Research Articles Base: Stock Market

APPRAISING THE LONDON STOCK MARKET

APPRAISING THE LONDON STOCK MARKET Introduction and the Tools to Consider in Appraisal In the lens of economics, stock market is tasked to allocate resources efficiently.  Its main purpose is to accumulate the necessary capital for firms to finance future investments which naturally comes from the willing and able investor.  Simply, stock market is one of the keepers of the equilibrium between demand and supply (1965).  The firm demands and the investor supplies.  At the end, when the firm has already harvest the fruits of its project, it will incur earnings that will in turn re-supply the exhausted finances of the investor, usually at a premium.  This premium does not make any distortions in the equilibrium but deemed as the payment of the firm for the transaction costs, risk and idleness investor incurred in exchanging his money against a piece of paper.   However, time passed by.  The traditional view to stock market needs to be adjusted to the present condition that affects the trading floor.  The occurrence of intermediaries like brokers and traders, regulation from the government, involvement of foreign firms and investors, complexity and uncertainty of the environment, are among others that pressure the historic purpose of stock market to mutate into a multi-tasking mechanism that addresses the interests not only of a certain economy but also the individual actors . For the purpose of our appraisal, actions from these actors that are intended to respond solely towards their self-vested interests and gains at the expense to the requirement of the market will be credited as stock market inefficiency.  That is, if they defy fulfilling demand and supply equilibrium even though the stock market allows their transaction to happen and they are suitable for such transaction.  Due to this, it can be said that the stock market is inefficient if an investor prefers to supply a large company in favor of a smaller and needier one.  However, debate could ensue when the investor affirms that the large company aims to invest to a bigger venture, say, create a research and development facility.  In such circumstances, appraisal will require analysis and cost-benefit evaluation to reflect neoclassical economic () implications of a certain situation and determine efficiency issues in the stock market.  Nevertheless, the assumption in appraisal would be framed in the lens of equilibrium in demand and supply.       In appraising presence or absence of fraud in the stock market, suspicious situations rather than those under litigation or already punished will be emphasized to be able to construct analysis and evaluation.  It is assumed that government intervention is acting in good faith as to reprimand perpetuators but fraudulent entities are either just too good or the technological era had helped them.  Important experiences of the industry should also be noted.  Small companies are the common subjects of the perpetuators (1992) because their shares are relatively less traded and relatively small in number.  As a result, they are easily controlled by opportunistic behaviors.  Another, brokers and dealers are usually the perpetuators.  They are typically experienced and could also have partners-in-crime like accountants, lawyers, advertising agencies, co-brokers and co-dealers.  Information about the company, which can be existing or artificial, like financial performance, previous stock market facts and other pertinent data for investors to based their decisions are commonly printed in “pink sheets” (1992) or other media that are limited or sometimes contained misleading content for attraction.  Finally, the prevalence of unaccustomed or new investors in the stock market could also be used as indication that motivates fraudulent acts.  Of course, the companies who issue the stock can announce exciting plans but bounded by actual operation results ( 1997).      Because of many contributory factors that can simultaneously influence the scope and impact of fraud, our approach to identify possible or noticeable entrance for perpetrators is holistic wherein evaluation to involved actors, situations, regulation and stock market history will be used to arrive at a claim.  The appraisal necessitates us to be detectives searching a culprit, who is either convicted or has pending case.  However, he is hiding, or in the case of a mere suspect, the detective should prove the facts of the case.                 The London Stock Market Overview             The London Stock Market is composed of three different venues wherein investors and companies meet: Main Market, Alternative Investment Market and the Derivatives Market.  The first has the most rigorous listing requirements for companies like 25% of shares in public hands, three years trading experience, shareholders approval, presence of sponsors (the consultants) and minimum market capitalization.  The second is the soft other of the main market wherein growing and start-up firms could source investments.  The last is a platform largely involve in hedging of certain assets to pass or absorb their risks ().             Both local and international participants are allowed to transact to their chosen trading platforms.  Electronic, phone and face-to-face trading are available in the stock exchange.  LSE derives revenues from three activities; namely, facilitate access to capital markets, broker services and information systems.  All of these are available to guide the decisions of both investors and companies alike on where to invest as well as where to source funds ().                                    Operating as a private enterprise ran by a set of Board of Directors, LSE also has investors and also generate its own profit to cover operating costs in maintaining efficiency in trading through internet and television utilization.  Thus, performance of companies in the latest stock trading day is delivered to concerned participants faster.  Log-in services are also available in their website wherein credit card holders can pay the use of their services.  LSE also had opened its first Asia-Pacific Headquarters in Hongkong to get a peak in the growing economy of China ().   The LSE Appraisal on Efficiency             The Big Bang’s abolition of fixed commission of brokers and allowing trading companies to have their own dealers in the market (Michie 1999) could lessen the incentive for them to study the markets.  Controlling opportunistic behavior and its accompanying adverse impacts, brokers’ motivation tool, through commissions to perform better to find a company that really needs capital or one that really has surplus of it, diminished.  The abolishment could hinder efforts to seek markets in a broader spectrum, as their transaction costs like communication and travel costs cannot be redeemed, that in effect will limit the flow of capital in the stock market.  Commission serves as their starting point to get involve in a vast, and now international, market.  The option to work in a company as personal broker could also impede their opportunity to drift to a larger and complex market.  The limitation of the search is attached to the needs of one company to sell or buy securities, so, transaction tends to be stimulated unidirectional.             The separation of large and small issuers () of securities made it easy for the market to distinguish the needy in relative matters.  If an inexperienced investor has a surplus or savings in a relatively smaller amount, it can be assumed that he values this amount.  To prevent transaction costs like accountant or analyst fees, he can simply invest in AIM as the companies there is easier to evaluate in terms of future prospects.  Unlike large companies whose operations are more complex and vast, this type of investor that would invest here would demonstrate huge risks because of ambiguity.  The distinction transforms new and inexperienced investors to be efficient capital providers.              The information services of LSE and their media relations department () have the capability to transmit trade data happening in the electronic platforms and trade floors via electronic devices.  The advantages of technology in operations of the stock exchange enhance motivation from investors to join the trade due to absence of expensive transaction costs like transportation and time.  This is significant to wealthy people who are usually characterized by old age and traveling from a distance can disincentive them to invest.  However, this type of investors can be caught to false hopes and loose money because of too much reliance to stock prices undermining the background of the firm they extended their investment.  The capital should go to those companies who are capable to use them in a profitable manner.  In return, they can bear fruits for their investors.  This cycle if uphold can accelerate economic activity.                The business mindedness            of Board of Directors could emphasize the importance of profiting rather that of economic equilibrium.  Most of them have private enterprise backgrounds (), including the Chairman, which can undermine the government’s role in neutralizing business activities rather limited to profit-driven decisions and strategies.  They have marketing arm to allure international investors and capital seekers to get involve in the local trade.  In the lens of national interest, there are two implications; namely, capital will flow to finance local businesses and capital will get out of the borders.  The oblique intervention of the government in the LSE activities could result to unequal distribution of capital that could adversely affect the local investment seekers.              In the international view, however, the potential of capital to flow in the hands of markets are maximize while transaction cost is minimized.  The rich will crawl in the doors of the poor for the latter to benefit from the surplus of the former.  The constraint though is that trading firms who are small and needs the capital of larger firms or rich individuals should be listed in AIM.  Investors may not be attracted by the category since brokers can easily manipulate the stock price.  Assurance should be provided first by the company to investors before transactions may ensue.  In the opposite manner, large firms who are listed in the Main Market would receive the greater amount of investment from wealthy investors because of the lower risks of failure of its operations, hence, greater amount of return.  Capital could concentrate to this category favoring the stricter policies confronted by companies under this listing compared to AIM.    The LSE Appraisal on the Absence or Presence of Fraud                         The available services of LSE create certain nets to prevent existence of fraud in the trading ().  They can provide information about the trend, history and other pertinent data for a speculating investor and issuer.  It is unlikely that it will risk its corporate reputation and history for just certain amounts of money.  Thus, if participants would want to support their decision with safer means, LSE can give it to them.  These services also are performed by its employees who undergo training and enjoy benefits.  This human resource factor tightens the entrance for fraud to be performed by its brokers, analysts and other sponsors.              Main Market is a market that due to large capitalization of traders (), brokers do not have the tools to manipulate the prices of securities substantially.  Because of this, AIM could be a possible and rational place for opportunistic behavior to ensue.  The complexity of trading, due to its internationalization, result for markets to trade disregarding analysis or hiring brokers who often regarded as a hope for correct and factual analysis.  Since speculation is one of the main mechanisms for investors to trade, studying the nature of the destination of investment is likely to be passed to brokers.  The wealthier the investor, the busier it is to observe the bout-by-bout trading.  As a result, AIM is an ideal dwelling for ghastly brokers to do their thing, unguarded.              In the Derivative market (), the buyers are gaining through absorption of risks () while the initial sellers of assets get-off from such risks.  However, buyers may have enormous risk exposures and may cause its finance to exhaust to a certain level.  Because of this, it may re-sell its old contract for a higher price through some form of marketing and “sales talk”.  At this point, information about the old contract can be extended manipulatively to involve alluring future gains from the assets.  This act is likely to accelerate and becomes more exposed to fraud if the buyer conceives that his original contract phases loss.  Since LSE confirms it has a strong market base (), these opportunistic dealers would select victims from the large pool especially international investors.              Though electronic trading is a significant development to modern securities market, the power and speed of technology can also be used in fraudulent means (2001).  The information from the internet and chat rooms can mislead investors and can loose money in an instant by using their credit cards to upload the payment.  LSE has a website () where important information about the trading is posted.  As a result, investors would tend to rely much of their decision making through the internet, perhaps, undermining the information in daily broadsheets due to speed and comprehensiveness of net data.  However, scams and misleading information has its ways to be posted and allure investors.  The web-based approach and seemingly corroborating stance of LSE to technology, thus, motivate investors to accept data regardless of authenticity.             For the international capital seekers, they can enter the market through AIM with less pressure to show who they really are in home countries ().  They can restructure their identities to become good performing and “hot” companies in the eyes of the local investors.  They can deploy shares through the control of their brokers wherein collusion to exercise investor fraud could arise.  They can distribute laundered money into the market and LSE could also serve as refuge for foreign kingpins who would want to avoid local restrictions to become rich.  They can cloth themselves to be small even they are capable to raise huge amount of capital.  These companies can list their names the market to start their fraudulent acts towards unwitting investors.  The hands-off position of the government to the operations of the business is a huge incentive for fraud to occur.         Concluding Remarks             The inefficiency of capturing a wide capital market base due to unmotivated brokers who are thirsty for commissions and limited concern of personal brokers of trading companies could be addressed by the intervention by the government.  Since LSE brokers are also likely to be profit-driven, the state could signal its economic analysts to set-up a team of researcher that can find investors inside and outside its borders.  More importantly, it should inform small but enthusiastic firms to issue shares where advertising is the key to dig deep to the grass roots of the business society.  In this manner, the effort to invite outside investors will have positive return to the local economy.             Efficiency observed in distinction of Main Markets from AIM can be improved by extending support for the trading firms and prospects under AIM.  LSE should protect small firms from fraudulent brokers and inform them to study rumors about stock prices and verify them before trading.  LSE could also install authentic information device for investors in AIM in order to prevent unsolicited and misleading data that could hinder the attractiveness of AIM to investors.  Further, they could also reverse heavy reliance of some investors, mostly inexperienced, in internet and impersonal information about speculations in the stock market through an effective branding.  For example, investors would be provided with a certain tag line such as, “Securities are not cards, trading is not the same as gambling.  Authentic information and guided speculation is the key.”             Maybe, it is high time for the state to place a public figure in the LSE Board of Directors.  Since it is one of the biggest and most international stock exchange in the country, it is rather logical to oversee its operations as the entire economy is affected by the events in its trading area.  This figure will uphold the inflow of investments and transfer of it to small businesses.  Perfect competition is the best economic structure developed as it makes every industry alive, produces efficiently and with focus on quality.  The capital should not transform the good-looking, large company into a monopoly rather equal distribution of wealth— a public concern.                           Being a hotspot, AIM may discourage investors from investing with companies in its listing relative to big names in Main Market.  LSE should assess the need to encourage their regular investors to trade in AIM to enhance the well-being of the trade in this area.  Incentives to the willing investors from Main Market to trade in AIM could be a rational move.  But AIM listed companies should also have a congruent adjustment like requiring them to present company background to get impression from this regular investors.  The loose policies in AIM can make or break the trade, companies and investors if not restructured.             The LSE management could improve its reputation to the market through extensive training and behavioral guidance to its employees who often act as brokers and sponsors instilling the virtue of honesty.  Although speculation, in practical terms, is a form of gambling, LSE employees can play the game without fraud.  When investor understands that the company has integrity, while chance is the only hope concretize by some research and back-up with experience, investments will pour.  In the similar manner, AIM trading should be prioritized.  Its reputation is the key for small firms to get the capital they need.  As an option, the company could demand that every listed company in AIM is required to present the identification of their brokers to prevent fraud and test its integrity.             The fraud prevalent in derivatives market, although often untold, could be minimized when dealers will be replaced by LSE employees.  The fight for profit would be a mind game.  Practicing complete and accurate information-dissemination to speculators, unnecessary erosion of the economy (from some economics theorists) would be prevented through deployment of the true nature of the original contract of the initial asset sale.  Lastly, the idea that LSE sees the internet and the technology as partners for efficient trading should be bounded for the sake of the inexperienced investors.  Effectiveness of trade could be undermined that reminding every trader to double check the unsolicited data or ask the LSE to authenticate it could be a rigorous but useful fraud deflection.                     Credit:ivythesis.typepad.com

APPRAISING THE LONDON STOCK MARKET

APPRAISING THE LONDON STOCK MARKET Introduction and the Tools to Consider in Appraisal In the lens of economics, stock market is tasked...

STOCK MARKET

Compare the financial manager’s viewpoint with the viewpoint of an employee or stockholder with regard to maximizing share value.               Financial Management means the efficient use of economic resources namely capital funds and deals with the procurement of funds. Generally, the source of funds of companies is from the contribution of shareholders.   The objective of a firm is to maximize value or wealth. Value of a firm is represented by the market price of the company’s common stock. The market price of a firm’s stock represents the focal judgment of all market participants as to what the value of the particular firm is. It takes in to account present and prospective future earnings per share, the timing and risk of these earning, the dividend policy of the firm and many other factors that bear upon the market price of the stock. Market price acts as the performance index or report card of the firm’s progress.   Value maximization is defined as the reduction in the expected costs of business disruption, exceed the expected costs.               In the viewpoint of the financial manager, maximizing profit is the primary objective in order to maximize also the shareholder value. Businesses must make profits for surviving. Corporations must provide a higher return on their equity capital. The profits that are made create trust from the investors and are usually reflected in higher share prices. The profits are also a source of corporate competitive health and wealth.   In maximizing share value, the management should create sustained profitable growth, maintain a disciplined approach to decision making, build upon financial health as a competitive advantage, and foster a culture of integrity and transparency. Financial manager need to link investment to growth that drives profitability in order to increase shareholder value.    Shareholders prefer maximization at the level of their portfolio or an industry, not at the individual firm level. Shareholders interests are typically equated with share price. The many diversified shareholders, including large institutional investors, do not maximize their return based on the performance of a single firm; firm externalities may diminish overall portfolio performance.   Shareholders focus on profit after tax, cash flow and growth strategy. They believe that the success of the organization can be measured by share price, dividends, and economic profit. They believe that the purpose of a company is first and foremost to maximize shareholder value.     References:       Credit:ivythesis.typepad.com

STOCK MARKET

Compare the financial manager’s viewpoint with the viewpoint of an employee or stockholder with regard to maximizing share value. ...

STOCK MARKET AND STOCK PRICES: UNDER THE LENS OF EFFICIENT MARKET HYPOTHESIS

STOCK MARKET AND STOCK PRICES: UNDER THE LENS OF EFFICIENT MARKET HYPOTHESIS   Introduction             The invisible hand in economics implies that isolated benefits existing in the economy will not be apparent and will continue to be believed normal events.  This is because all economic actors are doing the same thing, which is, outwitting one another to get an upper hand with economic gains and benefits.  In specific areas such as stock markets, the invisible hand is redefined by efficient market hypothesis.  The mechanism is the same with reference to stock price indifference and absence of isolated case of attractive investment.  However, the historical stock market bubbles/ crashes as well as corporate scandals show that the hypothesis is merely a theory and has its limits.    EMH and its Major Forms Efficient market hypothesis or EMH is an investment theory that posits the zero possibility of outperforming the stock market by using fundamental (e.g. corporate date, economic factors) and technical (e.g. trending) analysis in investment appraisals ().  Due to this, EMH assumes that share prices are determined in the market through all possible and existing information.  There is no room for investors even an expert to achieve gains through available information.  EMH incorporates them to the current share price.  For example, there are no undervalued or overvalued stocks which can attract speculation for potential gain.  As a result, there is no other way to outperform the market rather than to invest and purchase for riskier stocks.  Although highly theoretical and controversial, EMH was evident during 1987 stock market crash and some corporate scandals.      There are three forms of EMH; namely, weak, semi-strong and strong forms (Investopedia).  The first form states that technical analysis can be utilized to outperform the market because the current stock price reflects all past prices that it had during trading.  Alternatively, fundamental analysis can be used to measure if the stock is undervalued or overvalued.  The second assumes is in conjunction to the initial definition of EMH but gains can be held when investors will be able to use unpublished information about the stocks.  Therefore, only public information (i.e. published) are integrated to current stock price.  The third agrees with the complete definition of EMH that includes in the current stock price both the public and private (i.e. through insiders) information.  With this, even when investors will consider a huge amount of research to achieve price gains, this form retires the outcome.   EMH Failure and Capital Market Research              The historic Great Depression and Enron collapse are two cases in two different times that proved that EMH failure will not be discovered and addressed until adverse effects to stakeholders are at peak.  This calls for a pro-active approach in conducting capital market research in which the endeavor should be infused even if obvious effects are yet to emerge.  The more stringent policies may defer and discourage Enron-like firms temporarily but pro-activity to determine the culprit (client alone) or culprits (client plus auditor) is conceded to have its strategic merits for capital suppliers.  Every potential and existing shareholders and creditors are now bound to get all the help they need from financial advisors, government and peers to secure their funds to entities that have at least a sprinkle of EMH or some degree of the weak-form.  Otherwise, their investment can be easily diluted by the market and/ or the entity without even imploring some contingent measures.  In simple terms, they will lose the battle without pulling out their swords and shields.               Being in chorus to the behavior of a certain financial market proved to be beneficial and less complicated for shareholders.  The case of Great Depression and Enron is not an everyday case while the general pulse of market participants is oftentimes correct and profitable.  However, there are several factors to consider when shareholders will completely give their trust and relate investment options to the capital markets.  For example, the efficiency of stock exchanges in which corporate shares is traded out of their traditional operations.  In economics, the role of the stock market is merely to provide a venue in which demanders and suppliers of capital can meet (1965).  Today, this venue becomes complicated due to brokers and traders, regulation from the government and involvement of foreign firms and investors as well as complexity and uncertainty of the environment.                For example, the London Stock Exchange had abolished Big Bang scheme that led to de-motivated independent brokers and conversely allowing entities to have their own dealers (1999).  In effect, the exchange can fail to limit the marketing campaigns private brokers can use to attract investors.  As Enron primarily utilized the lack of corporate disclosure and insider trading to obtain its objective, this situation can mimic the manipulative feature by misleading promises and bias advises.  In addition, the abolishment can hinder broker efforts (both private and independent) to seek markets diligently due to their “focused” clients that can ultimately limit the flow of capital in the economy.  Limiting the access to capital and interested borrower stimulates as well aggravates the inclination of firms to implement actions that continuously mitigate the functions and invisible hand of EMH.  Another Enron or perhaps Great Depression can follow in the coming years.    Asymmetrical Information              According to Investopedia, asymmetrical information is a condition when one party in a transaction has a more substantial and relevant information than the other party.  In this case, it is likely that the former party will have higher bargaining power throughout the transaction until the latter discovers the error or default in the agreement.  When applied in the corporate setting, the theory of the separation of ownership and management can illustrate this case.  The theory states that investors have an indirect access to inside information with regards to the real corporate value compared to directly managing executives (2002).  As observed, investors can be applied with management tactics to raise self-vested interests of executives.  Traditionally, the latter opt to sell and issue shares when the firm is overvalued as well as the investors are unaware of such condition.  However, this dogma had long been discovered by the market.  as such, investors repel this executive behavior by revaluing their shares causing a negative market reaction.  In the end, the management could not maximize the traditional tactic due to unfolded information of its significance to investors.                 The supposedly first stage of the collapse of Enron was derived from Skilling drastic imposition of rigid and hostile retention scheme (Thomas 2002).  This is a condition of moral hazard (1999).  Before Skilling took the post of Division Manager, former employees have symmetric information with the firm regarding their worth.  However, when Skilling tackled human resource issues, he tried to abort loyal but change-averse staffs with master-level and doctorate degree holders without full disclosure of the plan so that former staffs have adjusted their work ethics accordingly.  In a different case, the unethical accounting practice of Fastow and his collusion with Andersen auditors is an information asymmetry under signaling (2002; 1999).  The victims are the shareholders unknowingly handed by non-transparent corporate and financial reports.  Fastow and Andersen signaled to each other about the hidden action which transformed shareholders as one having asymmetric data from the start of the contract.               Information asymmetry to employees was regarded as the first dark stages of Enron collapse because staff resistance to change is one of the top causes of failure of major corporate changes (2002).  Skilling, who had substantial experience as financial advisor, undermined human resources when it insisted to be hostile on them.  Without loyal employees, quality management is adversely affected because highly-qualified but new employees are neither capable nor motivated in conforming to the new methods under Skilling culture. This scenario may have been integrative-planned by  to limit the size of familiar employees to minimize their unethical exposure.  At this point, Enron was not looking strategically rather financially.  The incomplete information staffs would have been received (like the transition to highly-qualified and scholarly recruits) sparkled the negative atmosphere throughout the organization.  It ultimately impeded cultural cohesion and deepened the opportunity of higher executives to execute their self-vested practices.               On the other hand, information asymmetry to investors as well as rating agencies led to unguided substantial investments.  This formed the foundation for the fame and fortune of Enron to emerge.  Although signaling is primarily evident to investors that purchase stocks or those who increase their holdings under Andersen regime, moral hazard can be more appropriately tagged to initial investors of the company way back in 1980s.  The loophole of this practice by colluding parties, however, is that the huge amount of stakes that used to support the firm’s operations, stock attractiveness and continuity of the unethical practices made them very crucial to the existence of Enron.  As a result, when the scandal cropped up in the offing of the new millennium, the firm had faced not a gradual demise rather instant shutdown.    Option Grants Under opportunistic perspective, the economic incentives of Enron can vary depending if they opt to engage in fraud or take risks with regards issuing options.  The perspective is an accounting policy used by an organization that is based on manager’s incentives to increase their wealth; however, this will be shouldered by other parties within and beyond the organization (1997).  When they employ fraud, they can manipulate accounting methods providing a tampered profits and performance ratios.  According to the survey of  (1997), most managers are remunerated from the profits or ROA of their respective firms.  In effect, executives will not only impress employees to undergo option grants but as well impress the investors to provide higher incentives believing that the firm is doing well.    Further,  (1987) showed that restrictive covenants formed by corporate debts are surmountable by fraud to improve accounting numbers.  The process will begin after executives have manipulated financial ratios permissible to the constraints of creditors.  In effect, the firm can enjoy strategic actions it cannot implore when the manipulation did not take place.  In return, the firm can implement strategies that will ultimately lead to profitability and growth in either prospective or actual sense.  When this information is delivered to employees, they will think that stock options are attractive investments.  They will purchase stocks unknowing that they are merely funding the efforts of executives to conceal mismanagement or possible bankruptcy.  As a result, executives are rewarded two-fold.  They can manage the firm with the support of creditors and implementing strategies with employees in full support due to the stock options the latter is currently holding.  The cover-up ultimately leads effective fraud on the part of executive whose incentives goes beyond remuneration rather long-term employment, promotion and fame within the industry.                        In a similar case, political groups can impede strategic actions of the firm if it reports high earnings or disclose issues pertaining to adverse external effects of their operations (1997).  The government may impose tax sanctions or legal remedies on tax evasion while environmental groups can boycott its products when informed about negative externalities (like oil spills).  These situations have their adverse impacts in both short-term and long-term existence of the company.  In effect, fraud to accounting methods can result to lack of disclosure and computational manipulation to arrive at a standard level of accounting reports.  This is why the study of  (1996) found that firms with environmental disclosures still used them for corporate image building.  As a result, similar to the benefits of corporate ability to bypass creditor restrictions, the firm can induce its strong business outlook to employees deepening the need of the later to resort to option grants.  Executives can distort the likelihood of disruptions from external actors from a major mental lapse in decision-making through designing accounting methods that can hinder such mistake.                  On the other hand, under efficiency perspective, the efficiency of the contracting parties or transactions at hand is pursued to end at a minimum agency cost.   According to  (1999) accounting alternatives are adopted by executives because it reflects the underlying and true performance of corporate assets ().  This makes fraud selection for executives ineffective, if not, legally impaired.  In this case, risk taking is the more strategic choice for executives to maximize their incentives.  For example, there are different methods to compute for depreciation or amortization.  When this will be related to stock options, executives have minimal control over the options due to the absence of fraud.  In effect, it is left to accept the repercussions of the market.  Although this is ambiguous making a less enthusiastic employee to involve their investment in options, this can be an effective mechanism keep employees and executives “unattached” to corporate performance.                Due to this, executives will not be pressured to take unethical accounting practices.  One incentive of this is that employees may see the worth of their executives that can induce corporate cohesion.  By doing so, executives can freely implement their strategies and run the organization more smoothly.  Through this, they can reap the benefits of fraud tactics through similar economic benefits plus the recognition they can derive from complimenting and idolizing employees.  They can extend affect their investment decision in the long-run which inevitably acquire employee’s trust.  By this time, executives can opt to apply fraudulent actions as they wish.  Another incentive is that accounting best practice can be awarded to the company by external actors as well as investors. In effect, executives can go away from unethical practices and manipulation that can minimize the costs of hiring additional skilled accountants and the cost of “greasing” to auditors, politicians and other colluding parties.    Conclusion             The stock markets of today are likely positioned in the middle of reality and theory, that is, under semi-strong EMH.  It allows gains for the issuers and investors alike to make investing exciting and thrilling that is compatible to the appetite of rich businessman and influential people.  The discussion shows that EMH failure is necessary to give way for all the stock market actors to reap specific gains and achieve their personal/ corporate interests.  However, the drawback is that inefficiency in macroeconomic sense is detrimental for the people in the lower bracket of earnings-capacity (i.e. those in poverty or even the working class).  They are completely unable to participate in the stock market, minimal access to assess companies based on credible/ accurate financial statements and controlled by their employers.  As a result, this serve as a policy issue for authorities that requires review and appreciation of EMH and the appropriate EMH form to use in different economic conditions.         Credit:ivythesis.typepad.com

STOCK MARKET AND STOCK PRICES: UNDER THE LENS OF EFFICIENT MARKET HYPOTHESIS

STOCK MARKET AND STOCK PRICES: UNDER THE LENS OF EFFICIENT MARKET HYPOTHESIS Introduction The invisible hand in econom...

The Role of Ghana Stock Market in the Economic Development

The Role of Ghana Stock Market in the Economic Development   In accordance to the economic development of Ghana and their financial market, Mishkin (2001) argued that usually financial assets are going to the process of trading. Companies enable exchange of previously issued financial assets.  Moreover, the facilitation of lending and borrowing of newly issued financial assets sale. Basically, there are numerous samples of financial market around the globe and one of this is the Ghana stock market. Actually, like in other researches and studies, the debate involving stock market is primarily concentrated on its efficiency. The efficiency of stock markets is important, particularly for financial participants, as this influences the prices received and paid for securities purchased and sold. For instance, the cost involved in changing securities and loans into cash for liquidity needs is influence by efficiency conditions. Efficiency also influences the time required to complete a certain transaction (Digital University, 2011).  Moreover, the government of Ghana as well as its financial institutions that are into security trading are also aware of the significance of market efficiency. In order to facilitate effective economic development plan, government organisation as well as its financial institutions knew that large transaction can be supervised by other dealers, who in turn will take advantage of the information they acquire about large known buyers or sellers and utilize it to bid up the price of the sell short securities a dealer is attempting to unload or the securities in demand. Short-selling refers to the act of putting assets borrowed from an owner on sale and later on, purchasing it back to return the borrowed security (Digital University, 2011). The efficiency of stock market also enables the market of Ghana to take in a transaction devoid of a large price change. Furthermore, market efficiency is involved with the amount of transaction costs characterized by the difference between the financial asset’s ask price and bid. With this, the spread of the bid-ask becomes narrower, if the efficiency of the financial market is great. Market efficiency also determines whether capital has been allocated to these funds that have the utmost profit at any specified risk level. Without the efficient determination of prices, capital will not flow to the investment with the highest risk adjusted return. This case can negatively affect a country’s economic growth and productivity (Digital University, 2011). Due to the importance of financial market efficiency, several arguments have been raised in relation this issue. In response to this, theories have been introduced, of which the most controversial was the Efficient Market Hypothesis (EMH). For more than thirty years, the introduction of Eugene Fama concerning the Efficient Market Hypothesis is actually the main context of financial economics. The principle behind the EMH argued that security prices at any time completely replicate all the existing information. Meaning, the stock market prices securities at their fair values (Tam, 2002). Under this concept, Fama (1970) defined three distinctive market efficiency forms: weak, semi-strong and strong. Among these forms, the semi-string has been the focus of the majority if empirical researches. The concept described by the strong form of EMH states that securities prices reflect all existing information, even private ones. Sufficient evidence has been provided, showing that stakeholders gain earnings from information trading that is not yet included into prices (Seyhun 1998). Thus, the strong form does not grasp in a business market with an irregular playing field. Alternatively, an EMH with the semi-strong type implies that security prices reflect all public information available.  As there are overvalued or undervalued securities, trading costs are then not capable to create superior earnings. Upon the discharge of the latest information, the information is fully incorporated to the price rather hastily.  Intraday data’s availability enabled tests that provide evidence of public information affecting stock prices within a short span of time (Gosnell, Keown & Pinkerton, 1996). On the other hand, the weak form of EMH implies that pat returns or prices reflect prices or returns in the future. From the incoherent feat of technical analysts, it was suggested that this form holds. Fama (1991), however, expound on the concept behind the EMH weak form, and included the use of macroeconomic variable or accounting in the prediction of future returns. With respect to the previous discussion, it was stated that the semi-strong form of efficient market theory (EMT) argued that looking at past prices or information is no longer needed and no other benefits we can get by looking at this. The market already knows the information and it is built into the price. The value of any financial information is solely due to the expected reward it will yield. If the market already knows all past accounting records then what value is an accounting report? On a personal level, we may feel that it is interesting and may therefore pay to view it. But to the market, there is no value. It has already seen the information. Looking at the report will not in any way provide an edge for future profits. If we do buy the stock and make money, it is not from reading the report; instead, it is from new information that arrived after reading it that happened to move the stock in our favour. An easier illustration is this: How much would we pay someone to know yesterday’s closing price on IBM? What about for the day before? If we answered nothing (as we should) then what value is a chart showing all of the closing prices (and all intra-day prices)? What value is an accounting report with old information? As seen in that example, we can be able to see the validity of semi-strong EMH. Based from the concept depicted by the semi-strong form of market efficiency, the stock price reflects all publicly available information. In line with this, many studies have attempted to examine the efficiency of public information on predicting price movements. In general, studies had indicated that market quickly responds to these diverse corporate announcements within a short span of time. Applying this general conclusion, investors then cannot expect to earn higher returns by trading on the date of the announcement. In one popular study (Fama, Fisher, Jensen & Roll, 1969) the feedback of stock price was studied in relation to stock splits. Traditionally, stock splits have been good news in general for investors as they are naturally preceded by dividend increases. The study found that on the average, stock splits were pave the way by phases of tough performance presumably due to the tendency of firms splitting in good times. Nonetheless, no evidence of abnormal performance of stock prices was observed by the researchers after the split. This means that no profit will be gained by investors when stocks are purchased on the split date. This evidence complies with the EMH. The presentation actually shows the cause and effect situation of the progress of Ghana Stock Market.  Actually, if the stock market of Ghana is excellent, more projects and financial returns will enter ion Ghana and this also means economic progress and development.   References: Digital University (2011). The Efficiency of the Financial Markets. Available at: http://www.digitu.com Accessed: January 28, 2011.   Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25, 383-417.   Fama, E. (1991). Efficient capital markets: II. Journal of Finance, 46, 1575-1617.   Fama, E. F., Fisher, L., Jensen, M. & Roll, R. (February 1969). The Adjustment of Stock Prices to New Information. International Economics Review.   Gosnell, T.F., Keown, A.J. & Pinkerton, J.M. (1996). The intraday speed of stock price adjustment to major dividend changes: Bid-ask bounce and order flow imbalances. Journal of Banking and Finance, 20, 247-266.   Mishkin, F. S. (2001). The Economics of Money, Banking, and Financial Markets. Boston, MA: Addison-Wesley.   Seyhun, N. (1998). Investment intelligence from insider trading. MIT Press.   Tam, F. (November 2002). Markets not entirely efficient. Business Times (Malaysia). Credit:ivythesis.typepad.com

The Role of Ghana Stock Market in the Economic Development

The Role of Ghana Stock Market in the Economic Development In accordance to the economic development of Ghana and their financial mark...

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