Wharton@Work

June 2023 | Finance

What Financial Managers Need to Know Now

Three of the four largest bank failures in U.S. history occurred in March, setting off an abrupt drop in global bank stock prices. Regulators responded to prevent further failures and potential global contagion, most notably by brokering the acquisition of Credit Suisse by rival USB. But those actions did little to restore confidence in the banking system. Nearly $150 billion has since been moved, much of it from small- and medium-sized banks, into money market mutual funds, and the fallout continues as financial managers assess the fragility of the sector and work to manage the risks.

Wharton finance professor Itay Goldstein, who recently hosted the live panel discussion “Understanding the Banking Crisis,” says the bank failures highlight the need for financial managers to have the latest and highest quality information and insights to inform their decisions. “There's a lot at stake when managing the financials of a firm, whether big or small. Firms can be very good at what they're doing, but if they don't know how to manage the financial aspects of the business then, eventually, they will fail.”

As academic director of the Advanced Corporate Finance program, Goldstein assures that the latest developments in the sector are explored in depth, with expert finance faculty sharing their research and new insights. “Your decisions should be shaped by an open mind that is well informed about current changes in, for example, the macroeconomic environment,” he says. “Finance is constantly affected by new developments in technology, banking, and the global economy, and the more you know, the better your decisions can be.”

New Ways to Raise Capital

Another one of those changes involves the ways firms can raise capital. “A couple years ago,” says Goldstein, “SPACs [special purpose acquisitions companies] were the hot thing in financial markets and many leaders came to the program wanting to know how to use them. Now they are on the decline. Today we are talking instead about short-term capital markets, how to raise short-term debt, and the risks involved. So, we continue to update the program as developments evolve and include what financial managers need to know.”

In terms of capital structure, financial managers must determine the optimal balance between debt and equity, and understand — in today’s environment — the benefits and costs of having more debt. Goldstein explains, “If you have too little debt, then you are not using some of the tax advantages that debt could bring. But if you have too much debt, it means that you are exposing yourself to the risk of bankruptcy. Many firms have failed because they lacked an understanding of those trade-offs, and we are bringing the tools and discussing the new developments that should help them make wiser decisions.”

Financial Technology

Fintech, another cutting-edge topic, is also covered in the program. “Even though some participants are very experienced and work in firms that are on the financial technology frontier in different dimensions,” says Goldstein, “it is new and still evolving. They always learn something about potential applications for their own firms. When you talk about big data and how it can inform financial decision making, this is an eye-opener. With developments in blockchain, a lot of financial managers are asking themselves how much they want to invest and be exposed to it. That’s especially true as new scandals and disruptions in this sector constantly shake public confidence in it. But the underlying technology continues to move forward and is certainly something that financial managers need to be aware of.”

The Risks of M&A

Goldstein leads a session on mergers and acquisitions, noting that many leaders in the sector are not familiar with the substantial research on how M&A can destroy value. “In many cases, firms fail to use mergers and acquisitions effectively because they are so hooked on the idea that they end up competing and paying too much. It can become a more emotional and less strategic decision, and we have ample evidence that such an approach can destroy value. It has done so in the past repeatedly, and when participants learn this, they realize that they need to be more cautious. To create value, they need to do the calculations in a more balanced and objective way, correctly evaluating the costs and benefits.”

But perhaps most top-of-mind for financial managers today is the fragility and uncertainty in the banking sector. “They’re still trying to understand what to do,” says Goldstein. “Should they put money in banks? If they do, how should they decide between insured and uninsured deposits? To what extent is the bank taking risks? These issues took a backseat for a while, but now are at the top of people's agendas.”

While today’s banking failures, and the fragility they exposed, may feel familiar, Goldstein says feeling like you’ve been through this before and that you know precisely which actions to take can backfire. “The history of financial crises is puzzling in the sense that you see things repeating themselves, but they don't repeat themselves in exactly the same way. You need to learn from the past, but even when you learn those lessons, it's not enough to completely bulletproof yourself and not be exposed to any crisis going forward. You need to stay on the frontier of the issues that affect financial management so you can know the risks and manage them.”