1980s Affecting Corporate Finance Article Review

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Gongloff (2010) tried to predict the future of investors' desire for corporate debt by mentioning that a double-dip recession would imply more defaults and scare investors away from corporate bonds. By contrast, economic recovery could lead to higher interest rates and an invigorated stock market, luring investors back into the purchase of stocks and weakening demand for bonds. The latter scenario seems more likely. Despite the huge exodus of money from stocks since the summer of 2010, it may be a good idea to own stocks. Corporate earnings are setting record levels, due to increases in productivity and businesses in foreign markets, and corporate profits increase stock prices. Yet for institutional investors, which have superseded individual investors in stock markets, the only choice is not bonds vs. stocks in American corporations. There is the option of investing in stocks of foreign companies. For example, American investors have been heavily involved in Korean stocks.

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In sum, developments in the 1980s like deregulation and internationalization motivated corporations to bypass commercial banks and seek financing in capital markets. This was true mainly for large corporations with good credit ratings. But even smaller firms entered the financial markets in a significant way via the issuing of junk bonds. The predominance of financial markets has continued up to 2010 with no strong indications of abating. Today's low interest rates and the hampered stock market have strengthened the old trend toward financial markets as a source of external financing for corporations. Yet some analysts feel that the huge supply of bonds will eventually saturate the market. Moreover, high levels of profits by many American corporations and expected economic recovery in the U.S. are signs that the bond market will eventually subside as investment in stocks becomes a more desirable option, at least in the medium term.

Financial Markets and Corporate Finance


Gongloff, M.(2010, September 8). Blue-Chip Borrowers Issue Debt in Droves Wall Street

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Journal (Online). Retrieved from http://proquest.umi.com.ezproxy.fiu.edu/pqdweb?index=0&did=2133668831&SrchMode=2&sid=2&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1290691705&clientId=20175 [END OF PREVIEW] . . . READ MORE

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