Journal of lnrernarional Financial Management and Accounring I : 1 1989 Recent International Financial Innovations: Implications for Financial Management Richard M. Levich New York University and National Bureau of Economic Research I. Introduction It is now clear that financial innovation has become a major force affecting the United States, Japan, and other developed economies and a force that will continue to spread worldwide. Financial innovation is a broad topic that leads to a variety of important issues. At the microeconomic level, a basic theme has been to model the factors leading to financial innova- tion and the criteria for successful new products. At the macroeconomic level, the central theme has concerned the economic implications of financial innovation, such as the risk that innovation portends for financial services firms, the integrity of financial markets, and ultimately the safety and soundness of the financial system. Both of these themes were reviewed in a report published by the Bank for International Settlements (1986) and in a recent paper by Levich (1988). The purpose of this paper is to focus on another set of concerns - the impact of financial innovations on corporate financial management. Our specific aim is to outline the systemic changes that are affecting financial markets, and in turn, to suggest how these changes may affect financial management policies or practices. Financial innovation, per se, is not a new phenomenon. Numerous innovative financial changes such as the Federal Reserve System (1 9 13), the Bretton Woods Agreement and the International Monetary Fund ( 1944), the Federal Reserve wire and negotiable certificates of deposit (1960s) took place well before the proliferation of new financial products and financial markets of the last 20 years. Recently, however, the pace of financial innovation has accelerated. While the details of the process differ across countries, financial innovation reflects several common features including (i) Product innovation - the development of new risk management and funding vehicles, (ii) Securitiza- tion - a greater tendency toward market-determined interest rates and