ACCA Advanced Financial Management (AFM) Practice Exam

What can indicate that managers are avoiding the discipline of capital markets?

1. Too much corporate social responsibility

2. High levels of internal financing

3. Frequent asset sales

4. Low employee morale

The correct answer is: High levels of internal financing

High levels of internal financing can suggest that managers are avoiding the discipline of capital markets. When a company relies heavily on internal funds rather than seeking external sources of finance, it may indicate a reluctance to engage with capital markets. This avoidance can stem from a desire to maintain control over the company without the scrutiny and discipline that external investors or lenders might impose. In capital markets, companies are held accountable for their financial performance and strategies, as investors expect returns on their investments. By depending on internal financing, management may be sidestepping this accountability and the performance pressures that typically come with external funding. It can also lead to inefficient capital allocation, as managers may fund projects that are not necessarily aligned with shareholder interests without the need to justify their decisions to external stakeholders.