THE EVOLVING ROLE OF STRATEGY CONSIDERATIONS IN THE THEORY AND PRACTICE OF FINANCE

Abstract

Perhaps there is no area in which the practice of financial management and its academic treatment are more divergent than in the area of corporate strategy or strategic planning. The practice of financial management or financial engineering has for many years been involved in assessing various strategies and analyzing investment alternatives with dominant strategy themes (e.g. investments in research in development). Their academic counterparts, however, have had great difficulty relating the strategy literature to the finance literature. There are a number of reasons for this but perhaps the most important one has been the fact that the strategy and finance literatures have grown up with very different heritages. Financial economists, who provide the theoretical structure for the practice of financial management, have a deeply rooted heritage in the structure of the neoclassical theory of the firm and have traditionally been extremely reluctant to branch out to new areas unless those areas could somehow be incorporated into that particular theoretical structure. This seems to be changing. Part of the reason has been the movement of the strategy literature toward finance as is evidenced in the work of Michael Porter who has adopted the language of the theory of the firm to address the problem of corporate strategy. In addition, part of the movement toward convergence is due to a similar movement of the finance literature toward consideration of strategy issues using contingent claims models as is exemplified in the work of Stewart Myers. In this paper we begin to weave the story of agreement between strategy and finance. Furthermore, we identify some of the issues that must be addressed as this process of convergence continues.

Citation

Martin, J. and Kensinger, J. (1988), "THE EVOLVING ROLE OF STRATEGY CONSIDERATIONS IN THE THEORY AND PRACTICE OF FINANCE", Managerial Finance, Vol. 14 No. 2/3, pp. 9-15. https://doi.org/10.1108/eb013596