interest rate for a risk-free, lost alternative investment ) and a risk premium . The risk premium represents that part of the shareholder's expected return that he demands as compensation for the entrepreneurial risk in addition to the risk-free interest . The costs of external financing include, in particular, the interest expenses that depend on the prevailing interest rate level . Availability issues are decided by the offer on the money and capital markets . The interest rate level and availability cannot be influenced by the company - at least in the short term - and represent data parameters .

investment

Operational investments are to be divided into tangible , intangible and financial investments according to the investment object. Depending on the importance of the investment for the company, a distinction can be made between simple operational investments (e.g. the purchase of a delivery truck in a large company ) and complex strategic investments (e.g. the purchase of a company of the same size). As part of the congruence of maturities , the term of the selected financing instruments and the effects on economic key figures (on the capital structure and debt figures ) must be taken into account ( reaction parameters ). From the perspective of financing costs, the optimal capital structure is achieved when quantitative and qualitative financing costs form a minimum.

The key figure of the marginal efficiency of capital forms the actual basis of investment decisions. As marginal efficiency of capital refers to those interest rate at which the cost of the investment with the present value matches the investment (= present value of the net proceeds of the investment). The company will only invest when the marginal capacity of capital exceeds the current market rate. If an investment generates a higher return than an alternative financial investment, it is invested and vice versa. With the expected service life of a machine to be purchased of 2 years, the following formula results:

Here are the acquisition costs of the investment Net income of the investment in the first year Net income of the investment in the second year Marginal performance of the capital (return on investment)



For example, if a machine costs 1,000 euros with a two-year service life and the entrepreneur expects 500 euros in the first year and 540 euros in the second year net income from the machine, the result is a marginal performance of 8%. If the market interest rate is 7%, investments are made; if it is above 8%, the investment is not made. This marginal capacity was first introduced by John Maynard Keynes in February 1936 in his General Theory of Employment, Interest and Money .

Finally, the marginal return on the investment made is also of interest, as is the financial leverage .

Risk management

The risk management has experienced widespread in recent decades. The considerable fluctuations in exchange rates and interest rates and numerous financial crises , which also affected the real economy at non-banks , contributed to this. The strategic risk management deals with trend-setting issues of corporate policy and is accordingly located at the top management level ( board of directors ). Operational risk management is concerned with risk identification , risk quantification , risk aggregation , risk management and risk monitoring at the middle and lower management level . It provides risk information for financial tasks (e.g. about the aggregated total risk scope in order to derive cost of capital rates from it.)

Payment transactions

The payment transactions handles the in-house and in particular the external payment flows in connection with financial institutions from. These handle domestic and international payment transactions using all necessary means of payment .

Business research

In business administration, a distinction is made between classic , neoclassical and neo-institutionalist finance theory .

  • Classical finance theory is initially a research focused on the legal effects of institutional financing and legal form decisions. In particular, it includes a descriptive typology of financial institutions and separates financing processes from investment decisions. It regards the financial processes only as an auxiliary function: For a given production and sales program, certain production capacities are necessary, which may have to be built up through investments. Classical finance theory brought decision-oriented aspects into research on corporate finance, with a future-oriented function. It is divided into four sub-areas in particular:
  • The focus of neoclassical finance theories is on the economic decisions of individuals and their optimization, although it was only the expansion to the investment and financing sector that contributed to the emergence of neoclassical finance theories. They strictly separate investment and financing decisions and understand the financing as the allocation of the cash flows triggered by the given investment. Neoclassical finance theories build on the portfolio theory developed by Harry Markowitz in 1952 . The Capital Asset Pricing Model developed in 1961 and the option price theory that emerged in 1973 also belong to the neoclassical research area as capital market theories. Further milestones in the development of neoclassical finance are the Fisher separation theorem, which states that investment decisions are determined solely by the capital value and savings decisions are determined solely by the subjective preferences of the saver; the Dean model, which deals with the optimal investment and financing program; the irrelevance theses of Modigliani and Miller , which shed light on the influence of a company's leverage on its cost of capital.

Economics

In economics, the financial economy ("monetary sector") forms the counterpart to the real economy, in whose interplay the time horizon plays an important role. In the financial sector, all economic entities are represented that provide financial services such as banks, insurance companies, institutional investors and financial markets. Economics aggregates all economic subjects whose main task is related to financial activities.

Since the financial sector has a higher reaction speed and higher volatility of rates or returns than the prices / wages in the goods and labor markets , the financial markets can process new information faster than the real economy. Joseph Schumpeter makes this clear in his metaphor about a dog (which symbolizes the financial economy) who follows his sedate master (real economy) on a common promenade - even if the dog runs ahead and then lags behind: At the end of the promenade, both are again together. "The (state) finances are one of the best points of attack for the investigation of the social gears ... as well as in the symptomatic meaning - insofar as everything that happens is expressed in the financial economy".

The financial sector is a complement to the real economy because it provides value-added infrastructure. The complementary interdependence between the financial and real economy is often used to explain financial crises . According to an ideal, the real and financial economy should develop in parallel. The yardstick can be, for example, the stock return , the real economic stock return of which is referred to as the dividend yield . The financial share return is made up of this dividend yield and the annual percentage increase in share price : To a real economy dividend return of 3%, an assumed annual share price increase of 7% is added, so that the financial share return is 10%. A parallel development between the real economy and the financial economy is not likely because the commercial principle leads to specialization in either real economic or financial activities. If, for example, the financial economy in a state is restricted by financial market supervision , market regulation , state intervention or even a ban on interest rates and the real economy is generally left to the commercial principle, the real economy is likely to grow faster than the financial economy. Conversely, Monaco , for example, focuses on activities that make the city-state even more attractive as a financial center ; the real economy hardly plays a role there.

The financial economy also affects the real economy and vice versa; there are interdependencies between them. Even empirically, there is no parallel course between the two. Judging from the historical returns on the capital markets from results 1872 to 2000 in the United States , a risk premium of 5.57%. If one estimates the risk premium based on the development of the real economy, it is only 3.54% for the same period, which means a non-parallel development of 2 percentage points. This shows that decoupling did not take place until 1951, because since then the risk premium of the real economy of 2.55% has lagged significantly behind that of the financial economy of 7.43%. The financial crisis from 2007 onwards was mainly caused by a lack of or faulty risk management within the financial sector. This crisis spilled over the real economy. In economics, attention is drawn to the imbalances between the real and financial economies. While the global real economy was quantitatively 2: 1 superior to the financial sector around 1980, today it is clearly inferior at 1: 3.5. This considerable disproportionality expresses risk potential and shows that money capital is in abundance. This indicates increasing market risks in the financial sector. The market risk is in this imbalance especially in an overshooting ( German  "overshoot" ) resulting speculative increased speculative bubbles that last until in the slower real economy, the new equilibrium is established.

Others

The German Society for Finance , founded in November 1993, is the central scientific society in the field of finance in German-speaking countries.

Demarcation

Finance is differentiated from finance in that the latter is operationally concerned with the procurement and use of money or capital as well as with the processing of payment transactions . Only the aggregation of all payment flows belonging to the finance department results in the finance industry.

See also

literature

  • Literature on finance in the catalog of the German National Library
  • Klaus-Dieter Däumler: Business finance. 8th completely revised edition. Verlag Neue Wirtschafts-Briefe, Herne u. a. 2002, ISBN 3-482-56458-2 ( business administration in study and practice ).
  • Guido Eilenberger : Corporate Finance. Introduction to investment and finance, financial policy and corporate financial management. 7th fully revised and expanded edition. Oldenbourg, Munich a. a. 2003, ISBN 3-486-25535-5 ( textbooks and handbooks on money, stock exchange, banking and insurance ).

Individual evidence

  1. ↑ Jörg-Christian Nissen, Future Europe: Compass for an Economically Sustainable Europe , 2017, p. 210
  2. ↑ Martin Bösch, Finanzwirtschaft: Investment, Financing, Financial Markets and Control , 1990, p. 4 ff.
  3. ^ Matthias Lehmann, Finanzwirtschaft: A market-oriented introduction for economists and lawyers , 2003, p. 8
  4. ^ Matthias Lehmann, Finanzwirtschaft: A market-oriented introduction for economists and lawyers , 2003, p. 9
  5. ↑ Edwin O. Fischer, Finance for Advanced , 2002, p. 199
  6. ↑ Klaus Spremann / Pascal Gantenbein, Financial Markets: Fundamentals, Instruments, Connections , 2019, p. 85
  7. ↑ Bodo Leibinger / Reinhard Müller / Herbert Wiesner, Public Finance , 2014, p. 1
  8. ↑ Johanna Souad Qandil, Perception of the quality of the final examination , 2013, p. 57
  9. ↑ Johannes Frerich, Causes and Effects of the Regional Differentiation of Private Saving Activities in Industrialized Countries , 1969, p. 90
  10. ↑ Bernhard Felderer / Stefan Homburg : Macroeconomics and new macroeconomics , 1989, p. 110 f.
  11. ^ John Maynard Keynes, General Theory of Employment, Interest, and Money , 1936, p. 115
  12. ^ A b Louis Perridon / Manfred Steiner , Finanzwirtschaft der Unternehmens , 1995, p. 15f.
  13. ^ Carl Christian Kauffmann, Management of Minority Holdings in Germany , 2009, p. 85
  14. ↑ Klaus Spremann / Pascal Gantenbein, Financial Markets: Fundamentals, Instruments, Connections , 2013, p. 74
  15. ↑ Joseph Schumpeter, The Crisis of the Tax State , in: Rudolf Hickel, Die Finanzkrise des Steuerstaats , 1918, p. 329 ff
  16. ↑ Klaus Spremann / Patrick Scheurle, Financial Analysis , 2010, p. 95
  17. ↑ Klaus Spremann / Patrick Scheurle, Financial Analysis , 2010, p. 96
  18. ↑ Klaus Spremann, Economy and Finance: Introduction to Business Administration and Economics , 2013, p. 62
  19. ↑ Klaus Spremann, Economy and Finance: Introduction to Business Administration and Economics , 2013, p. 63
  20. ^ Eugene Fama / Kenneth French , The Equity Premium , in: Journal of Finance vol. 57, 2002, p. 637 ff.
  21. ^ Eugene Fama / Kenneth French, The Equity Premium , in: Journal of Finance vol. 57, 2002, p. 637 ff.
  22. ↑ Armin Günther, Complementor Relationship Management , 2014, p. 146 f.
  23. ^ Pahl-Rugenstein-Verlag, sheets for German and international politics , issues 1–4, 2009, p. 9