The most well-known and widely explained models on underpricing is based on asymmetric information among investors. These include the winner’s curse hypothesis, Information Revelation Theories, Principal-Agent Models and underpricing as a signal of firm quality. Others are based on institutional reasons such as legal liability and behavioral explanations like investor sentiment (Ljungqvist, 2004). Theories that may potentially be specific to emerging growth firms, which tend to be lesser known, are the ones based on valuation risk and underpricing as publicity stance. Firms that are less known or could not indicate a long history of profitability may usually be underpriced due to unpredictable risk associated in valuation (Damodaran, 2009).
By cause of the presence of D&O insurance, there are fewer financial incentives vis-à-vis directors and officers to present the duty of care and skill (i.e. the moral hazard). As a result, the precautionary function of directors or officers liability law is undermined or negatively affected by the D&O insurance. D&O insurers should take various measures to mitigate the moral hazard. Issue 3 – the method / policy to set up the bonus and allowances for executives Shareholders concern about executives may overpay themselves, get extravagant allowances, carry out unprofitable but power enhancing investments.
What changes were required to implement the Supernova process—for FAs? For Merrill Lynch itself? What were the risks and potential benefits for both? Major change in philosophy and approach on managing accounts of clients, where financial advisor will merely be focusing on long term relationship and profitability rather than acquisition and immediate return. For Merrill lynch change is nature of work, where customer retention and loyalty will be given importance and also resulting in less market errors due to decrease in number of clients and focusing on profitable clients.
It is very hard to say that SOX would prevented the scandal but they would have being exposed sooner because of the Sarbanes-Oxley section and titles rules and regulation such as; Titles II the auditors partner rotation; Title III, the responsibility or reporting accurate financial corporate reports. They reported depreciation expenses of garbage trucks as a salvage values, and subjective to other assets that did not have any value. Title IV the financial disclosures of financial reports was overstated or understated in some reports to inflates a high profit margin. The Titles VIII, the alteration and destruction of records that would protect the
Throughout the case, it can be seen how Cendant Corporation was performing activities that dealt with the interactions of income smoothing. The main cause of performing with Income Smoothing was to make their shareholders and investors believe that they had a professional and ethical operation running. Income smoothing can best be represented as how either gains or losses from a certain period are taken into a good or bad period with losses or no profits. Income smoothing throughout this case was used as an unethical practice performed by Cendant Corporation to achieve financial stability and falsify numbers to make the investors believe they had premium stocks when in reality it wasn’t what was really occurring which would then lead to the
Section 1: Fraudulent financial reporting is the premeditated and calculated falsification or omission of financial information/documents such as: balance sheets, income statements, etc. The ultimate goal for a firm to falsify financial reports is to improve their profitability and ultimately their performance of the firm. By firms falsifying and omitting information from their financial reports, they are misrepresenting themselves to their investors. If a firm looks as if they are performing well, then more people will want to invest in the firm. The people who are being hurt at the end of the day are not the people at the top of the firm, CEOs and management, the people who are being hurt are the investors that will untimely lose their investments and the employees who work at the firm.
There are basically two arguments why fair value accounting can donate to pro-cyclicality. The first argument is that fair value accounting and asset write-ups allow banks to raise their leverage during economic expansions, which in turn makes the financial system more vulnerable and financial crises more severe. The second argument is that fair value accounting can cause corruption in financial markets. The idea is that ―banks may or have to sell assets at a price lower than the major value and that the price from these forced sales becomes applicable to other institutions that are required by fair value to mark their assets to market. Fundamental value differs from fair value in the following
The ethical issue in such an instance is the accountant reporting the true financial status of an organization in regards to the profit, liabilities and companies assets. It is easy for those accountants that are unethical to alter the financial records of a company. This makes the company seem to be doing well in the short term, but in the long run, it leads to failure of the company. The other ethical issue is a falsification of documents. Falsification of documents involves changing the details of the documents which are original so that they can appear real ( Bampton and Cowton, 2013, p.552).this is done with the aim of deceiving another person.
Revenue management is a scientific method that helps firms to improve profitability of their business. For many years, firms use revenue management to predict demand, to replenish inventory, and to set the product price. The benefit of revenue management can be found in a variety of industries, including airlines, hotels, and electric utilities. Dynamic pricing is a popular method of revenue management, especially when a firm needs to sell a given stock by a deadline. The goal of dynamic pricing is to increase the revenue by discriminating customers who arrive at different times.
Q4 - OE_Weaknesses What do you see as Delta’s particular weaknesses? "Again from an investment standpoint, in the past it has felt like sometimes they can be overly optimistic in terms of guidance, which is good in terms of setting a high bar for the company. But it can often leave investors more cautious on the underlying fundamentals of the business because of earnings revisions and estimate revisions, things like that, which then cause them to question their