Case of Study Dot-Com Crash of 2000
What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of the capital market? * Investors: Trade with proper education and information. * Investment Banks (underwrites): provide advisory financial services, helped the companies price their offerings, underwrite the shares, and introduce them to investors, often in the form of a road show. Entrepreneurs and existing companies: their like to attract saving from savers to fund their business ideas Companies, but entrepreneurs typically have better information than savers on the value of business investment opportunities. Secondly, communication by entrepreneurs to investors is not completely credible because investors know entrepreneurs have an incentive to inflate the value idea. Capital Markets: provide a way for connect individuals and institutions who want to invest and companies which need capital. The public market should make a proper valuation of the companies which want to do an IPO, because that will effect on all intermediaries.
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Regulators (SEC, Financial Accounting Standards Boards – FASB): they are agents regulatory with mission of regulate the financial reporting of public companies and establish standards of financial accounting. Intermediaries: because the entrepreneurs typically have better information than savers on the value of business investment opportunities and communication by entrepreneurs to investors is not completely credible because investors know entrepreneurs have an incentive to inflate the value idea. The role these intermediaries are to close this gap of information. * Venture capitalists: the principal job is to screen good business ideas and entrepreneurial team from bad ones. Brokers, Financial planners and the media: inform and tray to close the gap of information between parts.
Portfolio managers and Buy-side Analysts: they have to act on behalf of investors and helping them to buy companies that are fairly priced and sell companies which are overvalued (industry research). * Sell-side Analysts: they have to monitor the performance of public companies and determine whether or not their stock are good or bad investment at any point in time. Additionally, they provide research to buy-side before the company go to public. Investment Bankers, Sales Force and Trades: they have to provide their expertise in helping companies to go public and introducing them to the investors. * Accountants, Auditors and Lawyers: Audit the financial statements of companies and evaluate if they comply with establish standards and represent the true states of the firms. This give to the investors and analysts the confidence to make decisions based on these financial documents. 2. Are their incentives aligned properly with their intended role? Whose incentives are most misaligned?
No, in fact some incentives are misaligned, such as: the payment of commission to investment banks based on the amount of money that the company managers raise in its offering (around 7%). Additionally, the auditors because they received payment form the same company which they are evaluating. 3. Who, if anyone, was primarily responsible for the Internet stock bubble? Venture capitalists, because they was influenced by the ebusiness euphoria in the market and bring public companies with questionable business models, or not yet proven themselves operationally and sustainability