Evolution of Finance

Change they say is the only constant thing in nature and that has been seen in the aspect of finance. They finance I was born into is not the same today. A lot of needed changes have ensued and we hope to see even more changes.

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Texts have it that at the inception of the 20th century, finance emerged as a field separate from economics but still was closely related. Emphasis then was on corporation finance and this was a reflection of the development at the time as industrialists concentrated on building of giant industrial corporations only.

Research also shows that in the 1920s, following the outburst of innovations in technology, firms needed funds to update production processes and techniques. The focus then was on liquidity and the financing of projects embarked upon by the various firms. Later on in the 1930s, the world economic depression gave birth to an era of conservation.

This caused the emphasis to shift to other topics like maintenance of liquidity, preservation of firms, and the bankruptcy or liquidation procedures. There was an increase in the amount of business regulation and financial data disclosed to government this period.

Between the 1940s and the early 1950s, no significant change in the study of corporate finance was recorded. Up to this period, the study of finance was descriptive or definitional in nature. The orientation had been from the viewpoint of outsider to the firm, such as lender or investor.

Notable changes only occurred as a more analytical decision oriented approach began to evolve in the mid 50s. The first area of study to generate the new found enthusiasm for decision-related analysis was capital budgeting, in which the financial manager was presented with analytical techniques for allocating resources among the various assets of the firm followed by working capital management, dividend policy and capital structure formation.

As time went on, financial management focused on the portfolio theory which states that "the risk of an individual asset should not be assessed based on possible deviations from it's expected returns but should be considered in relation to its marginal contribution to the overall risk of a portfolio of assets."

The emphasis back then has actually been on risk-return relationships and the maximization of return from a given level of risk. However, emphasis has been shifted from that to the use of computers as analytical tool for sound decisions making presently. Thus, the position has shifted from that of the outsider looking in to the financial manager involved in making important day-to-day decisions thereby affecting the overall performance of the firm.

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