Evolution of Finance: 8 Stages of Financial Theory Evolution

Evolution of Finance: 8 Stages of Financial Theory Evolution

The field of finance is broad and dynamic. It directly affects the lives of every person and every organization. There are many areas and career opportunities in the field of finance. The financial manager plays a dynamic role in a modem business organization.

Financial managers raise funds, manage cash positions, help increase acceptance of the present value, and select capital investment projects. The financial manager has emerged as the key player in the overall effort of a company to create value.

Basic principles of finance, such as those we will learn in this textbook, can be universally applied in business organizations of different types.

Stages of Financial Evolution

Phases or Steps of Evolution of Finance

In the first age of civilization, the barter system was started according to the needs and demands of human beings. The monetary system was started to remove the barter system’s problems. Gradually money has been captured widely in society as the medium of exchange, price measurement, and standard of transactions.

At the end of the 19th century, finance became a separate subject due to the spread of economic activities, money circulation, control, and monetary policies. Before this time, finance was accepted as a branch of economics.

Origin Decade of Finance (1890-1900)

At the end of the 19th century, the financial journey started. In 1897, the famous economist Thomas L. Green wrote a book named “Corporation Finance.”

This book recognizes finance recognized as a distinctive discipline. In the same decade, the famous writers E. S. Mid Arthur, Stone Viewing, and William Dedecisol developed books based on finance.

During the 1890-1900 merger process, companies started in the USA. In 1899, J. D. Rock Feller merged Standard Oil Group of Companies by establishing Standard Oil Company in the USA.

In 1900, an organization was built known as the US Steel Company, with a capital of 1.44 billion that captured 63% of the money of the U.S. share market, as no other company had yet. At that time, in the USA near about 300 companies merged and required a large amount of capital and skilled financial managers.

By this time, financial statement was prepared and analyzed internally in the- organization. From that time, finance was highly approved and accepted by all.

The decade of Protection to Investors’ Interest (1900-1910):

In this decade, protecting the attention of investors’ interests was considered, and government control rose.

Liquidity protection of business, the principle of cash, bill payment, financial report, etc., and financial information were published and maintained. As a result, business finance was being sped out very fast.

The decade of Technology & Industrial Revolution (1910-1920)

In this decade, with prime technology invention and the success of Henry Ford in 1913, a huge production process was started and discovered a complete industry. The needs and demands of capital were increased due to the huge production of industries.

As a result, the capital was collected by the different financial organizations, and preparing deed documents and looking for inventors were required. At that time, selling shares were needed.

Here, external financing was given more emphasized rather than internal financing. In this decade, Edman Ilicons, W.G. wrote an improved book on finance.

The decade of Computer & Analysis (1920-1930)

At this time, using a computer makes it so fast for the betterment of financing progress. They use a computer to collect detailed information, analysis, research, and make decisions become easy.

The decade of Depression & Recovery (1930-1940)

In 1929, falling in the share market made the situation depressed later in the decade. The U.S. steel Company shares decreased from $262 to $216, General Motors from $92 to $7, and the share price of PCA from $ 115 to $ 3. At the time, the share price of about 30 new companies went down to 89%.

For this reason, the loan was arranged in finance, but loan refunds and protection of liquidity became cases of problems. In financial activities, a capital-planning system has been added because of the organization’s replacement and to keep it protected.

Old Era of Evolution (1940-1950)

This is the time called the old era of evolution. By changing the old techniques, present and new techniques have been made suitable to use, eradicating related shortcomings. Capital budgeting and other important subjects were added to finance.

At the same time, the financial decision added to it. As a result, the duties of financial managers increased in large portion.

Modem Era of Finance (1950-1960)

In this decade, the assessment model was developed.

In 1952, Professor Henry Markowitz developed a portfolio theory named Capital Asset Pricing Model (CAPM) and called on the based of his name Markowitz Model. William F. Sharpe, John Linter, and Michael C. Jensen have developed the theory based on Markowitz Model.

In 1958 and 1961, Franco Modigliani and Merton H. Miller gave M.M. Model (Modigliani and Miller Model) based on the dividend policy which is prevailing today. In that decade, modem finance was developed.

For the assessment, dividend and capital structure theories prevailed. The combined tradition was made due to give more emphasis on capital budgeting.

Expansion & Growth (1960-Present)

William F. Sharpe further developed Portfolio Theory and Capital Asset Pricing Model (CAPM) in this decade.

In 1970, Black & Schall developed a famous Option Model. According to the model, a specific risk portfolio of a capital asset is adopted and mixed with other assets. In 1980, these evaluation models were widely used in business firms.

For evaluating this model, then in 1974, Arbitrage Pricing Theory was discovered.


The evolution of finance is becoming an important matter of fact gradually. With the changing of time, several theories & models have helped financial activities. As a result, finance users can compete and challenge the global age by making decisions in any changing situation.