International Financial Management: Analysis of HSBC's Dividend Policy, Efficient Market Hypothesis Theory, and Project Appraisal Methods

This report critically analyzes and evaluates HSBC's dividend distribution policy, efficient market hypothesis theory, and methods for appraising projects. It also discusses the importance of international financial management and the challenges faced by HSBC in different financial markets.

International financial
management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Critically analysing and evaluating dividend distribution policy of HSBC................................3
Critically analysing the efficient market hypothesis theory in context of HSBC’s operations...5
Critically analysing and evaluating HSBC’s methods of appraising projects.............................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................1

INTRODUCTION
International finance or international finance management is defined as the management
of finance of an international business environment. This is inclusive of exchange of foreign
currency for trading and earning money. It is important for an international business as it helps in
connecting the company with international deals. HSBC Holdings plc is a British origin MNC
that operates in financial sector. The current report will critically analyse and evaluate the
company’s dividend distribution policy, efficient market hypothesis theory and methods for
appraising projects.
MAIN BODY
Critically analysing and evaluating dividend distribution policy of HSBC
A dividend distribution policy is defined as the policy which a company use for
structuring its shareholders’ dividend pay -out. There are three types of dividend distribution
policies that namely are: constant, stable and residual dividend policy. The dividend policy that
the HSBC uses is stable dividend distribution policy (KANAKRIYAH, 2020). This type of
policy for distribution of dividend is the most common & easy one in use. The goal of the
company behind adopting this type of policy is to distribute a predictable and steady pay -out of
dividend over each of the year. This form of policy for distribution have the goals that are most
preferred by the investor because in such a policy the investors are sure to receive dividend
irrespective of whether the earnings of the firm goes up award or experiences a fall (Al-Sharif,
2020). HSBC aligns its long term growth plans with adapting to this type of policy and avoids to
have volatility in terms of quarterly earnings. This gives the shareholders of HSBC to have more
certainty and timely payment of dividend.
Advantages of constant dividend policy are that it resolves the uncertainty of investors as
company gives stable dividends by not changing the dividend amount if there are temporary
fluctuations in the earnings of the company. The benefit for the company is that when it
continues to give same amount of dividends when its earnings falls it give investors an
impression that the company’s future is bright. This type of policy is most liked by investors that
prefer a fixed amount of earnings (Pattiruhu and Paais, 2020). Further investors prefer to invest
in such companies which have capacity to pay regular dividends. There are certain disadvantages
of this policy, it becomes highly difficult to change this policy once it gets implemented,
changing it means affecting the attitude of investors largely. Because it seems to them that it is a

cut in salary when the dividend amount falls. For countering this company adopts a rate of
dividend which is conservative so it becomes easier to maintain it over the years.
Importance of international financial management to HSBC
Proper international financial management helps HSBC to achieve same level of
effectiveness and efficiency in each of the markets in which it operates. Without international
financial management it would be difficult for the company to sustain. It helps company to
calculate exchange rates of varied nations currencies, to know every nation relative worth in
terms of such rates. With effective IFM company secure its shareholders’ wealth maximization,
it is a measure by which a company’s performance can be assessed. The main of every
organization is to maximise the returns that it gives to its shareholders so IFM is important for
the company (Nayak and Lai, 2021). The aim of international FM is to enable the company in
maximising its profits so it becomes essential for the company to utilize it effectively. Through
IFM HSBC is able to make correct investment decisions, which helps in earning maximum
profits. safe investments are promoted that are sure to entail high returns. With it HSBC is
enabled to allocate its funds in such a manner that its activities of business runs without any kind
of interruptions, leading to increase in profits. further it also helps the company to achieve such
an interest rate for the borrowed funds that is optimum (Verdier, 2020). All the finance options
available to company are evaluated and checked by the managers based on which the funds that
comes from safe and reliable source that are available at minimum interest rates is selected. In
international trade one of the most important part is forex risk, so its effective and timely
management becomes necessary for the managers. Such rates are difficult to manage because of
their erratic and volatile nature. It may result in leading company in a situation of heavy losses,
IFM helps in saving a company from such losses. Political risk management, is another
important goal of HSBC and a utility of IFM (Barber, 2021). Cases of any unrest in political
aspect of the region in which operations of the company are there and also political instability
needs to be considered while managing funds. IFM helps in effective fund management by
considering such situations of political field. Expanded sets of opportunities are effectively used
through IFM by the company. Available opportunities are used in the best possible way so it is
important.

Critically analysing the efficient market hypothesis theory in context of HSBC’s operations
Efficient market hypothesis theory is also known as efficient market theory. This theory
states that a company’s share prices are efficient in reflecting all the information and it is
impossible to generate consistent alpha. In this theory trading of stocks is always at fair values.
According to this theory it is impossible to purchase stocks at undervalued prices for a trader and
also the selling of stocks at inflated rates is not possible. The outperforming in overall stock
market is thus impossible by any means of selecting the stock by expert or making use of market
timing (Rossi and Gunardi, 2018). The only way that exists in front of an investor willing to earn
higher returns is to invest money in such investments that are riskier. This theory has been highly
disputed and controversial. The believers of the theory say that searching for a stock that is
undervalued and trying to forecast its market trends by analysing technically or fundamentally is
senseless. Going with the theory available both the types of analysis that is technical and
fundamental cannot be used to produce alpha consistently. Further insider information can only
lead to outsize the returns by adjusting the risk. A large number of evidence is there from
academic perspective that supports EMH theory and same amount of evidences that are not in
support are also present. There are different types of efficient market hypothesis. First is the
weak form of EMH which is based on the assumption that all financial instruments’ market
prices represent every information that is market related, information that isn’t disclosed is
excluded. Further it also assumes that financial instruments historical data is not related with the
future data. Next is the semi strong form of EMH is also based on the assumptions of the first
form and market prices are quickly adjusted in the responding to any public information
disclosing newly (Kelikume, Olaniyi and Iyohab, 2020). So the scope for fundamental and
technical analysis is absent. The last one is the strong form of EMH this states that both the
information that is historical and current are represented by securities’ market prices.
Information that are both from insider and disclosed publically are included in this.
Critically analysing and evaluating HSBC’s methods of appraising projects
There are five methods of appraising projects namely, economic analysis, financial
analysis, market analysis, technical feasibility and managerial competence. The first method that
is economic analysis in this the projects need for materials, capacity utilization levels, projected
sales and expenses and probable profits are included. In this type of appraising projects costs and
benefits are evaluation (Vassallo and Bueno, 2021). The economic analysis of HSBC aims at the

profits which it is making. Financial analysis is defined as a process that is used in evaluation of
businesses, budgets, projects, and transactions related to finance for determining their suitability
& performance. The market analysis method is the activity by which the information regarding
the factors that affects projects and market are gathered (Soparat, Suksuwan and Trangkanont,
2019). The next method of appraising projects includes the process by which it is proved that the
particular project is technically possible. Managerial competence means the skills, knowledge,
habits and attitudes of management with which it can successfully manage the project.
Before the production the company anticipates the market that is possible for the product.
the potential customers of the product, where & when will be the product will be sold are
predicted. Technical feasibility of the project is done for taking into the consideration the
technical aspect. Further management competence is used to analyse whether the management is
competent to carry the project and make effective use of the funds invested.
Challenges that HSBC is experiencing in different international financial markets
International financial management is a process that is highly complex having its own
processes and methodologies. Further globalization makes it even more complicated with
increasing level of integration between commodity and financial markets. Managers of HSBC
are required to understand such environment for making the organization able in achieving its
maximum value. Challenges that HSBC experience in international market are the unique
variables & risks (MacKenzie, 2021). One such challenge is the complex and multiple taxation
systems that affects profitability and operations of the company. Manager faces challenge of
reducing the overall tax burden of the company while transferring funds from affiliates with high
tax to those with low tax by making use of tax havens. Another such challenge is financing
function that comes with the multiple funds sources. Forex rates and political risk consideration
in the event of funds positioning and mobilization of cash resources is challenging task. MNCs
need to situate the elements like currency, geography and institutional diversity in such a way
that leads to making these work in accordance to their view. Having a management that is
flexible and intelligent with forward looking approach is a real task (Liu, Lee and Lee, 2020).
Management faces challenge in making complexity & diversity of environment to work for the
firm’s advantage and reducing the negative impact of in progress conflicts.

CONCLUSION
On the basis of the report the meaning and importance of internal financial management
have been made clear. The report has critically analysed and evaluated the chosen corporation’s
dividend distribution policy. The report has described the challenges that HSBC faces in
different financial markets. Further a critical analysis of efficient market hypothesis theory has
been done in the report. Lastly the methods of appraising projects have been outlined.

REFERENCES
Books and Journals
Al-Sharif, B. M., 2020. Dividend-Payout Policy and Share-Price Volatility in Islamic Banks:
Evidence from Jordan. Asian Economic and Financial Review. 10(3). pp.266-274.
Barber, A., 2021. HSBC: Learning Without Change?. In UK Banks and the Lessons of the Great
Financial Crisis (pp. 237-278). Palgrave Macmillan, Cham.
KANAKRIYAH, R., 2020. Dividend policy and companies' financial performance. The Journal
of Asian Finance, Economics and Business. 7(10). pp.531-541.
Kelikume, I., Olaniyi, E. and Iyohab, F.A., 2020. Efficient market hypothesis in the presence of
market imperfections: Evidence from selected stock markets in Africa. International
Journal of Management, Economics and Social Sciences (IJMESS). 9(1). pp.37-57.
Liu, Y., Lee, J. M. and Lee, C., 2020. The challenges and opportunities of a global health crisis:
the management and business implications of COVID-19 from an Asian
perspective. Asian Business & Management. 19(3). pp.277-297.
MacKenzie, D., 2021. Trading at the speed of light: How ultrafast algorithms are transforming
financial markets. Princeton University Press.
Nayak, B. S. and Lai, H., 2021. Strategies and Transformations in Chinese Banking Industry: A
Study of the HSBC Bank (China) Ltd. from 2010 to 2019. In China: The Bankable
State (pp. 37-71). Springer, Singapore.
Pattiruhu, J. R. and Paais, M., 2020. Effect of liquidity, profitability, leverage, and firm size on
dividend policy. The Journal of Asian Finance, Economics and Business. 7(10). pp.35-
42.
Rossi, M. and Gunardi, A., 2018. Efficient market hypothesis and stock market anomalies:
Empirical evidence in four European countries. Journal of Applied Business Research
(JABR). 34(1). pp.183-192.
Soparat, P., Suksuwan, N. and Trangkanont, S., 2019. The integrated appraisal framework of
rural road improvement projects. Engineering Journal. 23(3). pp.117-140.
Vassallo, J. M. and Bueno, P.C., 2021. Sustainability assessment of transport policies, plans and
projects. In Advances in Transport Policy and Planning (Vol. 7, pp. 9-50). Academic
Press.
Verdier, P. H., 2020. Global banks on trial: US prosecutions and the remaking of international
finance. Oxford University Press.
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