Tài chính doanh nghiệp - Chapter 3: The financial information marketplace

Chapter 3The Financial Information Marketplace Learning Objectives To identify important sources of information about the financial system.To understand why the efficient distribution of information within the financial system is so important.To learn how market participants keep track of the prices of financial assets.To learn about the flow of funds accounts and discover what is meant by “social accounting.”IntroductionSound financial decisions require adequate and reliable financial information.We may divide the sources of information relied on by financial decision makers into:debt security prices and yields,stock prices and dividend yields,information on security issuers,general economic and financial conditions, andsocial accounting data.The Great Debate OverEfficient Markets & Asymmetric InformationThe efficient markets hypothesis (EMH) contends that information relevant to the pricing (valuation) of loans, securities, and other financial assets is readily available to all borrowers and lenders at negligible cost.The Great Debate OverEfficient Markets & Asymmetric InformationOn the other hand, the concept of asymmetric information argues that the financial marketplace contains pockets of inefficiency in the availability and use of information, such that insiders can earn excess returns by selectively trading financial assets based on the special information they have been able to acquire.The Great Debate OverEfficient Markets & Asymmetric InformationIn an efficient marketplace, each individual investor will rationally use all the relevant information that is available to value stocks and bonds.Hence, each financial asset will generate an ordinary, normal or expected rate of return commensurate with its level of risk.The Great Debate OverEfficient Markets & Asymmetric InformationIf the EMH holds, any temporary deviation of actual returns from expected returns should be quickly eliminated as investors react to temporary underpricing or overpricing of assets.Different Forms of the EMHThe weak form of the EMH argues that the current price of a financial asset already reflects all its price and trading volume history.The semistrong form contends that the current price of a financial asset already reflects all publicly available and relevant information.The strong form argues that the current price of a financial asset already captures all relevant public and private information.Different Forms of the EMHRepeated research studies tend to support the weak and semistrong forms of the EMH.The strong form, however, has aroused the most controversy, especially because of the existence of insider trading activities and the apparent presence of pockets of special information asymmetrically scattered throughout the financial system.Insider Trading & Asymmetric InformationInsider trading refers to buying or selling a financial asset based on special knowledge or privileges, before that privileged information becomes publicly known.Asymmetric information refers to the inequalities in the quantity and quality of information available across different locations within the financial system. Problems Informational Asymmetries Can CreateLemons and Plums. A loan officer (buyer) cannot be sure without incurring substantial costs whether his or her potential customer (seller) is a lemon (sour) or plum (sweet).A mispricing may cause plums to be driven away from the market.Problems Informational Asymmetries Can CreateAdverse Selection. A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its high-balance, low-activity (and hence most profitable) customers.Solution: Enable customer signaling via a conditional price schedule for different account plans.Problems Informational Asymmetries Can CreateMoral Hazard. One party to a principal-agent contract may decide to pursue its own self-interest at the expense of the other party, often because of poorly drafted contracts or ineffective monitoring activity.Solution: Draw contracts with the appropriate incentives so that agents will want to act more in line with the interests of principals.Asymmetry, Efficiency, & Real-World MarketsAll real-world markets have elements of both efficiency and asymmetry.Perhaps, real-world markets are split into segments:A highly efficient segment in which well-informed individuals and institutions trade.A less efficient segment in which less-well-informed small investors trade.Informational Asymmetries and The LawSome laws and regulations are designed to improve the flow of information between buyers and sellers and to protect the public against deception in valuing financial assets.U.S. examples:1934 Securities Exchange Act1940 Investment Company Act1970 Securities Investor Protection ActRegulation FD (Fair Disclosure), 20002002 Sarbanes-Oxley Accounting Practices ActSources of InformationDebt Security Prices and YieldsData: bid & ask prices, yields-to-maturity Sources: real-time computer networks (e.g. Reuters, Bloomberg), televised reports (e.g. CNN, CNBC), financial press (e.g. The Wall Street Journal)Data: bond yield indexes Sources: Moody’s Investor Service, The Daily Bond Buyer, U.S. Treasury, Dow JonesSources of InformationSource: Board of Governors of the Federal Reserve System, Federal Reserve Bulletin, selected issues*2004 figures for JanuaryIndicators of Average Bond Yields(Average Annual Yields in Percent)Sources of InformationStock Prices and Dividend YieldsData: prices (year-high, year-low, day-high, day-low, closing), sales volume, most recent dividend, dividend yield, P-E ratio, stock price indexes (e.g. DJIA, S&P500, Wilshire 5000), foreign stock prices Sources: computer networks (e.g. Internet), financial press, television, radio, financial institutions (e.g. S&P, Morningstar)Sources of InformationSecurity IssuersData: firm history, principal products/services, key officers, recent operation summary, financial statements, credit ratings, industry performance indicators Sources: regulatory agencies (e.g. SEC), trade associations, commercial institutions (e.g. Moody’s, S&P, Dun & Bradstreet), directories & databases, journals & magazines, credit bureausSources of InformationGeneral Economic and Financial ConditionsData: interest rates, money supply measures, industrial output, international transactions, unemployment rate, inflation, forecasts Sources: central banks (e.g. the Federal Reserve), statistical bureaus (e.g. Bureau of Economic Analysis), financial pressSocial Accounting DataSocial accounting refers to the system of record keeping that reports transactions between the principal sectors of the economy, such as households, financial institutions, corporations, and units of government.The two most closely followed social accounting systems in the U.S. are the National Income and Product Accounts and the Flow of Funds Accounts.National Income and Product AccountsThe National Income and Product Accounts (NIPA) present data on the nation’s production of goods and services, income flows, investment spending, consumption, and savings.In particular, the gross domestic product (GDP) measures the market value of all goods and services produced in the economy within its geographical boundaries.National Income and Product AccountsThe Components of the U.S. GDP, 2004* ($ billions, current)Source: U.S. Dept of Commerce and the Federal Reserve’s Flow of Funds Accounts*Figures are for the first quarter of 2004 and annualizedFlow of Funds AccountsThe Flow of Funds Accounts trace the flow of savings by businesses, households, and governments into purchases of financial assets;show how the various parts of the financial system interact with each other; andhighlight the interconnections between the financial sector and the rest of the economy.Flow of Funds AccountsThe construction of the Flow of Funds Accounts requires four basic steps:Sectoring the economyBuilding sector balance sheets3 - 27Statement of Financial Assets and Liabilitiesfor the Household SectorStatement of Financial Assets and Liabilitiesfor the Household SectorSource: The Federal Reserve’s Flow of Funds Accounts.$ Billions, Outstanding at Year-End *Figures are for Q1 of 2004 & annualized. continuedFlow of Funds AccountsThe construction of the Flow of Funds Accounts requires four basic steps:Sectoring the economyBuilding sector balance sheetsPreparing sources and uses of funds statementsSources and Uses of Funds Statementfor the U.S. Banking Sector, 2004*Source: The Federal Reserve’s Flow of Funds Accounts. ($ Billions) *Annualized data from Q1.Flow of Funds AccountsThe construction of the Flow of Funds Accounts requires four basic steps:Sectoring the economyBuilding sector balance sheetsPreparing sources and uses of funds statementsBuilding a flow of funds matrix for the whole economyTotal Net Borrowing and Lending in Credit MarketsSource: The Federal Reserve’s Flow of Funds Accounts. ($ Billions) **Annualized data from Q1.3 - 33Total Net Borrowing and Lending in Credit Markets continuedFunds Raised in Credit and Equity MarketsSource: The Federal Reserve’s Flow of Funds Accounts. ($ Billions) *Annualized data from Q1.Flow of Funds AccountsEstimates of flow of funds data can be used to help make forecasts of lending, borrowing, and interest rates.However, these social accounts do have a number of limitations:Transactions among economic units within each sector are not captured.Flows that occur within the time period under study are not captured.The market-value bias of the data distorts actual savings and investment activity.Markets on the NetAmerican Economic Association at of the Currency at www.occ.treas.govDun & Bradstreet at www.dnb.comFederal Deposit Insurance Corporation at www.fdic.govFINIX European Stock Market Indices at www.finix.at/Markets on the NetInternational Monetary Fund at www.imf.orgInvestment Company Institute at www.ici.comMoody’s Investors Service at www.moodys.comNew York Stock Exchange at www.nyse.comThe NASDAQ Stock Market at www.nasdaq.comMarkets on the NetSecurities and Exchange Commission at www.sec.govThe Bond Market Association at www.investinginbonds.comThe Financial Times at www.ft.comThe Wall Street Journal at www.WSJ.comU.S. Department of Commerce at www.doc.gov/Chapter ReviewIntroduction: The Importance of Information in the Financial MarketplaceThe Great Debate Over Efficient Markets and Asymmetric InformationThe Efficient Markets Hypothesis (EMH)What Is An Efficient Market?Different Forms of the EMHInsiders and Insider TradingThe Concept of Asymmetric InformationChapter ReviewThe Great Debate Over Efficient Markets and Asymmetric Information contProblems Informational Asymmetries Can CreateLemons and PlumsAdverse SelectionMoral HazardAsymmetry, Efficiency, and Real-World MarketsInformational Asymmetries and the LawChapter ReviewSources of InformationDebt Security Prices and YieldsStock Prices and Dividend YieldsSecurity IssuersGeneral Economic and Financial ConditionsSocial Accounting DataNational Income and Product AccountsThe Flow of Funds Accounts