Efficient Market Hypothesis: Pension Fund Managers Essay

Question:

Discuss about the Efficient Market Hypothesis for Pension Fund Managers.

Answer:

Introduction:

The current study is concerned with evaluating the main functions of Chief Financial Officer (CFO) and also discuss the strategy of pension fund managers in the light of efficient market hypothesis. The role of CFO is crucial for any organization and efficiency of a CFO impacts organizational performance and thus the study discusses the impact of CFO roles on organizational objectives. The study further discusses the various aspects of efficient market hypothesis theory followed by an evaluation of the investment strategy pursued by pension fund managers.

Discussion:

The chief financial officer of a company is among the senior executives of the company whose main responsibility is to manage the financial actions of the company they are working for. The CFO also requires keeping a track on the financial strengths as well as weaknesses of the company and proposes the remedial measures. In the words of Hiebl (2015), it is the responsibility of a CFO to ensure the authenticity of the financial reports of the company.

As observed by Sweeney (2013), the retail companies in Australia are facing a serious completion from their rival firms due to the emergence of many new companies. The Adairs Retail Group Pty Ltd currently operating in Australia has a series of retail stores across the country providing products of home d?cor for sale. The company also provides the services through its online portals. Here, the responsibilities of a CFO are of paramount importance as a CFO has to manage the finances of the Adairs Retail Group Pty Ltd to get the best possible outcomes.

The responsibilities of a CFO in Adairs Retail Group Pty Ltd can be sub divided into the following categories namely

Responsibility as a Controller of the Company

Accounting – According to Liang and Chang (2014), it falls under the prime responsibility of a CFO to ensure that the presentation and reporting of the annual reports are accurate. The historical information of the reports of Adairs Retail Group should also be placed accurately as a lot of important decisions regarding the investment to be done by the shareholders, creditors; employees etc are dependent on the accuracy of the financial reports. It is also imperative that the accurate financial reports of Adairs Retail Group be published on time to make beneficial for the investors to choose between companies for investment. The CFO of Adairs Retail group is responsible to ensure the appropriation regarding the accounting allocations and its documentation. As observed by Hoitash et al. (2012), the CFO may also require undertaking the responsibility of cash management and keep a check on the cash disbursements, accounts payables and receivables along with the bank reconciliation and payroll functions.

Internal Control – As opinioned by Proctor (2014), it is the responsibility of the CFO of Adairs Retail Group to construct and execute the financial strategies and accounting process. The CFO of the following company needs to review and approve the invoices that are to be paid along with the reports of the accounts receivables. In the words of Amato (2016), the CFO of Adairs Retail Group also requires coordinating with the auditors and external tax accountants in order to prepare the income tax structure of the company. In addition to that, the CFO of Adairs Retail Group will have to organize the records of the company in a manner that may make it easily accessible for the purpose of examination.

Financial analyzing, planning and reporting – Under this area of responsibility, the CFO of Adairs Retail group has to review all of the financial contracts, agreements and the financial policies along with the credit negotiation and the vendor agreements. As said by Friedman (2015), in order to frame the long term financial strategies it falls under the duty of a CFO to provide a comprehensive financial data. The CFO of Adairs Retail Group needs to ensure the coordination of the financial planning with the business operations. The financial analysis skills of the CFO of Adairs retail Group may also help the company to assist the decisions of policy making by the executive management. As observed by Agrawal et al. (2013), this indicated that the CFO also needs to be an expert in providing expert perspective and opinion regarding finances of Adairs retail Group. The CFO has to administer the finances and takeover the reporting duty in maintaining the financial statements and budgets of the company as well.

Responsibility as a Treasurer of the Company

In the words of Armstrong et al. (2016), the maintenance of the financial position and improving the financial condition of the company comes under the responsibility of the CFO. The capital structure of Adairs Retail Group has to be overseen by the CFO of the company. It is one of the major responsibilities of the CFO of the following company to determine the best possible mixture of the debt, equity and the internal finances. According to B?ttner et al. (2013), one of the major treasurer functions of the CFO includes addressing the problems associated with the capital structure of Adairs Retail Group.

In addition to the above responsibilities as a treasurer, the CFO of Adairs Retail Group will require coordinating the budgeting and investing activities in all parts of the company. In the words of Wright (2015), the rates of depreciation of the capitalized assets are determined by the CFO and the necessary advice is also given by the CFO of Adair Retail Group regarding the purchase and lease of the assets along with the disposal of the same. The CFO also provides the required guidelines for the use of the financial resources of Adairs Retail Group and the necessary steps to be taken in regard to the budget policies and procedures of the same.

Along with the above mentioned responsibilities, the CFO of Adairs Retail groups monitor the performance of the financial staffs and recommend actions to be taken in context of the promotion or dismissal of the same.

Responsibility of Forecasting Economic Strategies

The CFO of Adairs Retail Group plays an essential part in the future financial situation of the company. in the words of Barsky and Catanach (2013), the identification of the areas in which the company is most efficient and the ways in which the company can capitalize from this is determined by the CFO of the company. The CFO also makes future predictions and allocates the resources of the company similarly to ensure the future success of Adairs Retail Group.

In addition to this, according to Six et al. (2013), the CFO requires to coordinate the data and the analysis of it throughout the workings of the company to identify the possibility of the occurrence of risks and expansion opportunities. The CFO does an analysis of the new markets in order to expand the business to a new level. The internal and financial control systems are also formulated by the CFO of Adairs Retail Group. The management of the company also gets subsequent support in the development of the growth strategies by analyzing the economic as well as industry trends.

According to Habib and Hossain (2013), it is the duty of the CFO of Adairs Retail Group to keep a check on the ongoing performance of the company regarding its growth and accomplishment of the objectives of the company and taking the appropriate measures to ensure that the company is meeting its organizational goals. The submission of the annual reports of the company on the prescribed time is also looked upon and ensured by the CFO of Adairs Retail Group. Above all, the CFO has to manage the financial reporting done by the company both internally as well as externally.

The Chief Finance Officer or CFO of a company helps in shaping the business and increase the integration of the company in the global economy. As per the view of RW Hiebl and Feldbauer-Durstm?ller (2014), the duty performed by the CFO of a company of being a controller, treasurer as well as of forecaster helps the company in determining through the financials of the company about the growth of the same and how far the company is able to fulfill the objectives. As a controller, the CFO looks upon the financial reports of the company and through a brief analysis of it draws a outcome of the areas in which the company may withdraw maximum revenue. This helps in meeting the basic objective of Adairs Retail Group that is to generate the maximum amount of profits.

As observed by Bishop et al. (2014), in the form of a treasurer, the CFO helps in the proper allocation of the resources of the company that may reduce the cost of production and other expenses incurred by the company that in turn may reduce the cost of productivity incurred by the company and increase the profit margin of the product thus fulfilling the basic objective of the company.

The CFO of Adairs Retail Group also does an extensive analysis of the industry in which the company is operating along with the market structure of the same. The purpose of analyzing is to identify the areas of growth of the company and make strategic plans as well as prepare to face the increasing completion in the market that may help the company to sustain in the long run. It is one of the major objectives of Adairs Retail Group to face the rise in competition and expend its growth throughout the industry.

Efficient Market Hypothesis (EMH) is a popular theory in corporate finance which holds that it is not possible to beat the market as stock market efficiency makes the current stock prices to incorporate and indicate all relevant information. As per the theory, stocks always get traded at the fair value in the stock market which further makes it impossible for the investors to sell stocks of inflated price and buy undervalued stocks. Therefore, the theory suggests that it is impossible to outperform the stock market by way of market timings or stock selection by market experts. In this context, Habib and Hossain (2013) stated that the EMH theory observes that the only way to beat the market is by investing in high risk stocks to earn higher returns.

The EMH theory has major impacts on portfolio managers, pension fund managers and others. The EMH theory is undoubtedly a cornerstone in advanced financial theory however it has also raised certain controversies. Pension fund managers supporting this theory think that it is meaningless to look out for undervalued stocks or try to predict trends in market by way of technical or fundamental analysis. However, it is important to note that there has been investors who have been able to beat the market consistently over the years. For example, Warren Buffet had beaten the stock market to earn more than average returns which as per the EMH theory is not possible. Similarly, during the stock market crash in the year 1987, Dow Jones Industrial Average (DJIA) got reduced by 20% on a single day which indicates that in contrast to the EMH theory stock prices can get reduced from fair values.

Pension fund managers can focus on low cost portfolio with a passive investment strategy. Most of the pension fund managers pursuing EMH theory are more concerned with portfolio diversification, passive investment strategy and total market index as a benchmark for performance. The pension fund managers think that there is no way of knowing the future performance of a company not even by studying past performance. This makes the pension fund managers to play safe and apply passive investment strategy for the clients. Portfolio for the clients is also developed accordingly. In this context, Hoitash et al. (2012) stated that passive investment strategy involves buying and holding stocks for a long-term period to earn good returns thereon. Another important aspect in this regard is that the pension fund managers believe that buying and holding stocks for a long-term period automatically sets-off short-term market inefficiencies.

On the contrary, the market might not always be efficient as held by the EMH theory. Pension funds often try to avoid small cap stocks. This is mainly because of the additional requirements associated with such stocks. On the other hand, it is also a practice of the pension fund managers to sell-off stocks that no longer meet the investment objectives regardless of its current state of performance level. Thus, the main focus of pension fund managers is on fulfilling clients’ pension objectives. The strategy is on creating a fixed flow of income post retirement of the clients.

Conclusion:

sThe study indicated that controlling organizational activities, treasury management and forecasting are the three major functions of a CFO. It was observed during the study that a CFO is entrusted with the responsibility of maintaining integrity in all financial reporting and ensuring proper compliance of the same to statutory norms. On the other hand, CFOs are required to maintain optimum cash and liquidity level in the organization at any point of time and that forecasting financial benefits & risks is a key part of the CFO’s roles. Furthermore, it was found that EMH assumes that it is not possible to beat the market and therefore pension fund managers can pursue passive investment strategy to provide a stable income flow to the clients.

Reference List:

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