Recession normally refers to a negative growth in the Gross Domestic Product (GDP).This has to be in two consecutive quarters so as to qualify as a recession. This normally marks a reduction in the economic activity, which in turn is marked by a decline in production, and a slump in the consumer spending (Kirchen 2009). This normally has a damaging effect on small businesses as well as the large businesses. Even the stock market is negatively affected by these changes. This paper discusses the impact of recession on businesses as well as the theory of stock market efficiency both the limitations as well as the accomplishments. Arguments will be based on General motors, Starbucks and Wal-Mart and how the current recession has affected them.
Effect of recession on businesses
The effect of recession on Wal mart, Star bucks and General motors in the current recession was marked by a decline in the sales revenue. It was also marked by reduction in profits. This was also the effect on other large businesses and as a result the businesses either reduce the number of employees they hire or they freeze the hiring docket entirely (Cheng 2009). They also due to the decline in the economic activities stop buying new equipment and cut down on the research activities normally carried out to reduce production (Krish 2009). New product roll out is also stopped within the company. The expenditure that is used for marketing activities as well as on advertising is also reduced so that advertisement goes down as well as the amount expended to marketing activities. The graph shows GM data during recession (Kirchen 2009).
Theory of stock market efficiency
Stocks are a piece of owner ship in a company. A declining stock market leads to a slowdown in the global economy. It usually leads to a declining confidence as far as the consumers are concerned. The stocks of these companies fall and the dividends also slump or totally fade out (Cheng 2009). This causes the institutional investors who normally hold the stock for the company end up selling and re investing the proceeds into stocks that perform better. This further depresses the company’s stock price.
This further result in credit impairment and eventually it may result to bankruptcy. This may happen because the Accounts receivable are affected in that the debtors of the company may pay the company slowly and this declines the company’s ability to obtain financing (Gross 2008). This may lead to drawing new terms of credit payment for the companies’ debtors and this may result to bankruptcy eventually. Starbucks General Motors and Wal-Mart were all affected and their operations in the stock exchange were also affected. Luckily, none of the above fell into a state of bankruptcy (Trumbull 2009).
The companies also reduce the amount of benefits expended to employees and this may cut down the employee’s morale. This is due to the fact that they now work longer hours and there is the fear among the employees of further lay offs. In an active market, stocks are appropriately priced and they reflect all the available information (Krish 2009).
Markets are not perfect on the contrary, markets are very tough. An efficient market is defined as a market that has a large number of profit “maximizers” with each of them attempting to predict the future market value. The theory has assumptions such as competition in the market. It also suggests that price movements normally do not follow a particular direction and thus it is hard to predict prices at that level (Gross 2008). Competition drives all the information into the price. The shortcomings of the research market theories are empirical anomalies, which imply that there are problems that are experienced of fitting the theory to the available data. The other shortcoming is the defects that are noted in the efficiency as a model in the stock markets. The other problem is the problem of testing efficiency in stock markets. These are such issues as joint hypothesis problem, changes in the risks and changes in risk free rate (Kirchen 2009).
The recession has greatly affected the activities of businesses around the world. Small and large companies are both victims of the effects of the recession. It affects the economic activities such as the level of production in the businesses as well as the employees being laid off. It further cuts down on the advertising and marketing costs which all make the company engage in less activities. This further affects the stock market and the level at which the companies trade their shares. The stock market efficiency has its accomplishments and shortcomings, which the companies and organizations ought to understand.
Cheng, Adria. “Wal-Mart Needs to Prove it’s More than a Recession Play.” Market Watch. 3 June 2009. http://www.marketwatch.com/story/wal-mart-needs-to-show-legs-beyond-recession-play 24 May 2010.
Gross, Daniel. “A Venti-Sized Recession? The More Starbucks a Country has, the Bigger its Financial Problems.” Newsweek Web Exclusive. 20 Oct. 2008. http://www.newsweek.com/id/164878 24 May 2010.
Krish. “Business Report: Starbucks Tries Reinventing Itself.” Business and Jobs. 11 Aug. 2009. http://ayushveda.com/blogs/business/business-report-starbucks-tries-reinventing-itself/ 24 May 2010
Kirchen, Rich. “GM bankruptcy, recession impact on cars.” The Business Journal of Milwaukee. 17 July 2009. http://www.bizjournals.com/milwaukee/stories/2009/07/20/story2.html 24 May 2010.
Trumbull, Mark. “GM Bankruptcy: How will it Impact the US?” The Christian Science Monitor. 31 May 2009. http://www.csmonitor.com/Money/2009/0531/gm-bankruptcy-how-will-it-impact-the-us 24 May 2010.