...illegal transactions that derived from the disclosure of insider information. The article notes that Scott London pled guilty to insider trading after “repeatedly” tipping off a friend (Shaw) to corporate secrets of major KPMG clients (amongst these: Herbalife Ltd. and Sketchers USA Inc.) in exchange for monetary and gift compensation. As a result of his actions, London was sentenced to 14 months in federal prison and to pay a fine of $100,000. The greater loss for the former partner; however, is noted to be his high-paying position and extraordinary damage to his reputation. In review of this article, one notes that insider trading is a strong example of information asymmetry in the form of adverse selection. As per its definition, adverse selection is “a type of information asymmetry whereby one or more parties to a business transaction… have an information advantage over other parties.” (Scott, 2014). In this case, Shaw gained an unfair advantage over ordinary investors by receiving and exploiting London’s insider information that provided for numerous profitable trades. In Chapter 4, the Efficient Securities Market Theory is introduced which further explores the issue of information asymmetry. In brief summary, the chapter states that, “Efficient securities market theory alerts us to the primary reason for the existence of accounting, namely information asymmetry. When some persons have insider information, the adverse selection problem arises leading to pressure to find...
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...Count: ____1492________ Asymmetric Information and Its impact upon the Market Function Introduction Financial market functioning is based on certain fundamentals and technical principles. Information about the market scenarios and the background activities are stated as the fundamental aspects of the financial market movements. If a deal is being carried out between two entities and one entity possesses additive information over another then this scenario reflects the actualization of an unfair financial transaction. The possession of additive information by one entity over another in the financial market is stated as information asymmetry or asymmetric information (Hughes, Liu and Liu, 2007). The current discussion includes the overall assessment of various theories that had been presented over the period of time and their practical application into the financial market in context of asymmetric information. In addition, the discussions carried out in the current essay also elaborate the impact of asymmetric information over the financial activities that are carried out in the financial markets. Asymmetric Information and Its impact upon the Market Function In reference to economics as well as to that of contract theory, the concept of asymmetric information reflects the view of an unfair advantage of one entity over another entity in context of information regarding...
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...Nash equilibrium = a pair of strategies (strategy is a best response against the other) When players act rationally, optimally, and in their own self-interest, it’s possible to compute the likely outcomes (equilibria) of G. By studying G, we learn: Strategies are likely to take us and how to modify the rules of the game to our own advantage. SEQUENTIAL G (players take turns moving) are influenced by who moves first (a potential first-mover advantage, or disadvantage), and who can commit to a future course of action. Credible commitments (threats) are difficult to make because they require players to commit to a course of action against their self-interest. Thus, the best threat is one you never have to use. SIMULTANEOUS-move G, players move at the same time. In the prisoners’ dilemma, convict and cooperation are in tension—self-interest leads to outcomes that reduce both players’ payoffs. Cooperation can improve both players’ payoffs. Rules of thumb: • Be nice: No rest strikes. • Be easily provoked: Respond immediately to rivals. • Be forgiving: Don’t try to punish competitors too much. • Don’t be envious: Focus on your own slice of the port pie, not on your competitor’s. • Be clear: Make sure your competitors can easily interpret your actions. Strategic: model as either a simultaneous-move or sequential-move game. Focusing on how the outcome of bargaining games depends on who moves first and who can commit to a bargaining position, as well as whether...
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...session class = quick • This is a 3rd year class = challenging – Quick + challenging = be organized • Do the assigned homework (min. 1:1) • Read the chapter beforehand • Come to class CHAPTER 1 The Canadian Financial Reporting Environment • Exams will have – Multiple choice & matching questions – Short answer questions – Problems – mini cases Prepared by: Dragan Stojanovic, CA 5 Copyright © John Wiley & Sons Canada, Ltd. As edited by Jeff Kent, CPA,CA M.B.A. The Canadian Financial Reporting Environment CHAPTER 1 The Canadian Financial Reporting Environment Financial Statements and Financial Reporting •Accounting and capital allocation •Stakeholders •Objective of financial reporting •Information asymmetry After studying this chapter, you should be able to: • Explain how accounting makes it possible to use scarce resources more efficiently. • Explain the meaning of “stakeholder” and...
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...With the spate of recent corporate failures there have been increased criticisms and calls for regulatory reform of existing accounting and auditing practices. The issue of regulation within the accounting profession has been highly contentious and led to many debates. Those in favour of a free-market stress that market forces will optimise the allocation of resources and as such regulation is not necessary. Whilst those opposing this view believe that markets are imperfect and as such outside intervention in the form of regulation is required. Both sides hold valid arguments as to why regulation is or is not necessary and this paper shall examine these opposing views before providing an informed opinion. The anti-regulation or free-market approach to accounting is one that has been subscribed to for many years. The main thrust of the American Institute of Accountants in 1934 was anti-regulation, they stressed that, “no attempt [should be made] to restrict the rights of corporations to select detailed methods of accounting deemed by them to be best adapted to the requirements of their business” (May 1934, 80). The argument behind this notion is that the natural market forces or the “invisible hand” of the market will ensure self-regulation. Ross (1979, 379) implies this when he writes, “…disclosure regulations are generally neither required nor desirable, since left on their own, firms will have incentives to report accurately”. The belief that firms have internal incentives...
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... |future due to its potential earning capacity. | | |Efficient market |An investment theory that states it is |Www.Investopedia.com | | |impossible to “beat the market” because stock | | | |market efficiency causes existing share prices | | | |to always incorporate and reflect all relevant | | | |information. | | |Primary versus secondary market |The difference between the primary capital |Www.Investopedia.com | | |market and the secondary capital market is that | | | |in the primary market, investors buy securities | | |...
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...resources consistent with APA guidelines. Term | Definition | Resource you used | Time value of money | “The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.” | Time Value of Money (TVM) Definition | Investopedia. (2003, November 24). Retrieved May 5, 2015, from http://www.investopedia.com/terms/t/timevalueofmoney.asp | Efficient market | “The degree to which stock prices reflect all available, relevant information. Market efficiency was developed in 1970 by Economist Eugene Fama who's theory efficient market hypothesis (EMH), stated that it is not possible for an investor to outperform the market because all available information is already built into all stock prices.” | Market Efficiency Definition | Investopedia. (2004, January 4). Retrieved May 5, 2015, from http://www.investopedia.com/terms/m/marketefficiency.asp | Primary versus secondary market | “Primary vs. secondary market says that the primary market deals with the newly issued securities while the secondary market deals with already traded securities. When the companies issue securities in the primary market, they collect funds directly from the investors through the securities sales. But, in the secondary market the money earned from selling a security does not go to the company. The money...
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... |money is worth more the sooner it is received | | |Efficient market |The Efficient-market hypothesis (EMH) states |wikipedia.org | | |that it is impossible to "beat the market" | | | |because stock market efficiency causes existing | | | |share prices to always incorporate and reflect | | | |all relevant information. | | |Primary versus...
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...Medical exam required by insurance company, why? - Info asymmetry exists btw investor (customer investing in policy) and company. If no exam was done, the insurance company would offer the policy at an average price and healthy “good” customers would not buy the policy. Only lemons would purchase the policy and this result is adverse selection. Adverse selection leads to market failure because all the good customers are pushed out of the market and eventually the insurance companies would stop offering policies. Therefore no transactions are occurring and market failure results. - A exam helps fix the issue because it is done by a third party and provides unbiased information. The exam acts as a signal to the insurance company. The signal works because it is costly. The individual must pay for it and there is a negative correlation btw the cost of the exam and the health of the individual. Job market and car market (market failure): - Info asymm btw hirer and applicant. When info asymm exists, the hirer will offer an average salary because they don’t know if they are getting a lemon worker or a good worker. Only lemon workers will be willing to accept the offer and the good workers will refuse the offer. The good workers then “exit the market” leaving only a market for lemons. This results in adverse selection (the average price offered by the hirer pushes the good workers out and leaves only lemons.) When the hirer realizes he is only able to hire lemons, he will stop...
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...Book 1.2 Some Historical Perspective 1.3 A Note on Ethical Behaviour 1.4 The Complexity of Information in Financial Accounting and Reporting 1.5 The Role of Accounting Research 1.6 The Importance of Information Asymmetry 1.7 The Fundamental Problem of Financial Accounting Theory 1.8 Regulation as a Reaction to the Fundamental Problem 1.9 The Organization of This Book 1.9.1 Ideal Conditions 1.9.2 Adverse Selection 1.9.3 Moral Hazard 1.9.4 Standard Setting 1.9.5 The Process of Standard Setting 1.10 Relevance of Financial Accounting Theory to Accounting Practice Copyright © 2009 Pearson Education Canada Instructor’s Manual—Chapter 1 LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES 1. The Broad Outline of the Book I use Figure 1.1 as a template to describe the broad outline of the book and course. Since the students typically have not had a chance to read Chapter 1 in the first course session, I stick fairly closely to the chapter material. The major points I discuss are: • Accounting in an ideal setting. Here, present-value-based accounting is natural. I go over the ideal conditions needed for such a basis of accounting to be feasible, but do not go into much detail because this topic is covered in greater depth in Chapter 2. • An introduction to the concept of information asymmetry and resulting problems of adverse selection and moral hazard. These problems are basic to the book and I...
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...policy and provided workers with “the $5-a-day wage” he had doubled the amount of wages that were being paid to the average worker at the time. By increasing the wages Ford managed to accomplish several things. He managed to establish a solid-middle class with these wages which increased the buying power of those he employed. He also managed to decrease high turnover and excessive abdenteeism rates by making jobs more attractive with higher wages. Hiring replacement workers and training them were very costly, therefore increasing wages insured that employees would be eager to keep their jobs. Higher wages decreased employee turnover and also increased productivity since employees were more eager to work hard to keep their jobs. Asymmetry of information occurs when one person in a transaction knows more about what is going on than the other person. With Ford's model he knew by doubling wages he would increase profits because he was increasing the buying power of his employees. Therefore he was paying employees, however since they had more money they were more likely to buy his product and increase his overall revenue. The efficiency wage hypothesis argues that wages in some markets are determined by more than supply and demand. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage in order to increase their productivity or...
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...|Discuss the reasons why asymmetric information can be a source of market failure. Use examples to illustrate your answers. | |By Andrew Sweeting | |November 1998 | |Introduction | |This essay is concerned with the issue of information in microeconomics, particularly where information is a factor in the failure of| |individual markets in an economy. Economic information and its importance in microeconomics is initially discussed, and continues | |with defining asymmetric information, which is a factor that can lead to a market failure. | |In the analysis of asymmetric information in markets, ex ante and ex post asymmetries information are discussed in relation to market| |transactions. Ex ante asymmetric information can be explained through Adverse Selection in relation to quality of goods in the | |product market, and ex post asymmetric information can be explained through Moral Hazard in insurance markets. Strategies to correct | |market failure(s) caused by these information asymmetries is addressed for each example discussed. ...
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...Jain and Kini (1994) wrote this article in a bid to focus on this particular issue by study on the IPO firms during 1976-1988. They investigate the change in operating performance of firms after going public through IPOs which they find that IPO firms show a decline in post-issue operating performance. The main reasons that explain the decline in the post-issue operating performance of IPO firms are the existence of information asymmetry and/or a conflict of interest between the existing entrepreneurs and the new shareholders. The authors separate the reasons into 3 points: (1) the agency cost increases when a private firm transfers to public and the reduction in ownership stake consequently leads to the agency problem, (2) the window-dressing made by managers causes overstate pre-IPO performance and understate post-IPO performance, (3) the timing that issue stock in periods of unusually good performance levels while they know that the good performance is not sustainable. This article is divided into four parts; Part 1 presents the sources of collected information on IPO firms and the criteria used for selecting them. So, their finally sample consists of 682 firms. The authors also stated that all significant tests are based on the two-tailed Wilcoxon signed rank tests, assuming that the observations are independent. They concerned about the skewness of the data from operating performance. So, they used the median as a measure of central tendency throughout the literature. Part...
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...1. Question 1: “The role of the financial system in a market economy is to effectively and efficiently move funds from surplus budget units to deficit budget units.” However, in the absence of well-functioning financial intermediaries this transfer of funds may be severely retarded.” Discuss. Within a financial system, surplus and deficit units trade, which facilitates the movement of funds from deficit units to have access to those with the budgeted units. Hence, there is always the incentive to trade. The role of the financial system is also to allow the deferral of expenditure. The question is often asked, how can this exchange of funds take place, one may think of it as a do it yourself project, like selling your house, without a real estate agent, an individual can simply make a profit and cash in on funds without having to pay the middle man. Persons are often of the belief direct financing may be easier than the use of an intermediary, this occurs where ultimate users and ultimate providers of the funds exchange claims directly with each other without the use of the bank, however, it is not as simple as it seems. Many issues may arise that is why there is the need for well-functioning financial intermediaries. Also known as indirect financing this is where institutions pool savings together and investments of those with surplus budgeted units and lend them to persons within deficit units in order to receive a return. Financial intermediaries transform financial assets...
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...What can we learn from insider trade? Evidence from Thailand Nareemet Kittikhuntanasan Student ID: 5882942826 Project Advisor Kanis Saengchote, Ph.D. Committee Tanakorn Likitapiwat, Ph.D. Special Project Submitted in Partial Fulfillment of The Requirements for The Degree of Master Of Science in Finance Faculty of Commerce and Accountancy Chulalongkorn University Academic Year 2015 1. Introduction In general, the insiders are classified as the persons who have more information than the other investors and make an abnormal profit from this unpublished information. Under the Securities and Exchange Act B.E. 2535 of Thailand defines the insiders as directors, executives, auditors, their spouse and minor child, and the owner of more than 10% of stocks. Since they have valuable information than the outsiders, they might use this knowledge for their wealth. Hence, the other investors might use the insider trading data as a signal infers future view of the firms and adjust their portfolios and strategies to make some profits. Even though, there are many evidences supporting that insider trading is informative such as Aboody and Lev (2000) suggest that insiders make profit from their ability to acknowledge changed plan in the researcher and development budgets. Likewise, the paper from Jaffe (1974), Finnerty (1976) and Seyhun, (1986) support that insiders can make profit from their trading. However, many early literatures argue that there are market movement limitation...
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