financial activities & market effecient (mahabub) (2)

WELCOME

OUR PRESENTATIONTO

FINANCING ACTIVITIES AND

EFFICIENT MARKETS

FINANCING ACTIVITIES AND EFFICIENT MARKETS

Efficient Market ; Market Prices are Fair ; Investors Have Other Alternatives; Firms can’t Regularly Deceive the Market; Real Vs Financial Markets; International Perspective.

Efficient Market

Efficient Market :“An efficient market is a market which incorporates all currently available information when determining price”.

Efficient Market Hypothesis :Impossible to ‘beat the market’

Because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Forms Efficient Market :

Market prices reflect:

Forms of market efficiency Past market data

Public information

Private information

Weak form of market efficiency Semi-strong form of market

efficiency

Strong form of market efficiency

Forms Efficient Market :

Market Prices are Fair

Market Prices are Fair: Market Price: Amount at which an asset would change hands between two parties, where both have knowledge of the relevant facts. Also referred to as market price.

This is simply a different way to say that an efficient market correctly prices assets. The important implication here is that

differences among financing alternatives-from a price standpoint-are more apparent than real.

Investors Have Other Alternatives

Investors Have Other Alternatives

When the firm’s financial alternatives are being considered, the firm should Remember that investors have their own set of alternatives.

Investors will not pay any premiums for financial securities.

Investors have some alternatives those are:-1. Stockholders prefer debt financing or equity financing for wealth maximization.2. Stockholders prefer generous dividend payouts or lower Payouts with more reinvestment in the firm.

Financing Timing is Difficult!Timing of financing is difficult for the company for the efficiency of market.

When the firm is trying to decide when to issue securities, its attempts to predict the best time to issue often will be frustrated because nobody knows what will be or not in the future.

When financing time is difficult:-1. Firms don’t want to issue new bonds when interest rates are high.2. Firms don’t like to issue new common shares when their stock price are lower from the normal levels.

“Firms can’t Regularly Deceive the Market”

?Why

“Firms can’t Regularly Deceive the Market”

Price of assets are fairly mention or fairly disclosed to the market.

Relevant information used by the market.

Strong management.

managers, auditors catches the cleaver people who committed fraud.

Documents are fairly presented.

Real Vs

Financial Markets

Real versus Financial Assets

• Real Assets• Used to produce goods and services: Property,

plant & equipment, human capital, etc.

• Financial Assets• Claims on real assets or claims on asset income– “Money market” instruments (< 1 year to maturity)

• Bank certificates of deposit, Treasury bill, commercial paper, etc.

– “Capital market” instruments (1+ year to maturity)• Stocks, residential mortgages, long-term bonds, consumer

loans, etc.

Bank BorrowerLender

Money

Financial Instrument A:

e.g. Mortgage loan

Financial Instrument B: e.g. Deposit

Money

Financial instrument A is ‘issued’ by the borrower and is essentially a claim on borrower’s future income or asset. Financial instrument B is ‘issued’ by the Bank and is essentially a claim on Bank’s future income or asset.After financial instrument A is issued and sold to the Bank, it becomes a financial asset of the Bank.After financial instrument B is issued and sold to the lender, it becomes a financial asset of the lender, the liability of the Bank.

Real versus Financial Assets

• All financial assets (owner of the claim) are offset by a financial liability (issuer of the claim).

• When we aggregate over all balance sheets, only real assets remain.

• Hence the net wealth of an economy is the sum of its real assets.1

International Perspective Capital Market

Globalization in Capital Market 2

Attraction of the Global Capital Market?

• Increases the supply of funds available for borrowing.

• Borrower’s perspective– Lowers the cost of capital.3

• Investor’s perspective– Provides a wider range of investment

opportunities.– Favorable tax status.– Few disclosure requirements.

Effects of International Investment

ConclusionThis is all of my presentation. Thank you for listening me for a long time. If we have made any mistake, please pardon me. And If you have any further question on my topics, you can ask me.

Good Bye

The End