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Institutionalization

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Definition of Institutionalization

Institutionalization Image 1

Institutionalization

The gradual domination of financial markets by institutional investors, as opposed to
individual investors. This process has occurred throughout the industrialized world.



Related Terms:

Auction markets

markets in which the prevailing price is determined through the free interaction of
prospective buyers and sellers, as on the floor of the stock exchange.


Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.


business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market


capital markets

markets for long-term financing.


Cash markets

Also called spot markets, these are markets that involve the immediate delivery of a security
or instrument.
Related: derivative markets.



Changes in Financial Position

Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.


chief financial officer (CFO)

Officer who oversees the treasurer and controller and sets overall financial strategy.


Institutionalization Image 1

Closing purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in
a stock, or in a given series of options.


Corporate financial management

The application of financial principals within a corporation to create and
maintain value through decision making and proper resource management.


Corporate financial planning

financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.


Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.


cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)


costs of financial distress

Costs arising from bankruptcy or distorted business decisions before bankruptcy.


Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.


Derivative markets

markets for derivative instruments.


Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price


Institutionalization Image 2

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.


Dupont system of financial control

Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.



efficient capital markets

financial markets in which security prices rapidly reflect all relevant information about asset values.


Efficient Markets Hypothesis

The hypothesis that securities are typically in equilibrium--that they are fairly priced in the sense that the price reflects all publicly available information on the security.


Emerging markets

The financial markets of developing economies.


External Financial Statements

Corporate financial statements that have been reported on by an external independent accountant.


FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs


Financial accounting

The production of financial statements, primarily for those interested parties who are external to the business.


financial accounting

a discipline in which historical, monetary
transactions are analyzed and recorded for use in the
preparation of the financial statements (balance sheet, income
statement, statement of owners’/stockholders’ equity,
and statement of cash flows); it focuses primarily on the
needs of external users (stockholders, creditors, and regulatory
agencies)


Financial analysts

Also called securities analysts and investment analysts, professionals who analyze
financial statements, interview corporate executives, and attend trade shows, in order to write reports
recommending either purchasing, selling, or holding various stocks.


Financial assets

Claims on real assets.


financial assets

Claims to the income generated by real assets. Also called securities.



Financial Assistance

Economic assistance provided by unrelated third parties, typically government agencies. They may take the form of loans, loan guarantees, subsidies, tax allowances, contributions, or cost-sharing arrangements.


financial budget

a plan that aggregates monetary details
from the operating budgets; includes the cash and capital
budgets of a company as well as the pro forma financial
statements


Financial control

The management of a firm's costs and expenses in order to control them in relation to
budgeted amounts.


Financial Covenant

A feature of a debt or credit agreement that is designed to protect the lender or creditor. It is common to characterize covenants as either positive or negative covenants.
A positive covenant might require that the debtor maintain a minimum amount of working capital.
A negative covenant might limit dividend payments that may be made.


Financial Covenants

A promise made related to financial conditions or events. Often a promise not to allow certain balance sheet items or ratios to fall below an agreed level. Usually found in loan documents, as a protection mechanism.


Financial distress

Events preceding and including bankruptcy, such as violation of loan contracts.


Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).


Financial engineering

Combining or dividing existing instruments to create new financial products.


Financial future

A contract entered into now that provides for the delivery of a specified asset in exchange
for the selling price at some specified future date.


financial incentive

a monetary reward provided for performance
above targeted objectives


Financial Incentive

An expression of economic benefit that motivates behavior that might otherwise not take place.


Financial intermediaries

Institutions that provide the market function of matching borrowers and lenders or
traders.


financial intermediary

Firm that raises money from many small investors and provides financing to businesses or other
organizations by investing in their securities.


Financial Intermediary

Any institution, such as a bank, that takes deposits from savers and loans them to borrowers.


Financial Intermediation

The process whereby financial intermediaries channel funds from lender/savers to borrower/spenders.


Financial lease

Long-term, non-cancelable lease.


Financial Lease

Lease in which the service provided by the lessor to the lessee is limited to financing equipment. All other responsibilities related to the possession of equipment, such as maintenance, insurance, and taxes, are borne by the lessee. A financial lease is usually noncancellable and is fully paid out amortized over its term.


Financial leverage

Use of debt to increase the expected return on equity. financial leverage is measured by
the ratio of debt to debt plus equity.


financial leverage

The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In This way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.


financial leverage

Debt financing amplifies the effects of changes in operating income on the returns to stockholders.


Financial leverage clientele

A group of investors who have a preference for investing in firms that adhere to
a particular financial leverage policy.


Financial leverage ratios

Related: capitalization ratios.


Financial market

An organized institutional structure or mechanism for creating and exchanging financial assets.


financial markets

markets in which financial assets are traded.


Financial Numbers Game

The use of creative accounting practices to alter a financial statement
reader's impression of a firm's business performance.


Financial objectives

Objectives of a financial nature that the firm will strive to accomplish during the period
covered by its financial plan.


Financial plan

A financial blueprint for the financial future of a firm.


Financial planning

The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.


Financial Position

Status of a firm's assets, liabilities, and equity accounts as of a certain time, as shown in its financial statement.


Financial press

That portion of the media devoted to reporting financial news.


Financial ratio

The result of dividing one financial statement item by another. Ratios help analysts interpret
financial statements by focussing on specific relationships.


financial reports and statements

financial means having to do with
money and economic wealth. Statement means a formal presentation.
financial reports are printed and a copy is sent to each owner and each
major lender of the business. Most public corporations make their financial
reports available on a web site, so all or part of the financial report
can be downloaded by anyone. Businesses prepare three primary financial
statements: the statement of financial condition, or balance sheet;
the statement of cash flows; and the income statement. These three key
financial statements constitute the core of the periodic financial reports
that are distributed outside a business to its shareowners and lenders.
financial reports also include footnotes to the financial statements and
much other information. financial statements are prepared according to
generally accepted accounting principles (GAAP), which are the authoritative
rules that govern the measurement of net income and the reporting
of profit-making activities, financial condition, and cash flows.
Internal financial statements, although based on the same profit
accounting methods, report more information to managers for decision
making and control. Sometimes, financial statements are called simply
financials.


Financial reports or statements

The Profit and Loss account, Balance Sheet and Cash Flow statement of a business.


Financial risk

The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.


financial risk

Risk to shareholders resulting from the use of debt.


financial slack

Ready access to cash or debt financing.


Financial Trend Analysis

process of analyzing financial statements of a company for any continuing relationship.


Financial year

The accounting period adopted by a business for the production of its financial statements.
Finished goods Inventory that is ready for sale, either having been purchased as such or the result of a conversion from raw materials through a manufacturing process.


Fraudulent Financial Reporting

Intentional misstatements or omissions of amounts or disclosures
in financial statements done to deceive financial statement users. The term is used interchangeably
with accounting irregularities. A technical difference exists in that with fraud, it
must be shown that a reader of financial statements that contain intentional and material misstatements
must have used those financial statements to his or her detriment. In This book, accounting
practices are not alleged to be fraudulent until done so by an administrative, civil, or
criminal proceeding, such as that of the Securities and Exchange Commission, or a court.


Future-Oriented Financial Information

Information about prospective results of operations, financial position and/or changes in financial position, based on assumptions about future economic conditions and courses of action. Future-oriented financial information is presented as either a forecast or a projection.


Gradualism

A policy of decreasing the rate of growth of the money supply gradually over an extended period of time, so that inflation can adjust with smaller unemployment cost. Contrast with cold-turkey policy.


Growth phase

A phase of development in which a company experiences rapid earnings growth as it produces
new products and expands market share.


In-house processing float

Refers to the time it takes the receiver of a check to process the payment and
deposit it in a bank for collection.


Individual Insurance

Insurance that is offered to individuals rather than groups.


Individual Retirement Account

A personal savings account into which a defined
maximum amount may be contributed, and for which any resulting interest
is tax deferred.


Individual Retirement Annuity

An IRA comprised of an annuity that is managed
through and paid out by a life insurance company.


Institutional investors

Organizations that invest, including insurance companies, depository institutions,
pension funds, investment companies, mutual funds, and endowment funds.


Institutionally Induced Unemployment

Unemployment due to institutional phenomena such as the degree of labor force unionization, the level of discrimination, and government policies such as unemployment insurance programs, minimum wages, or regulations on business.


International Bank for Reconstruction and Development - IBRD or World Bank

International Bank for Reconstruction and Development makes loans at nearly conventional terms to countries for projects of high
economic priority.


Ito process

Statistical assumptions about the behavior of security prices. For
details, see the book by Hull listed in the “Bibliography”.


joint process

a manufacturing process that simultaneously
produces more than one product line
joint product one of the primary outputs of a joint process;
each joint product individually has substantial revenuegenerating
ability


London International Financial Futures Exchange (LIFFE)

A London exchange where Eurodollar futures
as well as futures-style options are traded.


London International Financial Futures Exchange (LIFFE)

London exchange where Eurodollar futures as well as futures-style options are traded.


Long-term financial plan

financial plan covering two or more years of future operations.


Maturity phase

A phase of company development in which earnings continue to grow at the rate of the
general economy. Related: Three-phase DDM.


Minimum purchases

For mutual funds, the amount required to open a new account (Minimum Initial
Purchase) or to deposit into an existing account (Minimum Additional Purchase). These minimums may be
lowered for buyers participating in an automatic purchase plan


modified FIFO method (of process costing)

the method of cost assignment that uses FIFO to compute a cost per
equivalent unit but, in transferring units from a department,
the costs of the beginning inventory units and the
units started and completed are combined and averaged


Money purchase plan

A defined benefit contribution plan in which the participant contributes some part and
the firm contributes at the same or a different rate. Also called and individual account plan.


multiprocess handling

the ability of a worker to monitor
and operate several (or all) machines in a manufacturing
cell or perform all steps of a specific task


Negotiated markets

markets in which each transaction is separately negotiated between buyer and seller (i.e.
an investor and a dealer).


Non-financial services

Include such things as freight, insurance, passenger services, and travel.


Notes to the financial statements

A detailed set of notes immediately following the financial statements in
an annual report that explain and expand on the information in the financial statements.


Open-market purchase operation

A systematic program of repurchasing shares of stock in market
transactions at current market prices, in competition with other prospective investors.


open purchase ordering

a process by which a single purchase
order that expires at a set or determinable future
date is prepared to authorize a supplier to provide a large
quantity of one or more specified items on an as-requested
basis by the customer


Opening purchase

A transaction in which the purchaser's intention is to create or increase a long position in
a given series of options.


Perfectly competitive financial markets

markets in which no trader has the power to change the price of
goods or services. Perfect capital markets are characterized by the following conditions: 1) trading is costless,
and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely
available, 3) there are many traders, and no single trader can have a significant impact on market prices.


Preferred Stock Stock that has a claim on assets and dividends of a corporation that are prior

to that of common stock. Preferred stock typically does not carry the right to vote.


Price discovery process

The process of determining the prices of the assets in the marketplace through the
interactions of buyers and sellers.


Pro forma financial statements

financial statements as adjusted to reflect a projected or planned transaction.


Process

A series of linked activities that result in a specific objective. For example, the
payroll process requires the calculation of hours worked, multiplication by hourly
rates, and the subtraction of taxes before the final objective is reached, which is the
printing of the paycheck.


process benchmarking

benchmarking that focuses on practices and how the best-in-class companies achieved their results



 

 

 

 

 

 

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