Financial Management and Goal Programming in Imperfect Capital Markets
EDGAR ORTIZ and GRACIELA BUENO
Financial management theory and tools have developed radically during the last three decades. The principles of finance have been mainly derived from studying the interrelationships between capital markets and the corporation and its environment. 1 Thus valuation and capital market indicators have become key variables for financial decision making for both private and public enterprises. Although full application of modern financial thought is far from being complete, corporations in most advanced countries have benefitted from these changes. Higher education, business training, and the presence of solid economies and nearly perfect markets, particularly securities markets, have contributed to a rather rapid and smooth transfering of know-how.
In the developing countries this is not the case. In addition to their own scientific developments and practices, a great deal of technological transfer has taken place from the most advanced to the less developed nations, in financial management as well as in other fields. Nevertheless, modern financial principles have been adopted in a limited way in corporate decisions. Often, financial managers in these nations choose outdated tools to solve their problems. They maintain that tools developed in the advanced nations are not relevant for their case due to market imperfections. Particularly, capital markets are thin and inefficient. There is a need to develop local administrative know-how based on serious research of local financial conditions. However, modern financial thought and theories can provide relevant principles and models to solve the problems related to financial decision making in the developing nations. Market imperfections should not constitute a barrier to rigorous decision making. Rather, financial principles derived under assumptions of perfect markets and perfect information should lead to a better understanding of the financial problems facing corporations in the developing countries. Although valuation might be imperfect, the goal remains maximizing the owners' wealth.