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Example research essay topic: Gdp Grew Capital Gains - 2,352 words

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Pages: 6 Sources: 10 What is "short-terms"? Introduction: Short terms or an unwillingness to invest in the long-term securities, while concentrating exclusively on short term gains has been talked about since the early 1980 s in Great Britain. The long-term investment usually relates to Research & Development (R&D) and ultimately contributes to the economic survival and excellence of the company and the whole country that hosts it. Some have even considered that the only reason why Great Britain from being the world strongest country and the largest economy now assumes only the fourth place after the USA, Japan and Germany. The other group of economists believed that short-terms was non-existent in Great Britain causing much ado about nothing.

In the following essay I am going to speak about the concept of short terms in Great Britain, its effects on the general economy, companies and households, present various findings, as well as express my personal critical opinion on the given matter. Body: In the nineties it was proven that indeed the concept of short-terms was a pending problem for the british economy and its people. Thus the problem was apparent, yet it was hard to understand why, if short-terms is bad and non-rational, was it supported in Great Britain. If Great Britain were a socialist country, the State would interfere and force the investors into investing long term, yet if Britain wants to remain capitalistic democracy, the market forces should do the job. If investing in long-term securities guaranteed prosperity than based on the common knowledge such investment s would have been supported by the general populace, which in reality not the case (Donahue, 2002).

A profound research undertaken by Maxam, Pederson, and Mattingly came to the conclusion that the rationale of investing long-term is well-understood in Great Britain, yet at the same time, the present barriers exist as to benefit from the long-term investments and cause the individuals invest short term in Britain, or long-term abroad like the USA, or Germany (Maxam, 2002). Corporate takeovers and heavy taxations were the primary reasons why people did not want to invest long-term, yet rather support the perilous notion of British short terms. Corporate Takeovers and short terms. The British business law does not oppose corporations to trade the stock of each other as well as acquire, merge, or dispose any other company, its individual branch or a single division. The only necessary condition to acquire a company is to either buy stock on the open market or make a tender offer. The system indeed is not bad, taking into account that under such setting the market forces can correct various market and corporate inefficiencies and benefit the economy as a whole.

At the same time it is believed that because people are selfish and love money, they would acquire the corporations only for the immediate gains (Porter, 1990). Then many mergers and acquisitions occur, the single corporation that now gains a larger size and that initially was guided by the common interest of the shareholders enters into the turmoil in which the interests of many partners are in great opposition. Thus, If a company X is the owner of company Y, it can set the prices in company Y so that to benefit itself (X), at the expense of the interests of the shareholders of company Y that represent the minority votes (Taverne, 1990). Furthermore, the conflict of interests indeed can grow through the common notion of the pyramid structure that allows the minority to gain control over the majority stake in any given company, thus causing the majority shareholders to think of the ways to stay in control of the power rather than to concentrate on the ways to benefit the economic activity at the corporation. For instance, The same company X, that owns 60 % stake of the company Y can exercise substantial control over other companies (Z, A, B, etc) that are owned by company Y. thus if company Y owns 60 % of each of the company Z, A, and B, then company X (by owning 60 % of company Y) can own all three companies Z, A, and B through company Y, thus being able to control all three companies Z, A, B by technically owning (60 % of 60 % = 35 %) only 35 % of each of the company.

The third important aspect of the merger-acquisition activities is that the company can certainly benefit from earnings manipulation as well as cooking the books. In other words, if a company X, that owns company Y has bad loans, accounts receivable or something that would damage the stock price, it can freely take them off of the company X balance sheet and put them on the company Y balance sheet in exchange of company Y stock. When the loans, Accounts receivable fail, it is the company Y that bears the loss yet at the same time benefits from the carry back and carry forward tax allowances. Of course its stock will also be affected by the bad loans, accounts receivables etc, while providing the carry back and carry forwards for its owner company X. In other words, for one mistake (bad loans, accounts receivables, etc. ) the government virtually pays the same company twice: to the owner and to its subsidiary (Donald, 2002). The most common solution which that at present are proposed are the ones that focus on either that companies should still be permitted to own shares of stock in other companies but only for investment purposes, and thus should not be permitted to exercise their voting rights.

On the other hand, it might be simpler if companies were not permitted to own shares in each other at all. Yet at the same time such law would place the british companies into a disadvantage making it unable to divide itself into several subsidiaries which kept separate accounts and could borrow money or make other contracts independently; it would also mean that a group of British companies would not form a consortium to undertake a joint venture (Donahue, 2002). To get round these problems, perchance two kinds of company could be legally recognized: ordinary public corporations, in which shares could only be held by individuals or unincorporated associations (e. g. pension funds and unit trusts), and subsidiary corporations, freely owned by other companies.

It should also be noted that the decision on whether or not to control the merger activities of the companies directly influences short-terms. In the USA investment institutions rely on takeovers or the threat of takeovers to make managers accountable to the owners of the business. If a company is inefficiently managed, investors sell their shares to a hostile bidder, or, failing that, they sell to any buyer, which reduces the price of the shares and makes a takeover bid easier. For example in Japan, and Germany hostile takeovers are very rare because the business community considers it to be unethical. Japanese and German managers directly influence the companies at the shareholder meetings and promulgate their own managers for the board of directors (Donald, 2002).

I personally, nevertheless, believe that a hostile takeover is the best inceptive that would want to make the managers work to keep their jobs, yet it can also make them think about the ways to assure that the company is not undertaken legally rather then focusing on the economic means to keep the company well running. As a rule takeover usually comes after bad management has already done its damage to the profitability of the business, but direct intervention by active shareholders as it is done in Japan and Germany can deal with the trouble before too much damage has occurred. Also I would like to note that takeovers because of the market overreaction can oftentimes become very expensive. Some economists even consider the mergers and acquisitions to be only beneficial for the investment banks which act as advisers. I would also add that if a company borrows funds to acquire the target company it usually places that debt on the balance sheet of that company, and thus makes it repay the debts that oftentimes if very expensive. The threat of short terms is the result of such merger and acquisition activities because, the corporate managers strive to stuff the channels, boost the short term profits in order to appear useful to the companies and remain in their position, while resisting the hostile takeovers.

Also the company may decide not to spend on the long term research but rather but back a significant portion of its own stock, and thus tie up the capital in the short time frame that otherwise couldnt have caused short-terms and had been invested long-term (Maxam, 2002). If managers are always looking over their shoulders, watching for the next hostile bid and planning their defences, it distracts them from looking ahead and planning the future of the company. They may devote all their efforts to safeguarding their own jobs by bidding for other companies themselves, or devising stratagems like "poison pills" and "golden parachutes", which do nothing to make a company more efficient but rather more defensive and oriented only for the short term results that are represented by the top management interests, not shareholders. When a company constantly changes the owners, it does not have any time for long-term planning because almost every time the new management would think about their own goals that first of all would be to safeguard their position as the top management and prevent others from hostile takeover of the given company instead of investing long-term (Berman, 2002). 2.

The effects of heavy Taxation. It is a common fact that if a company effectively invest in its own R&D its share price should also grow, because of the expectations that the R&D investment would yield higher profits over the rivals that do not invest in long term R&D. But when the corporate capital gains are heavily taxed then there is no motivation to invest in long-term R&D to watch the growing stock price being heavily taxed by the governments. The British capital gains taxes are the highest in the pack (USA, Germany, and Japan) thus there is no wonder that the investors are reluctant to put their monies into something they will have to give to the government. At the same time the British government revenues from Capital gains taxes is solely 3 % and if the tax was abolished all together, then the organizational motivation to increase the stock price would be much higher. Yet this time, the income tax also gets into effect.

The modern day tax system in Great Britain does attempt to encourage the investors to invest long-term by taxing them on the realized gains and on the net income, while removing the tax should the investors reinvest the profits. As a result the investors indeed reinvest yet they strive to reinvest in famous large companies, completely neglecting the small ventures encouraging investment in long-established companies at the expense of newly launched companies (Berman, 2002). If reinvested profits are exempt from income tax, and if capital gains tax does not exist, or if it is less than income tax then shareholders who want income for consumption will get more money if they receive it in the form of capital gains than in the form of dividends. Also If a company decides to reinvest its profits, it raises the price of its shares, thus enabling investors to sell at a profit, and this profit will be higher than the dividend which they could have received if the company had distributed its earnings. However, the quickest way for a company to raise its share price is not by investing in research and development, which only increases profits in the long term, by creating new productive assets, but by spending the money on taking over other companies, which increases profits immediately by acquiring assets which are already productive (Berman, 2002).

Takeovers therefore reduce competition, make the companies defensive and unproductive as well as unwilling to contribute to the creation of the extra productive assets but rather engage in predatory buy-sell techniques that encourage short-terms (Maxam, 2002). Thus I personally believe that if the investors had to pay the same taxes on reinvested profits that would equal to the taxes on dividends or capital gains. Conclusion on short terms in Britain. For some it may appear that indeed the short terms is not the problem for Great Britain because its economy is growing now compared to the declining economies of Germany and Japan. I would only note that the reason why the numeric figures of Great Britain are much larger than that of Germany of Japan. The GDP of Japan is four times the GDP of Great Britain, while the GDP of Germany is twice the GDP of Great Britain.

Thus if British GDP increased by $ 1 and the German GDP grew by $ 1. 5 numerically the British GDP grew faster because mathematically the German GDP has to grow by $ 2 to be equal in percentage terms to the British while in real terms it is already superior. I believe that unless the Great Britain undertakes some competitive program aimed at reducing short-terms, it is doomed to seeing the Germany, Japan and the USA taking over in percentage terms as well. REFERENCES Maxam Clark, The short terms in Great Britain, Oxford University Press, 2002 Michael E. Porter, The Competitive Advantage of Nations, Macmillan, Basingstoke, 1990. Steve Berman, The economics of short terms, McGraw Hill, 2002.

Mathew Donald, The US-British relations and investments, Prentice Hall, 2002. Michele Donahue, The international investments, NY Random House, 2002. Other Sources: Milton Friedman, Capitalism and Freedom, University of Chicago Press, Chicago, 1962. Friedrich A. Hayek, Studies in Philosophy, Politics and Economics, Routledge and Kegan Paul, London, 1967. Dick Taverne, "Making Capitalism Work", Economic Affairs 11 (1), October/November 1990, pp. 6 - 8.

Peter Thompson, Sharing the Success, Collins, London, 1990. Martin J. Wiener, English Culture and the Decline of the Industrial Spirit, 1850 - 1980, Cambridge University Press, Cambridge, 1981.


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Research essay sample on Gdp Grew Capital Gains

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