Evolution of Financial
Finance, as capital, was part of
the economics discipline for a long time. So, financial management until the
beginning of the 20th century was not considered as a separate entity and was
very much a part of economics.
In the 1920s, liquidity management and raising of capital assumed importance. The book, `FINANCIAL POLICY OF CORPORATIONS’ written by Arthur Stone Dewing in 1920 was a scholarly text on financing and liquidity management, i.e., cash management and raising of capital in 1920s.
In the 1930s there was the Great Depression, i.e., all round price declines, business failures and declining business. This forced the business to be extremely concerned with solvency, survival, reorganisation and so on. Financial Management emphasized on solvency management and on debt-equity proportions besides that the external control on businesses became more pronounced.
Till early 1950s financial management was concerned with maintaining the financial chastity of the business. Conservatism, investor/lendor related protective covenants/information processing, issue management, etc. were the prime concerns. It was an outsider-looking-in function.
From the middle of 1950s financial management turned into an insider-looking-in function. That is, the emphasis shifted to utilisation of funds from funds. So, choice of investment, capital investment appraisals, etc., is assumed importance. Objective criteria for commitment of funds in individual assets were evolved.
Towards the close of the 1950s Modigliani and Miller even argued that sources of capital were irrelevant and only the investment decisions were relevant. Such was the total turn in the emphasis of financial management.
In the 1960s portfolio management of assets gained importance. In the selection of investment opportunities portfolio approach was adopted, certain combinations of assets give more overall return given the risk or give a certain return for a reduced risk. So, selection of such combination of investments gained eminence.
In the 1970s the capital asset pricing model (CAPM), arbitrage pricing model (APM), option pricing model (OPM), etc., were developed all concerned with how to choose financial assets. In the 1980s further advances in financial management were found. Conjunction of personal taxation with corporate taxation, financial signaling, efficient market hypothesis, etc., was some newer dimensions of
corporate financial decision paradigm. Further Merger and Acquisition (M&A)
became an important corporate strategy.
The 1960’s saw the era of
financial globalization. Educational globalization is the order of the day.
Capital moved west to east, north to South and so on. So, global financial
management, global investment management, foreign exchange risk management,
etc., become more important topics.
In late 1990s and 2000s,
corporate governance got preeminence and financial disclosure and related norms
are being great concerns of financial management. The dawn of 21st Century is heralding a new era
of financial management with cyber support. The developments till mid 1950s are
branded as classical financial management. This dealt with cash management,
cash flow management, raising capital, debt-equity norms, issue management,
solvency management and the like. The developments since mid - 1950s and upto
1980s, are branded as modern financial management. The emphasis is on asset
management, portfolio approach, capital asset pricing model, financial
signaling, and efficient market hypothesis and so on. The developments since
the 1990s may be called post modern financial management with great degree of
global financial integration net supported finances and so on.