...Calculators, lemmings or frame-makers? The intermediary role of securities analysts Daniel Beunza and Raghu Garud Introduction As Wall Street specialists in valuation, sell-side securities analysts constitute a particularly important class of market actor.1 Analysts produce the reports, recommendations and price targets that professional investors utilize to inform their buy and sell decisions, which means that understanding analysts’ work can provide crucial insights on the determinants of value in the capital markets. Yet our knowledge of analysts is limited by insufficient attention to Knightian uncertainty. Analysts estimate the value of stocks by calculating their net present value or by folding the future back into the present. In so doing, they are faced with the fundamental challenge identified by Frank Knight, that is, with the difficulty of making decisions that entail a future that is unknown. These decisions, as Knight wrote, are characterized by ‘neither entire ignorance nor complete . . . information, but partial knowledge’ of the world (Knight, [1921] 1971: 199). The finance literature has not examined the Knightian challenge faced by analysts. Indeed, existing treatments circumvent the problem by adopting one of two extreme positions. In the first, put forward by orthodox economists, it is assumed that Knightian uncertainty is non-existent and that calculative decision-making is straightforward. Analysts are presented as mere calculators in a probabilistic world...
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...Asset Pricing Models Sony Thomas Capital Market Theory: An Overview • Capital market theory extends portfolio theory and develops a model for pricing all risky assets • Capital asset pricing model (CAPM) will allow you to determine the required rate of return for any risky asset Assumptions of Capital Market Theory 1. All investors are Markowitz efficient investors who want to target points on the efficient frontier. Assumptions of Capital Market Theory 2. Investors can borrow or lend any amount of money at the risk-free rate of return (RFR). Assumptions of Capital Market Theory 3. All investors have homogeneous expectations; that is, they estimate identical probability distributions for future rates of return. Assumptions of Capital Market Theory 4. All investors have the same one-period time horizon such as one-month, six months, or one year. Assumptions of Capital Market Theory 5. All investments are infinitely divisible, which means that it is possible to buy or sell fractional shares of any asset or portfolio. Assumptions of Capital Market Theory 6. There are no taxes or transaction costs involved in buying or selling assets. Assumptions of Capital Market Theory 7. There is no inflation or any change in interest rates, or inflation is fully anticipated. Assumptions of Capital Market Theory 8. Capital markets are in equilibrium. Risk-Free Asset • • • • An asset with zero standard deviation Zero correlation with all other...
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...as follows: There is an intrinsic value of a security and this depends upon underlying economic (fundamental) factors. The intrinsic value can be established by a penetrating analysis of the fundamental factors relating to the company, industry, and economy. At any given point of time, there are some securities for which the prevailing market price would differ from the intrinsic value. Sooner or later, of course, the market price would fall in line with the intrinsic value. Superior returns can be earned by buying under-valued securities (securities whose intrinsic value exceeds the market price) and selling over-valued securities (securities whose intrinsic value is less than the market price). APPROACHES TO INFORMATION TECHNOLOGY INFRASTRUCTURE INVESTMENT (continued) 2. Psychological Approach: The psychological approach is based on the premise that stock prices are guided by emotion, rather than reason. Stock prices are believed to be influenced by the psychological mood of the investors. When greed and euphoria sweep the market, prices rise to dizzy heights. On the other hand, when fear and despair envelop the market, prices fall to...
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...EFFICIENT MARKETS HYPOTHESIS AND OTHER THEORIES OF PRICING IN FINANCIAL MARKETS Name Course Title/Code Instructor’s Name Date Efficient Markets Hypothesis and other theories of pricing in financial markets Efficient market hypothesis (EMH) is a theory that emerged in the 1960s. It states that it is difficult to predict the market since the price has been set and reflect the current market conditions. It is a disputed and controversial theory. The theory is comparable to other theories of pricing in financial markets. Several strengths and shortcomings emerge through comparison with other theories of pricing (Blinder, et al., 2012). EMH states that no stock is a better buy when compared to others. It is the conclusion that leads to random choices. It is a vital tenet of finance theory. The EMH theory has a basis in other finance theories. It follows the classical theory of asset prices. To determine the connection, a situation where stocks are considered based on good deals. According to the EMH theory, these stocks are worth more than their relative prices. The worth of a stock is the present value of the expected dividends. In this regard, an individual will buy stocks at prices that are below this level. In essence, this is buying stocks that are undervalued assets (Kapil, 2011). Classical theory The classical theory follows the belief that the price of a stock is equal to the best estimate of the stock’s value. This equality means that the undervalued stocks are not real...
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...underwriting services and prime brokerage to its clients which can be either of the corporations, governments or individuals. Apart from this, they are also involved in market making and private equity deals, and is a primary dealer in the United States Treasury security market. History 1869 : Goldman...
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...Assessment 1: Individual Assignment Written Case Study Report Financial Analysis 1. Use the databases discussed in Tutorial 1 and locate the following information for Google Inc. (5*2 marks = 10 marks): 1.1. Number of outstanding shares for Google Inc. (current stock data): 286, 938, 352 1.2. List of stock exchanges that Google Inc.is listed at: * NASDAQ National Market * Boerse Berlin * Boerse Duesseldorf * Boerse Frankfurt * Boerse Hamburg * Boerse Hannover * Boerse Munchen * Boerse Stuttgart * Bolsa Mexicana de Valores * Bucharest Stock Exchange * Swiss Exchange (SWX) * XETRA Stock Exchange 1.3. The list of top 3 shareholders of Google Inc.: * Mr Lawence Page * Mr Sergey Brin * FMR LLC 1.4. Net income for Google Inc. as at 31/12/2014 (US$): 14, 444, 000 1.5. Total assets for Google Inc. as at 31/12/2014 (US$): 131, 133, 000 Use the information provided in the case and answer the following questions: 2. Identify two key factors behind Google’s early success and provide explanation as to why you believe these factors are Google’s strategic advantages. (2*4 marks =8 marks; word limit: 300 words max) 1. Google decided to implement a modified version of Overture’s cost-per-click model. Google looked at the cost-per-click bids by the relation of an ad’s actual click through rate. This ensured that relevant ad’s got top of the list positions, and ad’s that didn’t receive much exposure incurred less...
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...headquarters are based in Fairfield, Connecticut. The company operates in several areas including Energy, Technology Infrastructure, Capital Finance and products in the Consumer and Industrial category. The company was created by Thomas Edison, the inventor of the light bulb. The company is often considered the most successful conglomerate in the world. The basis for this is that it reached its conglomerate status before this became a common practice for companies. Since its inception, the company has continued to grow, expand and innovate in a variety of industries and fields including things that range from electric fans to airplanes. The company was ranked the 26th largest company and the 14th most profitable one in America in 2011. This was based on gross revenue but another list ranked the company 4th among the Forbes Global 2000 by considering more detailed metrics. It has also been listed as the 7th best company for leaders and 15th most admired company by Fortune in 2011/2012, number 5 for best global brand by Interbrand, and by Fast Company as the 19th most innovative company. Vision: 'We bring good things to life'. Mission: General Electric Mission Statement from their Core Values: "Passionate, Curious, Resourceful, Accountable, Teamwork, Committed, Open, Energizing, Always With Unyielding Integrity" Strengths • Overall revenues from emerging markets which include regions such as Middle East, Africa, Canada, Australia, Russia, Latin America, China and India expanded by 18%...
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...university of jerusalemthe school of business administration | S.W.I.F.T | Financial Institutions Management | Instructor: Prof. Eli Elyasiani | Ammar Gharra, Ronen Tzuri, ID | 14/07/2012 | Sprint 2012 | In these paper we discuss the orginis and the development of the Society of the Worldwide Interbank Financial Telecommunication which we call it SWIFT, the foundation, the infrastructure that its support, the alternative systems, and the role of Swift in war on terror and in sanctions on the Iranian Regime cause of it suspicious Nuclear program Introduction What is Swift: The growth in the global trade, the development of capital market beside the banks system, adding to this the globalization process and the wide raise of the international institutions lead the banks all over the world to develop an efficient interbank infrastructure which allow them to made international payments more accurate and with less error and definitely secure. Figure 1: Example of a payment Instruction trnaslated into a SWIFT message The Swift is not a bank and even isn't a settlement institution, according to their website, Swift is a non-profit organization that connect all of its members together to exchange financial information securely and reliably. Swift enables the bank to lowering costs, reducing operational risk and eliminates inefficiencies from their operations. Swift doesn't hold any funds, and doesn't operate or manage any account for its customers, it's...
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...There is a great controversy over the question whether inflation promotes economic development. A group of economists including Keynes is of the opinion that inflation, in one form or the other, is a factor which helps economic growth. Usually, two main arguments have been advanced in support of the view. Firstly, it is argued that inflation tends to redistribute income and wealth. The redistributive effect of inflation is always in favour of profit-earning class, that is to say, it redistributes income always from the wage-recipient class towards the profit-recipient class in the community. As a result, the saving ratio will increase because the marginal propensity to save of the profit earners is generally high as against the high marginal propensity to consume of the wage- earners because of their near-subsistence level of income. This increased saving, then, can be profitably invested by the entrepreneurial class in productive channels, thereby raising the level of employment, output and income. Thus, the rationale of a policy of "development through inflation" is that inflation raises the ratio of profits to aggregate community income (or national income) and the process continues till profits increase to the extent that entrepreneurs can finance the higher rate of investment from the saving out of their profits without any further recourse to credit, i.e., monetary expansion. Keynes favours mild inflation on the ground that it tends to stimulate business optimism through...
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...context of amplifying the effects and the complexity of the nature of crisis manifested now on the international level (economic, environment, demographic, value and moral etc.). The economic thinking pays increased attention to the issues related to economic crisis, as well as the development of theories that give satisfactory answers about the causes and, especially, the solutions to the crisis. Using scientific observation and comparative case study as research methods, this paper aims to make a theoretical critical review of the theories regarding the causes of economic crisis over time and to identify and analyze some anti-crisis policies. Keywords: economic competitiveness. crisis; macroeconomic theories; anti-crisis policies; JEL Classification: E30, GOL REL Classification: 81, 8M. 24 Laura Mariana Cisma§, Ruxandra ioana Pitorac Introduction Theoretical controversy on crises has augmented over the last two decades with a special accent on system and stmcture crises, as well as on the crisis of intemational economic relations among unequally developed countries. Crises regularity, in Juglar's opinion, is due to evolution and development. Each cycle comprises a period of prosperity, a crisis movement and a liquidation time. "The three periods occur one after another, always in the same order, although they have...
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...1 EFFICIENT MARKETS HYPOTHESIS Andrew W. Lo To appear in L. Blume and S. Durlauf, The New Palgrave: A Dictionary of Economics, Second Edition, 2007. New York: Palgrave McMillan. The efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. Developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioural economists who argue that the EMH is based on counterfactual assumptions regarding human behaviour, that is, rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioural anomalies. There is an old joke, widely told among economists, about an economist strolling down the street with a companion. They come upon a $100 bill lying on the ground, and as the companion reaches down to pick it up, the economist says, ‘Don’t bother – if it were a genuine $100 bill, someone would have already picked it up’. This humorous example of economic logic gone awry is a fairly accurate rendition of the efficient markets hypothesis (EMH), one of the most hotly contested propositions in all the social sciences. It is disarmingly simple to state, has far-reaching consequences...
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...companies all over the world. Outsourcing is an agreement in which one company contracts-out a part of their existing internal activity to another company. Outsourcing benefits company because it maximizing company’s resources, more efficient output and make legal agreement for performance guarantees. Telstra is Australia’s leading telecommunications and information service company (telco). Telstra has been using BPO (Business Process Outsourcing) which creates substantial business across Asia, North America and Europe. For home country, owners earn cost & saving efficiency and diversity of intellectual talent, hence, government face unemployed labor force and manager loss their ability to control as the disadvantages. For the host country, employees improve their life standart and there are economic growth. But, there’s higher social gap and inflation for the host country. Nike is a major publicly traded sportswear and equipment supplier based in the United States. They outsourced Customers services, manufacturing, advertising, promotion, charity, and society impact. For the home country, it cut their cost and expand international market, hence, it also bring negative social impact and mislead reputation. For the host country, it make lower unemployment rate and financial & risk reduction. Meanwhile, market monopoly and legal/ethic issue as the drawbacks. the Boeing Company was operated in 1916 and started to control the commercial airline market. Boeing industry...
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...Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers Michael C. Jensen Harvard Business School MJensen@hbs.edu Abstract The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows—more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why “diversification” programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidationmotivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover. Keywords: Dividend policy, Corporate Payout Policy, Optimal Capital Structure, Optimal Debt, Reivestment Policy, Overinvestment © Copyright 1986. Michael C. Jensen. All rights reserved. American Economic Review, May 1986, Vol. 76, No. 2, pp. 323-329. You may redistribute this document freely, but please do not post the electronic file on the web. I welcome web links to this document at http://papers.ssrn.com/abstract=99580. I revise my papers regularly, and providing a link to the original ensures that readers will receive the most recent version...
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...The Impact of Non-audit Services on Capital Markets Seunghan Nam Ph.D. Candidate Stern School of Business New York University New York, NY 10012 snam@stern.nyu.edu Preliminary Draft 7 January 2005 Abstract The framers of the Sarbanes–Oxley Act (SOA) presume that non-audit services lower the quality of financial statements, so they have prohibited auditors from offering most non-audit services. In addition, regulators believe that non-audit services (NAS) may cause the auditor to be perceived as “dependent” in appearance, thus increasing information risk, even if they have no impact on the quality of financial statements. I investigate two hypotheses using pre-SOA data. First, I ask whether the proportion of non-audit services fees to total fees has a positive or negative association with the ability of financial statements to predict a firm’s future cash flows, which can be considered a measure of the quality of the statements. Second, I ask whether the proportion has a negative or positive association with the cost of capital and the bid/ask spread, controlling for the predictive ability. The cost of capital and the bid/ask spread serve as proxies of information risk. Contrary to the proponents of prohibiting NAS, I find that the proportion of non-audit services fees to total fees has a positive association with the predictive ability. If we control for the quality of financial statements, non-audit services still have a negative association...
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...governments in foreign countries want to purchase. Trade provides a greater selection of goods and services to choose from, often at lower costs than at home. In order to prosper and profit, countries want to use their resources such as labour, land and capital, as efficiently as possible. However, the quantity, quality and cost of resources can differ substantially between countries. Some have natural advantages, such as ample minerals or a climate suited to agriculture. Others have a well-trained workforce or highly developed infrastructure, advanced telecommunications systems and reliable electric utilities, which benefit the production and distribution of goods and services. Canada, as an example, depends heavily on trade to sustain incomes and living standards of Canadians and the prosperity of the nation. Other than trying to produce everything domestically, which would be inefficient, countries often concentrate on producing those things that they can produce best, and then trade for other goods and services. By doing so, both the country and the world become wealthier. Today, most industrialized nations could produce almost any product they chose. However, this does not make good economic sense. Much of the labour, land and capital that would have to be directed toward the production of a new item unfamiliar to that nation could be used more efficiently in other industries. Countries achieve greater total wealth by devoting more resources to their most productive industries...
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