Answer to Question 1
Why did global capital markets grow so rapidly in the past decade? We can count at least four reasons. First, governments' deregulation of financial markets eased movement of capital across national borders. Second, innovation in information and communication technologies accelerated the ease and speed of global financial transactions. Third, globalization of business compelled firms to seek new cost-effective ways to finance global operations and conduct financial management activities. Fourth is the widespread securitization of financial instruments resulting in the conversion of illiquid financial instruments, such as bank loans, into tradable securities, such as bonds.
Some of the above factors contributed to the global financial crisis that began in 2008. The crisis arose partially because of the large-scale availability of credit and easy movement of capital across national borders. As investors bought commodities and real estate, the prices of such assets became unrealistically high. Eventually investors realized that valuations in credit markets were too risky, and so they sold assets on a massive scale. The total world value of financial assets (stocks, bonds, and loans) declined from 194 trillion in 2007 to 178 trillion in 2008. Fortunately, robust growth returned in 2010 and the total value of financial assets now exceeds 225 trillion.
The growth of international business has pressured multinational firms and international organizations to harmonize world accounting systems. Organizations such as the International Accounting Standards Board (IASB), the United Nations, the European Union, and the Asociacin Interamericana de Contabilidad (Interamerican Association of Accounting) have sought improvements in accounting measurement, disclosure, and auditing. The IASB is attempting to develop a single set of high-quality, understandable, and enforceable global accounting standards. Harmonization is particularly important to MNEs that seek foreign investors by listing on foreign stock exchanges.
Answer to Question 2
FALSE
