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How Wall Street Influences Corporate Finance

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Finely tuned financial markets contribute to the health and efficiency of individual businesses and the overall economy. In turn, a strong economy provides greater fuel for business growth. The two entities in the U.S. — Wall Street and corporations — have a symbiotic relationship and impact one another positively and negatively, depending on macro and micro circumstances.

“Wall Street” is a street in Manhattan that occupies a few blocks that a select group of large independent brokerage firms call home. However, as an Investopedia source notes, many of these entities are headquartered in other cities or have significant operations outside Manhattan’s financial district. So, when the media refers to “Wall Street” or “The Street,” they typically mean the entire U.S. Stock market, including the investment banks, asset management firms and financial institutions.

A Master of Business Administration (MBA) with an emphasis in Finance online degree will equip professionals with the business and economic know-how to navigate the complex world of the U.S. stock market and corporate finance.

The Stock Market as an Economic Indicator

Stock market performance (and the performance of specific exchanges) indicates the totality of listed companies and the confidence they have inspired in their profit-growing strategies. Many economists and investors believe that, in this sense, the stock market provides a six-month glimpse into future company performance based on accumulated knowledge up to the moment. But, of course, it is never a clear view; plenty of economic and geopolitical circumstances can arise in the next six-month period that change a single stock’s valuation or the performance of the broader exchanges, such as the Dow, S&P and Nasdaq.

The U.S. Stock market is a well-oiled machine with many working parts, from politicians and regulators to analysts and media, to institutional and individual investors. It is easier to take a company public in the United States and to have an initial public offering (IPO), because there are so many checks and balances in the system. For this reason, the U.S. stock market attracts more investors than any other country’s stock market and acts as a catalyst for further growth when companies are ready to go public. The number of companies that go public each year, the percentage of the stock market indices and individual stocks rising and falling within a year, are important economic indicators, among others.

The Market Moves the Needle in Corporate Finance

According to Investopedia, The United States is the largest economy in the world, with a gross domestic product (GDP) in 2021 of nearly 23 trillion dollars. More impressively, the 230% ratio of market capitalization relative to GDP is the strongest in the world.

Wall Street, or the stock market, provides everyone, from large institutions to small investors, the ability to invest in the free-market economy and identify superior investment opportunities. Investors can do this by focusing on specific funds (which may represent market sectors, investments that meet certain criteria or stock market indices). As a result, investments not only help to fund business growth when the capital is used wisely by business leaders but also help investors to beat rising inflation.

The market is moved by positive and negative information that emerges about a company from its own executives and from the media. When positive information encourages more buying over an extended period, it produces a bull market and a wealth effect for investors. This improves consumer confidence, which arises when economic conditions spur growth. As stock prices rise, companies use their market capitalizations to purchase assets or other businesses. This raises the tide for all businesses and the labor market.

Conversely, a precipitous stock market decline or crash has the opposite effect. Less wealth for businesses and investors lowers consumer confidence and reduces funding for business operations. Prolonged periods of poor market performance, otherwise known as bear markets, make it hard for smaller businesses to get the funds they need to grow.

The Symbiotic Wall Street – Business Leader Feedback Loop

When a smaller or midsize business is up for acquisition or an initial public offering (IPO), Wall Street starts producing more information on the company, otherwise known as the “amplification effect.” This can be triggered when companies sell off assets as well. This effect ramps up speculation and potential investment: If the information produced is more negative than positive, that often leads to heavier selling than buying, which puts downward pressure on the stock of the acquiring company, and the company to be acquired if it is public.

The stock market is not the actual economy, but it is a primary system that raises capital for investment through IPOs, mergers and acquisitions and share issuance. Business leaders take valuable cues from the market’s anticipation and reaction to their actions. Analysts cover individual companies and give public investors access to financial performance reporting and the financial models of the companies they cover. Because investment is the key to growth, analysts’ coverage of metrics like earnings per share and price-to-earnings estimates tend to drive business decisions. Leaders focus on beating Wall Street’s expectations concerning these performance metrics. The downside is that business leaders can become myopic, focusing on short-term financial results over long-term strategic planning.

The Curriculum Prepares Graduates to Make Market-Based Leadership Decisions

The University of West Florida MBA with an emphasis in Finance online program provides a solid understanding of national and international markets. Students learn how to use money as a tool to manage an organization’s financial future, with a focus on experiential application. With an emphasis on courses in financial markets and institutions, financial statement analysis, financial theory and practice and investments, graduates offer employers the total balance of business acumen and market savvy that it takes to lead in today’s complex economic environment.

Learn more about the University of West Florida’s online MBA with an emphasis in Finance program.

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