Camerer published in Journal of Economic Behavior and Organization in the year 1998 under the name “Disposition effect in securities trading: an experimental analysis”. This research was conducted in New York Stock Exchange. Their analysis is based on prospect theory, that is, outcomes or profits are determined based on a reference point and investors are not ready to take risk in the in the gain domain, but investors are ready to take risk in the loss domain. They termed the difference in risk attitudes of investors for gains and losses as reflection effect. How reference point effects investor behavior was studied under different economic conditions.
A high number signifies a healthy firm; whereas a ratio below 1 means that the firm is unable to pay its interest obligations due to insufficient earnings. Creditors look at this ratio to evaluate the probability of payment if the firm got into financial distress. Bond investors also look at this ratio to judge the security of the bill. This ratio is also important to shareholders as it can affect a firm’s share price. 3.4.
Wealth maximization might create conflict, known as agency issues, which describes conflict between the owners and managers of firm. As, managers are the agents appointed by owners as trustees, a strategic investor or the owner of the firm would be majorly concerned about the longer term performance of the business that can lead to maximization of shareholder’s wealth. Whereas, a manager might focus on taking such decisions that can bring quick result, so that he/she can get credit for good performance. However, in course of fulfilling the same, a manager might opt for risky decisions which can put the owner’s objectives at stake. Therefore, a manager should align his/her objective to broad objective of organization and achieve a tradeoff between risk and return while making a decision; keeping in mind the ultimate goal of financial management i.e.
One important thing to consider is that companies will sometimes use total sales instead of net sales when calculating their ratio, which generally inflates the turnover ratio. While this is not always necessarily meant to be deliberately misleading, one should generally try to ascertain how a company calculates their ratio before accepting it at face value, or otherwise should calculate the ratio independently. Another important consideration is that accounts receivable can vary dramatically over the course of the year. This means that if one picks a start and end point for calculating the receivables turnover ratio arbitrarily, the ratio may not reflect the true climate of the company’s issuing of and collection on credit. As such, the beginning and ending values selected when calculating the average accounts receivable should be carefully picked so as to represent the year well.
Pecking order theory One explanation of the pecking order theory is based on the information asymmetry. The asymmetric information comes from the fact that the management precisely knows, what the value of the company is, and what is the net present value of the ongoing investments, whereas the investors do not know exactly this, because they have fewer information, than the management. When the financing of a project should be decided, the management focuses on two things: the net present value of the project and the cost of finance. The project is worth financing from equity issue, if the company’s shares are overvalued (since their price is higher than their value). Overpricing occurs, if the incremental information available for the management
If the FASB was successful in eliminating conservatism, then it would increase information asymmetry between investors, not reduce it. If these accounting setters eliminate conservatism, a company’s uncertainty with preparing accounts will grow. Additionally, the IASB or the FASB have not taken into consideration academic inputs, how they will compensate lenders and borrowers as well as stakeholders for the lost of
and Head A. (2007), mentioned in their book, “Corporate Finance; principles & practice” that as dividends and tax liabilities are the transactions in cash so mangers should cautiously look at the effect of liquidity position of the company on the dividends. Dividends do depend on the profits but the profits are not the same as the availability of the cash to the company, so for that the dividends must reflect the liquidity of the company along with the profitability. Baker (2011), believed that dividend payout policy refers to the size and pattern of cash distributions to shareholders over time. The word policy implies that these distributions are stable and predictable.
Recent findings on Oasis APAC Ltd about strategic management and business policy has been influenced by agency theory. Research was recently carried out to conclude whether “accounting-based bonus contracts create incentives for executives to select accounting procedures to increase the value of their bonus awards [Collins, Dhaliwal and Rozeff (1981), Watts and Zimmerman (1978) Healy (1982) and Hagerman and Zmijewski (1979)]. However, few studies have examined empirically how these short-term bonus contracts affect executives’ production-investment decisions. Larcker (1983) examines the association between long-term performance plan adoption and corporate capital investments and concludes that growth in capital expenditures for firms adopting
Myers and Bacon (2001) discussed that the debt to equity ratio was positively correlated to the dividend yield. Therefore firms with relatively more investment opportunities would tend to be more geared and vice versa (Ross, 2000). The study by Hu and Liu, (2005) declares that there is a positive correlation between the cash dividend the companies pay and their current earnings, and a inverse relationship between the debt to total assets and dividends They claim current earnings do no really reflect the firm's ability to pay dividends. A firm without the cash flow back up
For games with low demand, tickets are cheaper than for games with high demand. Changing Conditions Using dynamic pricing strategies can boost profits more under certain market conditions, according to research conducted at the Olin School of Business at Washington University in St. Louis. The researchers found dynamic pricing for products works best when there is a lot of uncertainty in the market--for example when the product may have a very short life span, as is the case with movie tie-ins. Sellers can maximize profits by lowering prices as sales fall, then raising prices again as demand increases. changes can go either