Page 97 - Encyclopedia of Business and Finance

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Capital Markets

corporate cultures, distribution of responsibilities, and medium end of the maturity spectrum is called the money
logistics, among others, can be exceedingly complex. market proper, and the long end is identified as the capi-
Companies give many different reasons for acquisi- tal market. The financial instruments range from money
tion or merger. In most cases, they want to achieve oper- market instruments to thirty-year or longer bonds in
ating efficiencies and/or economies of scale. For example, credit markets, equity instruments, insurance instru-
in a merger the companies may be able to save money ments, foreign-exchange instruments, hybrid instruments,
marketing, producing, and delivering their products by and derivative instruments. Since about 1960 an explo-
combining their operations and eliminating duplication. sion of innovation in the creation and development of
Combining may also allow greater efficiency in coordinat- instruments in the money and capital markets has
ing activities across the companies’ units. occurred in both debt and equity instruments.
A company may be able to expand more cheaply and Some of the important (by volume) money market
more quickly through an acquisition or merger. There are instruments are Treasury bills and bonds, federal agency
also other possible reasons, such as realizing tax benefits securities, federal funds, negotiable certificates of deposits,
commercial paper, bankers’ acceptances, repurchase agree-
and capturing surplus cash. The essence of all the possible
ments, eurocurrency deposits, eurocurrency loans, futures
reasons is a belief that the merger or acquisition is a good
capital investment. Therefore, the analytical tools and instruments, and options instruments. Similarly, some of
basic decision rules are the same for mergers and acquisi- the key capital market instruments are U.S. securities;
tions as they are for other capital investments. However, U.S. agency securities; corporate bonds; state and local
particular care must be taken in applying these tools government bonds; mortgage instruments; financial guar-
because of the enormous size and complexity of the antees; securitized instruments; broker-dealer loans; for-
eign, international, and global bonds; and eurobonds.
investment.
Beyond the basic investment considerations, there
can also be important legal considerations connected with THE CAPITAL MARKET IN THE
a merger or acquisition. These include aspects such as UNITED STATES
compliance with federal antitrust laws, state anti-takeover The capital market in the United States is highly devel-
statutes, financial securities laws, and the charters of the oped, marked by sophisticated technology, specialized
corporations involved. financing institutions and functions, wide-ranging geo-
graphic locations, and continuous innovation in financial
SEE ALSO Finance; Time Value of Money
products and services to meet the needs of financial
investors and those seeking to acquire funds. There are
BIBLIOGRAPHY both direct and indirect markets. Corporations, for exam-
Brealey, Richard A., Meyers, Stewart C., and Marcus, Alan J. ple, engage in direct finance when they invest in one
(2007). Fundamentals of Corporate Finance (5th ed.). Boston: another’s paper directly without the services of brokers
McGraw-Hill/Irwin.
and other specialized intermediaries, similar to the prover-
Emery, Douglas R., Finnerty, John D., and Stowe, John D. bial entrepreneur getting funds from an uncle. Most of the
(1998). Principles of Financial Management. Upper Saddle financing in the United States, however, is done indirectly
River, NJ: Prentice-Hall.
through financial intermediaries who substitute their
Ross, Stephen A., Westerfield, Randolph W., and Jordan, Brad- credit for the credit of the borrower (user) of funds. The
ford D. (2006). Fundamentals of Corporate Finance. Boston:
total amount of credit for 2005 in the United States was
McGraw-Hill/Irwin.
projected to reach approximately $3,000 billion, of which
debt instruments accounted for $2,700 billion and equity
Douglas R. Emery instruments (net) for $300 billion.
John D. Finnerty
Money and capital market instruments are traded
directly among participants, in the over-the-counter mar-
kets and in organized exchanges. Many of the exchanges
specialize in the type of securities traded, thus giving focus
CAPITAL MARKETS and depth to that instrument or market. The major U.S.
The capital market provides financing to meet the exchanges are the New York Stock Exchange (NYSE),
denomination, liquidity, maturity, risk (with respect to Philadelphia Stock Exchange, Pacific Stock Exchange,
credit, interest rate, and market), and other characteristics Boston Stock Exchange, Cincinnati Stock Exchange,
desired by those who have a surplus of funds and those Midwest Stock Exchange, Chicago Board of Trade (CBT),
who have a deficit of funds. The capital market as a whole Chicago Mercantile Exchange (CME), International
consists of overnight to long-term funding. The short to Money Market, National Association of Securities Dealers

74 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION