The Role of NYSE in Corporate Financing Highlighting


Every firm needs funds to operate, as a result, corporate finance seeks to acquire and manage these funds. Corporate finance refers to the activities that involve money in a business environment (Megginson, 2008, p. 10). Five basic functions are involved in the practice of corporate finance: raising capital to aid companies operations and investment programs, that is, the external financing function; choosing the best projects in which to invest firm’s resources, based on each project perceived risk and expected rate of return, that is, the capital budgeting function; managing companies internal cash flows, working capital, and their mix of debt and equity financing, both to maximize the value of the firm’s debt and equity claims and to ensure that business organizations can pay off their obligations when due, that is, the financial management function; developing ownership and corporate governance structures that dictate managers to behave ethically and make decisions that benefit shareholders, that is, the corporate governance function; and the risk management function where corporate finance is involved in managing company’s exposure to all types of risks, both insurable and uninsurable, to maintain an optimal risk-return trade-off and hence maximize shareholder value. This paper discusses the functions of corporate finance and how the New York Stock Exchange contributes to the capital-raising and capital-allocating process. The paper also discusses how NYSE encourages savings and investments and assists individuals to save for the future.

Corporate Governance Function

The famous corporate scandals such as the financial collapse of Enron, WorldCom, Arthur Andersen, and Parmalat, indicate clearly establishing good corporate governance systems is essential (Markham, 2006, p. 95). The systems of governance determine who benefits most from company activities; then they establish procedures to maximize firm value and ensure that employees act ethically and responsibly. Responsible management does not develop in a vacuum. It emanates from good governance systems that encourage the hiring and promotion of qualified and honest people, and motivate employees to achieve company goals through salary and other incentives (Megginson, 2008, p.14).

Corporate governance systems development is quite challenging due to conflicts that arise between shareholders, managers, and other stakeholders. The shareholders of the company would prefer the managers to put more effort to protect their interests. However, it is rare in the interest of individual shareholder to devote the time and resources to ensure that managers act ethically. such oversight is conducted by individual shareholders, they would personally bear all costs of monitoring management, but would have to share the benefits with all other shareholders. This presents a collective action problem to occur in most relationships between shareholders and managers. On the other hand, though managers may wish to maximize the wealth of shareholders, they do not want to work harder than necessary, especially if others are going to gain most of the benefits. Alternatively, managers and shareholders may decide to collaborate together to run a company to benefit themselves at the expense of creditors and other stakeholders who do not have a say in corporate governance (Solomon, 2007, p. 175).

In sum corporate finance is concerned with how shareholders assure themselves of receiving a return on their investment. Advanced countries such as the US have assured the flow of huge amounts of capital to companies, and actual distribution of profits to shareholders, through appropriate governance systems. This view depends on the fact that: the corporate sector requires external funds for investment; the financial system provides such funds to the corporate sector from the household sector, and the interests of shareholders are safeguarded through rights control according to their rights to interfere with misbehavior in management.

The New York Stock Exchange sometimes referred to as the Big Board, is the oldest famous stock market in the world (Boone, 2008, p. 584). Currently, over 3000 common and preferred share issues are listed on the New York Stock Exchange. These shares represent the largest and most rich corporations in the United States and the total market value exceeds $13 trillion (Boone, 2008, p. 584). The New York Stock Exchange is the largest stock market in the world in terms of the value of the total stock traded. Firms willing to trade their stocks in the New York Stock Exchange must apply to the Exchange for listing and satisfy certain listing requirements. In addition, the enlisted firms are required to continue those requirements each year to remain listed. Corporate bonds are also transacted in the New York Stock Exchange (Fuller, 2005, p. 7).

New York Stock Exchange and other US security markets have five important functions in US capitalistic economy (Megginson, 2008, p. 10). These basic functions include: enabling corporations and governmental units to raise capital; assisting in the allocation of capital towards productive uses; providing opportunities for people to increase their savings by investing in them; revealing investor judgments about the potential earning capacity of corporations, thus providing guidance to corporate managers; and generating employment and income for American people (Fuller, 2005, p. 9).

NYSE in Enhancing Corporate Governance

The New York stock Exchange has long been championing for the improvement of corporate governance. The NYSE policies and regulations require corporations to adhere to all the procedures and standards laid down for listing. These procedures and standards have been amended periodically. The NYSE has even supplemented these standards when the transformation of capital markets has required improved governance standards or disclosure. The credit crunch bought about adverse effects to firms due to failures of diligence, ethics, and efficient control, which has provided NYSE the opportunity and responsibility to enhance corporate standards and disclosure standards (Luo, 2007, p. 132). For instance, Luo (2007) points that, the NYSE appointed a Corporate Accountability and Listing Standards Committee to revise the listing standards along with other proposals for reform, with the purpose of increasing accountability, integrity, and transparency of companies listed in the Exchange (p. 133).

The Committee concluded that the Exchange could only achieve this goal by improving upon the strength of the New York Stock Exchange and companies listed in fields of corporate governance and disclosure. As pointed out by Luo (2007), this approach accepts new prohibitions and mandates cannot guarantee those employees, corporate directors and others to give primacy to the ethical pursuit of the interests of shareholders (p. 133). The NYSE system is dependent upon the competency and integrity of corporate directors. The responsibility of corporate directors is to oversee diligent management while complying with the laid down ethical standards. The NYSE requires all listed companies to adhere to certain standards although it also companies to determine their own rules. These specific standards include conflicts of interest, where the private interest of individual influences in any way or appears to influence with the corporation’s interest as a whole. Conflicts of interest come about due to several reasons: when the director or employee, or members of their families take advantage of their positions to receive favors; and it also arises when the interest of the director or employee makes it hard for him or her to objectively and effectively work. All listed companies must have a policy that deters such conflicts of interests and defines a means for them to address potential conflicts (Luo, 2007, p. 133).

Additionally, Luo (2007) further explains that “employees, directors and officers of the listed companies are also prohibited from allocating themselves corporate opportunities, for instance, through use of corporate property, information, position, and others; utilizing company assets, position and information for personal aggrandizement; directly competing with the company” (p.133). All people working in a listed company owe them a duty to perpetuate their legitimate needs when they get the opportunity to do so. The aspect of confidentiality must also be adhered to by employees, officers or directors of the company. This is in terms of the information entrusted to them by the company or its customers, with exception when legal disclosure is legally authorized. Fair dealings are another important standard that listed companies are required to follow. Nobody is allowed to take advantage of others through manipulations, abuse of privileged information or misrepresentation of material facts. The company should also endeavor to promote ethical behavior as a basic standard required. It encourages employees to report violations of law, rules, regulations or codes Luo, 2007, p. 134).

NYSE Corporate Risk Management Function

Unprecedented developments in the field of corporate governance have been marked in the 21st Century. In 2002, the Sarbanes-Oxley Act of 2002 was enacted following public outcry. The implementation of this act heralded a host of reforms to corporate financial reporting systems. Many firms are still sorting through the Act, and grappling with its diverse implications. The 2008 financial crisis revealed more issues concerned with the effectiveness of risk management in a number of areas. The rules still apply in most areas. Challenges and obstacles that inevitably arise in business transactions can be well managed if the business is thoroughly understood. However, a review of corporate failures of the recent past indicates that in many instances, the executives and boards seem not to have full knowledge of the risks in business they were mandated to manage. Understanding the business is necessary to understand the risks involved in the business. There have been enough new rules to justify the corporate governance scene has transformed since 2002. It is still undergoing more changes due to the sub-prime mortgage issue of 2007 and the financial crisis of 2008. The 2007 credit crunch originated from the problems that emanated from non-corporate assets; housing mortgages. The crisis led to a sharp liquidity loss that impacted hard on financial institutions dealing with sub-prime mortgages. The absence of transparency on investments of long term by financial institutions, and the expectations that credit derivative losses would be transferred to their balance sheets caused confusion that eventually led to the close down of banks that provide short term financing. The crisis escalated into the market for corporate debts of long term causing sharp rise in bond spreads by the end of 2007. Many financial institutions have either gone under or bailed out through economic stimulus programs by respective governments globally since the beginning of the 2007 global financial crisis. These events are directly attributed to corporate governance failure, such as, laxity in terms of oversight by boards and flawed compensation practices for executives emboldened aggressive risk taking. Lack of proper mechanisms to monitor shareholders and flawed financial incentives were the root cause of the crisis.

The effect of the Sarbanes-Oxley has been important. It was one component of the broader effort to restore public confidence in the financial market (Schaeffer, 2004, p. 123). For instance, Securities and Exchange Commission asked national self regulatory organizations such as the New York Stock Exchange and NASDAQ to review their listing standards and present proposals to improve corporate governance of firms listed. The NYSE and NASDAQ as a result developed separate proposals for new corporate governance rules and presented them to Security Exchange Commission for consideration. Later the SEC approved the new corporate listing standards on November, 4 2003 after reviewing public concerns and various amendments submitted by SROs (Brown, 1995, p. 153).

The new standards approved for NYSE and NASDAQ included requirements concerning boards of directors, board committees and management. Both standards prescribed for NYSE and NASDAQ: require the composition of the board to include a majority of independent directors; strengthens the criteria of determining an independent director; the responsibility for director nominations and executive nominations are placed in the hands of the independent directors; demands separate meetings for non-management or independent board members; and demand a code of business conduct for all directors, employees, and officers (Rezaee, 2007, p. 266).

The NYSE standards demand firms to establish and disclose corporate governance guidelines that follow certain criteria among other provisions (Doty, 2004, p. 225); the NASDAQ provisions on the other hand, require companies to make public announcements whenever they get an audit opinion. The standards adopted by NYSE are more detailed than NASDAQ standards. NYSE standards have become common practice for many public companies, regardless where of they are listed (Doty, 2004, p. 226).

Contributions of NYSE in Capital Raising

The New York Stock Exchange does a good job of raising capital. This is one of the basic contributions NYSE does provide to strengthen the US economy. Corporations are able to raise capital by selling ownership shares or borrow through bonds,debt-related instruments. As a primary market, NYSE allows stocks and bonds to be sold to investors directly through underwriters. Therefore, it converts household and business savings into investments to benefit both savers and corporations (Brown, 2002, p. 28). Corporations raise capital in primary market transactions when they sell shares to investors in exchange for funds. In such transactions, corporations receive the proceeds from issuing securities. These are true activities of raising money by corporations to finance their businesses. As a secondary security market, New York Stock Exchange is involved in the reselling of stocks and bonds. NYSE provides people with assurance that they can sell their investments for cash when they feel they can do so. In essence, once firms in the New York Stock Exchange have issued their investors with securities, investors can sell them to other investors. Transactions between investors are referred to as secondary market transactions (Brown, 2002, p. 28).

NYSE provides a database on information that an investor needs about issuing stocks, markets and customer base, future earnings and growth potential, and management skills. Investors base their decisions about what stocks or bonds to buy on this information. NYSE provides clear criteria based on past performances in evaluating established corporations. The NYSE is a global meeting place for potential buyers and sellers. It has liquidity, that is, it attracts many buyers and sellers. As a liquid market, selling or buying is performed with minimal effect on the price that is competitively established in the NYSE. The advantage of NYSE for investors is “immediacy”. Customers are able to sell quickly when they need their assets, or make their purchase quickly when there is a chance, and to clear and settle the trade quickly (Brown, 2008, p. 4-134).

An important characteristic of NYSE is efficiency. This implies that changes in the collective judgment of investors about the fundamental value of corporation are accurately and swiftly reflected in the prices at which stocks and bonds are bought and sold, with minimum distortion from transaction costs, regulations, or other external factors. Information technology has speeded up the process of registering changes in investors’ judgment. Both information technology and deregulation has tended to lower transaction cost in the NYSE. However, some people believe that as a result of information technology and deregulation, market prices have recently turned volatile, and that the costs of transaction should deliberately be raised by taxing, to discourage “in and out” of trading.

The New York Stock Exchange is the largest and most prestigious stock market in the entire world. It is part of the broker market along with the American stock Exchange (AMEX) and other regional exchanges in the US. Trading in these exchanges, take place on centralized trading floors. According to Megginson (2008), all total shares traded in the US account for about 60% of the total dollar volume of all shares traded (p. 209). Basically, NYSE combines domestic and foreign securities, including bonds, stock and other investments transacted in a public market to be bought and sold by investors. It organizes and centralizes security markets operations, thus, assisting the US economy disburse money from investors into different locations of the market to spur economic growth. In essence, the New York Stock Exchanges enables government and businesses to access funds required in order to finance their major projects and develop (Megginson, 2008, p.210).

NYSE Encourages Savings and Investments

The NYSE contributes a lot in encouraging savings and investments and assisting individuals to save for the future. The level of investment and savings rate is assumed to be influenced by the New York Stock Exchange. The NYSE makes available capital for the industries as a product of multiple decisions of individuals to save or to spend. The rate of spending among American is considered low in comparison to other developed countries. Infact personal savings have declined sharply in recent years. The reasons considered for this decline includes: Americans feel less urge to save for retirement because of insurance coverage and pension plans; they can make large purchases financed by borrowing rather than saving; and two-income households engenders confidence that reduces the need to save.

Savings in the US may neither be low or declining. Economic experts usually consider private savings only, whereas majority of Americans think of their savings in terms of home purchase, pension contributions, and insurance policies. According to the US Congress, plans for pension, insurance cover, and homeownership are predictable long-term investments (p. 31). Public policies that are favourable to their growth might result to more capital for investment, in the long run, than a cut in the capital gains tax (United States Congress, 1990).

NYSE Role in Resource Allocation

The New York Stock Exchange allocate capital to its most productive uses, by allowing stocks or bonds to compete for investors funds in addition to enabling capital formation. Theoretically, stock market prices in the NYSE show the relative values placed on ownership in a corporation (Wilhelm, 2001, 166). The NYSE encourages market efficiency in undertaking this essential function. The economists contend that a stock price is the collective best estimates for investors of the present value of future earnings, reflected in the prices that are set by people bidding against each other, each uses incomplete but overlapping information. The best signal of allocation of resources depends on the interaction of supply, demand, and price (Lozonick, 2002, p. 26).

Taxes and regulations affect NYSE market pricing by altering the rewards for risk taking. Tax and policies of regulation work as intended in the NYSE when that effect is deliberate and desired. Efficient theorists of markets tend to view market regulations and taxes as harmful. Changes in the stock prices in NYSE are also influenced dramatically by mergers, acquisitions, takeovers, and leveraged buyouts that may have unpredictable effects on corporate values and corporate performance for reasons not related to market valuation. NYSE adheres to the theory of efficient market which stresses the importance of information in market behaviour. It is therefore not thought possible to “outperform the market” over time, even by studying all available information, because, in an efficient market, all information about stock value is presumably already reflected in market prices. Knowledge is the only “special” information that is available only to “insiders” such as regulators, corporate officials, and others, in which case its application is illegal. Majority of large investors in the NYSE hold “indexed “ portfolios that contains all of the stocks used in computing the standard and poor 500 index or another standard market index. The index is the weighted average price of a basket of selected stocks that are assumed to represent the entire market. The indexed portfolio should appreciate or depreciate just as the overall market does. Passive trading techniques intended only in reflecting general market trends can be used by investors (Lozonick, 2002, p. 26).

Some experts disagree with the claims that markets such as NYSE is perfect, that the behaviour is rational, and that investor the price investors are willing to pay represents judgment about fundamental values of NYSE. Joseph Stiglitz, a senior economist described the market as “a gambling casino for the rich”. Jacobs (1999) stated that Keynes john likened the market to a beauty contest in which:

It is not the case of choosing which faces are the prettiest, nor even those which average opinion genuinely thinks the prettiest (but)…we devote our intelligences to anticipating what average opinion expects to be (p. 83).

Since the market crush of 1987, doubts have been caste on the efficient market theory by several empirical studies. These empirical studies ask whether corporate assets actually declined in value or what new information caused the investors collectively to revise their previous judgment quickly. Many people concluded that price jumps occasioned by large block trades, by new computerized trade strategies and by professional speculators make stock prices extremely volatile. This endangers the financial systems, destabilizes the entire economy, and imposes unnecessary risks on small investors. Other people attribute excessive volatility on arbitraging, hedging and manipulation (Jacobs, 1999, p. 84).

In the New York Stock Exchange, the allocation of investment capital is affected by securities prices, banking decisions, interest rates, the mortgage market, and the domestic markets. It is also affected by currencies, economic conditions and policies in other countries. Enhanced efficiency of the stock market may not improve, or may not slightly improve, the allocation of corporate capital.

NYSE Assists in External Financing Function of Corporate Finance

Firms raise funds to support investment and other activities in one of two ways: either from outside (externally) from shareholders or creditors or internally by retaining and reinvesting operating profits. According to Megginson (2008), both US and non US firms raise about two thirds of their required funding internally, from the New York stock exchange, NASDAQ and other regional exchanges each year (p. 10). Corporations enjoy varied advantages to raise money externally unlike sole proprietorships and partnerships which face limited external funding opportunities. They can raise funds either by selling equity, that is, common or preferred stock, or by borrowing money from creditors. When corporations are young and small, they must raise equity capital privately, from friends and family or from professional investors such as venture capitalist. Thore (1995) states that Venture capitalist specializes in making high risk and high return investments in rapidly growing entrepreneurial businesses (p. 150). After firms reach a certain size, they must go public by conducting an initial public offering (IPO) of shares in the capital market. Selling shares to outside investors and listing the shares for trade on a stock exchange. After the IPO, firms have the option of raising funds by selling additional shares in the future (Thore, 1995, p. 150).


In sum, this paper has discussed the role of NYSE in corporate financing highlighting the major functions and activities of corporate finance. These functions include: external financing functions where the New York Stock Exchange supports companies in raising capital to assist their operations and investments; corporate risk management function where the New York Stock Exchange has assisted in reforming the listing standards to establish and disclose corporate governance guidelines. In essence, the NYSE standards demand firms to establish and disclose corporate governance guidelines that follow certain criteria among other provisions; the NASDAQ provisions on the other hand, require companies to make public announcements whenever they get an audit opinion. The standards adopted by NYSE are more detailed than NASDAQ standards. NYSE standards have become common practice for many public companies, regardless where they are listed; the NYSE enhances corporate governance. The stock Exchange has long been championing for the improvement of corporate governance. The NYSE policies and regulations require corporations to adhere with all the procedures and standards laid down for listing. These procedures and standards have been reviewed periodically. The NYSE has even supplemented these standards when the transformation of capital markets has required improved governance standards or disclosure; the NYSE also plays the crucial function of resource allocation necessary in the US economy (Wilhelm, 2001, p. 166).


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