State of the Art of Short-Run Financial Management

Abstract

0 In 1973, Smith [170] presented the state of the art of, and traced the development of research in, working capital management (WCM), thereby providing an anchor for measuring future research productivity. Since the early 1970s, the development of substantive WCM research has expanded dramatically. Thus, it seems appropriate to now update the state of the art of shortrun financial management (SRFM). SRFM reflects a broad, dynamic perspective, in contrast with WCM, which connotes a static view with a balance sheet orientation. Therefore, in this paper SRFM is used to encompass all of the components that affect the inflow and/or outflow of cash through a firm. The objectives of this paper are to interpret the major directions of SRFM research in recent years and present a critical review of the SRFM literature, and finally, to hypothesize various paths that future SRFM research might follow. Before evaluating the recent contributions to the SRFM literature, it is useful to identify major SRFM research themes. Exhibit I presents a three dimensional framework developed by Howard [88] that characterizes decision problems by their underlying structure. The three dimensions of the problem space are degrees of uncertainty, time dependence, and complexity. The degree of uncertainty ranges from deterministic situations where all variables are known, to highly probabilistic situations where little information is available about any variable. The time dimension ranges from a static condition of no change at a specific moment, to a dynamic condition that reflects changes occurring in future time periods. The complexity dimension is measured in terms of the number of variables required, where the more variables involved in the analysis, the greater the complexity [88, p. 212]. The author is grateful to W. Beranek, G. Emery, G. Gallinger, N. Hill, Y. Kim, J. Lakonishok, H.W. Lee, D. McCarty, A. Rappaport, V. Srinivasan, B.K. Stone, and D.T. Whitford for the numerous insights, suggestions, and encouragement.