free banking
...system will cause inflation problem, but the empirical experience told us that if the flexibility of free note issue on fractional reserves could be made to respond to demand and only to demand, it would lead to a more stable monetary equilibrium than any fixed rule for monetary growth. Question 2 Why does a firm’s share-price often increase after securing a bank-loan? As we know, the share price often increases when a corporation securing a loan. To explain this phenomenon, we have to explore the factors that affect the share price. Normally, the share price will be influenced by a large number of factors. These factors can be concluded as follow: I think the most important factor is the actions of investors. Individual, institutional and mutual fund investors all affect the prices of stocks, by their actions. For example, if a large number of people want to buy a certain stock its price will go up, otherwise, the share price will go down. This phenomenon reflects the basic market principle. Secondly, Business condition is another important factor. Both the condition of an individual business and the prospective of the industry will affect the price of its stock. Profits earned and volume of sales will all affect an investor’s action, which how much an investor wants to own a stock. Thirdly, government plays an important role in the stock market. Because the government makes all kinds of decisions that affect both how much an individual stock may be worth (new regulations on a business) and what sort of instruments people want to be investing in. The interest rates, tax rates, trade policy and budget deficits all have an impact on share prices. Finally, some economic indicators will affect investors’ decision. Investors will predict what is going to happen according to the general trends that signal changes in the economy. These indicators include the GNP of the country, the inflation rate, the budget deficit and the unemployment rate. These indicators point to changes in the way which ordinary people spend their money and how the economy is likely to perform. From the above mention, in my opinion, when a corporation get a loan from the bank, it will generates some outcomes which can affect the investors’ actions so that affect the share price floating. Firstly, we know “banks will rely upon both past and projected financial statement screen and monitor borrowers’ financial condition and determine their contract terms”. Due to the asymmetric information between banks and investors, once banks make a loan to firms, it imply that they approve the good prior performance of the firm and they have strong confidence to the firms’ future because they confirm their client has enough earning ability in the future so that they can make profit from it. So, this activity will be an obvious signal to the investors so that they will bid this firm’s stock. We know earning ability is the most important factor for the investors to choose a stock. Most of investors likely ...