It is often observed that firms with higher financial leveraged ratios tend to be more successful than those with lower ones. For instance, Wal Mart, a firm with a very high financial leverage ratio, succeeded in overcoming problems with its shares after the Great Depression. But, the same case does not hold good for Fannie Mae, one of the most financially Leveraged giant companies in US. It was able to retain its market position mainly due to government support and heavy discounting in its mortgage sales.
Similarly, the government intervention has a significant impact on firm investment efficiency through increased government purchases and sales. Studies have revealed that the purchase of Treasury bills by Federal Reserve banks helped reduce floating debt by $456 billion. The purchases of Bear Stearns and Morgan Stanley mutual funds also had a great impact on reducing market volatility and reducing share price pressures.
A key aspect of the economic stimulus package is the reduction in the interest rates. Lower interest rates imply reduced investment costs and increased realisation of earnings through firm investment efficiencies. This implies that as firms realise the potential savings through reduced interest costs, they will find greater incentive to increase their productivity and invest in order to capture those opportunities. In fact, many firms are reported to have increased productivity by using the economy recovery funds to purchase additional assets. Stimulus money thus played a crucial role in ensuring overall economic performance and thus boosting employment.
Further, a major reason behind the current recession is excessive leverage in financial instruments such as derivatives. As banks and financial institutions were highly leveraged, they found it easy to withstand any form of economic crisis. However, once the economic stimulus package was implemented, all these financial institutions became highly leveraged again. Hence, they faced problems in trying to manage their financial crisis. Moreover, the recent recession was primarily caused by the excess leverage created by financial institutions during the boom phase of the economy. When the boom finally ended, the financial crisis and the resulting recession then emerged.
The financial crisis period has been widely blamed on excessive leverage and poor management of the firms during the boom phase. However, when the recession period hit, many firms could no longer manage to survive without proper finance. Consequently, this resulted in a decline in the overall value of firm investments. However, the government intervention in the finance sector through the fiscal stimulus package and the liberalization of credit made possible for the return of firm investments to a level which would ensure sustainable economic growth.
Overall, the positive impact of the fiscal policy and the liberalization policy has been seen in the overall firm investments. The increase in capital formation and the enhancement of the overall efficiency of firms has been seen in the past few years. Ultimately, a firm investment plan should be one that ensures maximum returns over a long term period of time. Such a plan ensures that the economy is able to pull itself out of the debt trap and emerge strong and resilient.
