AUDIT 2018 1: Critical Analysis of an Equity Financing Article

This assignment presents an analysis of an academic article, "The equity-financing channel, the catering channel, and corporate investment: International evidence," by Yuanto Kusnadi. The student examines the relationship between equity financing and corporate investment, highlighting the impact of stock price sensitivity on investment decisions. The analysis covers the influence of market behavior, share turnover, and R&D on fund allocation. The student emphasizes the article's relevance to finance professionals and potential investors, emphasizing the risks associated with equity-based financing. The analysis also includes a case study of Coca-Cola's diversification strategy, underscoring the importance of financial planning, stock market knowledge, and strategic investment decisions for maximizing shareholder returns. The student's analysis concludes with a validation of the author's assertions regarding the importance of balancing equity and debt financing to mitigate market fluctuations and ensure optimal liquidity.

AUDIT
2018

1
By student name
Professor
Date: 29th June, 2018.
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CONTENTS:
Analysis………….............…………………………………………………......................…...3
References......................……………….....................................................................................5
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Analysis
In this article, titled: The equity-financing channel, the catering channel, and corporate
investment: International evidence, written by Yuanto Kusnadi, the author has heighted issues that are
associated with equity financing and how that is affecting the corporate investment structure and
channelizing of fund. The author highlights the point that the overall equity financing is dependent on
the investment-stock price sensitivity. It indicates the point that as the market behaves the returns of
the shareholders are affected and that affects the amount of funds that the company is investing in that
security. Capital markets, Share turnover and other R&D also shows such similar correlation between
funds and how they are channelized and affected by the sensitivity of the stock movement. The overall
findings of the authors are based on the research that they have conducted on equity based financing
and other catering hypotheses. Thus, the main crux of the overall research article is the dependency of
the corporates on equity based financing and how the changes in the overall level of prices affects the
movement of the stocks and that in turn affects the overall return that the company gives out and thus
affecting the overall market position of the company (Kusnadi & Wei, 2017).
There are many reasons because of which the stock prices might be affected and that would
include changes in the financing and the economic policy, changes in the rate of inflations, the overall
performance of the stock in the market and the kind of returns that it is offering the holder. For non-
equity investment companies, the effect is very low in comparison to companies that are dependent on
such funding for their operations. Investment is more sensitive in countries that have more developed
capital markets and higher share turnovers as the stakes in such countries is usually high and that affects
the share prices and financial structure (Kusnadi & Wei, 2017).
The main intended audience of the author are professionals who are working in the finance
sector and people who are thinking of investing their funds in stocks that are equity based. Such kind of
research paper will help them in understanding that the risk association is high and they should think
before investing in equity based funds that might be more prone to the changes in the economy
(Kusnadi & Wei, 2017). The working professionals who are there in the finance sector can take
important financial decisions after they have had good knowledge of the financing based challenges that
comes with equity investments. These are the main audience that the author wants to target.
The overall point of the author is correct because the changes in the prices of the stocks in the
market will affect those companies that have done equity investments and the returns to their
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shareholders will go high or low. The situation can be both sides equally applicable. When it comes to
debt financing the risk associated is low and not associated with shares and stock prices but with equity
the companies need to understand which are the funds in which the chances of getting the revenue is
more in considerable risk. One more point that should be mentioned is that the performance of the
stock describes the financial position of the companies and thus it becomes important to judge which
are the areas in which funds should be put in so that people who are investing gets the optimum return.
Shareholder wealth maximization is a concept that is widely followed and companies are expected that
through their financial policies and structure and decision making they will make sure that these people
gets the utmost return on their investment. So, the logic should be that there should be a balance
between the equity and debt financing so that the overall liquidity is balanced and companies are not
affected to that great extent in case the equity stocks do not fare well. Thus all the points that the
author has stated in his research paper appears to be valid and companies should try to give thought to
that (Kusnadi & Wei, 2017).
In case of Coca cola the company is trying to diversify its portfolio strategy and become the leader in the
beverage business and for this the company has started investing in more equity funds like the minority
equity holding in Chi Ltd. a Nigeria based leading dairy and juice company, creating a strategic
relationship between the two companies. This will help in product diversification and also help in
improving the overall branding strategy of the company. The overall gross profit margin of Coca Cola has
considerably increased from 60.7% in 2016 to 60.5% from 2015 and that has helped in the growth of the
company a lot. The main reasons for its growth has been rearrangement of its global supply chain, zero-
based budgeting, rationalization of the company’s operating model, and direct marketing investments
The authors assertion are completely correct and same has been seconded in the above
paragraph that highlights the need for better stock market knowledge, better financial policies and
planning and making smart investment decisions so that the overall return is high and not affected due
to high fluctuations.
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References
Kusnadi, Y., & Wei, K. (2017). The equity-financing channel, the catering channel, and corporate
investment: International evidence. Journal of Corporate Finance, 47, 236-252.
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