Download - 2012 FinCom Session 2
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Reporting and financialcommunicationSkema - MSc Finance - 2012
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Agenda
Regulatory framework
1. General organisation of the Stock Exchange
2. Market players
3. Regulatory environment : European Directives & AMF
4. Valuation models and key consequences for the corporation
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General organisationof the Stock Exchange
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General organisation
Financial Market Authority (AMF)
Marketinfrastructure
trading
clearing
centralcustody
Issuers /Companies
IPO
Share issue
Bond issue
Public offersetc.
Financialintermediaries
Brokers
Banks
Custodians
Assetmanagement
Mutual funds
Hedge funds
Private Equity
Press & News agencies, Media & journalists, Internet,Financial Analysts, Rating agencies 4
Cash flow
Newsflow
Client /Institutional
investorInsurance
Mutual funds
Pension funds
Sovereign funds
Independentfinancialadvisors
Client /retail investor
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The Stock Exchange is a company
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NYSE Euronext is a Limited Companypublicly traded
Regulated activity: its business fallsunder European and domesticregulations
NYSE Euronext provides its customerswith a secured transactions system
\ Allowing to buy and sell a wide range of
selected products: equity, debt, bonds,trackers, warrants
\ Fixing prices based on the order book
\ Guaranteeing safe transactions
Selected clients
\ Only approved intermediaries (brokers)are allowed to enter transaction ordersinside the mega IT system
\ Every other players (private andprofessional investors) shall go throughthose providers
Selected products
\ Only approved products can be traded
on the system
Transactions fees
\ Higher traded volumes mean higherturnover, no matter the way market goes
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A competitive company
NYSE Euronext is competing withother financial markets:
\ Europe : London, Frankfort, Madrid,Milan
\ USA : Nasdaq
\ Worldwide : Tokyo, Hong-Kong, Shanghai,Rio, New Delhi
In theory
\ Investors go for the lowest transactioncosts
\ Companies go for the highestconcentration of investors
\ High trading volume allow economy ofscale and cost cutting
Actually:
\ Investors go for the highest growth
prospects\ Companies get listed:
where there business is located
where there is cash available
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For the past 10 years,Stock Exchange companies tend toconcentrate worldwide
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A transforming company
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Bourse de Paris
+
Brussels StockExchange
+
Amsterdam Stock
Exchange
=
2000 2002
+
Lisbonne Stock Exchange
+
+
+
+
+
2007 2011
?
= = =
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Euronext ParisMarket structure
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Euronext ParisIndexes
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CAC Allshares
(500 companies)
Total Euronext list
(about 900 shares)
SBF 250
CAC 40
SBF 120
CAC Small&Mid190
Key figures
Highest market cap :Total 95 billon
Lowest market cap :
95%
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Trading system
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Trader
OrdersCollected
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Market players
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Brokers / traders
Brokers
\ approved by Euronext to executetransactions
\ Fees on trading on behalf of investors
\ May trade for their own interest
They participate to marketefficiency
\ Counterpart provided
\ Anonymous trade guaranteed
\ Liquidity improved
\ Information provided
4 main activities
Traders: ongoing trading on markets
Sales: direct contact with investors tokeep them informed and suggest ideas
Research: financial analysis, forecast,valuation and recommendation
Corporate: in charge of marketoperations (IPO, share issuance)
Marketing / Corporate access : organisemeetings between investors and issuers
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Institutional investors
Professional asset managers
\ International leaders in assetmanagement
\ Independent specialised asset managers
\ Portfolio managers for private investors
They work on behalf of:
\ OPCVM funds of funds
\ Insurance companies, pension funds,mutual funds
\ Private investors
Mutual funds (SICAV & FCP)
Manage the money of third parties
Collected via banks, insurance,independent financial advisors
Or via corporations (employees savingplans)
Banks, insurance
Can also invest their own equity
Private Equity
Pension funds
Manage the money of third parties
Mainly foreign investors
Average holding period: 1 year
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Employees shareholders
More and more employeesare shareholders
\ Directly: totally free
\ Via FCPE (company saving plans):5-year lock-up
\ Capital increase dedicated to employees
\ Public-to-private operations
\ Stock-options, free shares
For employees share plan is often seenas part of the compensation package
\ Highly sensitive to price changes, which may
impact the social context within the company\ Risk that employees would sell heir share at the
end of the lock-up period
Company saving plansare widely SRI oriented.
2 million employees shareholders
80% of CAC40 companies
representing 3% of the CAC 40
Employees interest may sometimesbe in conflict with shareholdersinterest
Employees know little about theStock Exchange
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Media
Press agencies:Reuters, Bloomberg, Dow Jones,AFP
\ Very wide audience
\ Main aim: inform quickly
\ Flash news from agencies may be the firstto hit the market, before the official PR
Daily press, finance and economy:Echos, Tribune, Figaro, FinancialTimes...
\ Audience: investors & analysts, economicenvironment (banks, providers, clients)
\ Main aim : information put intoperspective
with previous disclosure
with other sector information
Wealth press:Investir, Le Revenu
\ Audience : private investors
\ Main aim: provide investmentrecommendation
\ Ongoing contacts with financial analysts
Websites:Boursorama, boursier.com,Cerclefinance
\ Audience : private and insitututionalinvestors
\ Main aim: attract their audience
\ Mainly aggregated content
Other media: TV, radio, local press,business press
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Rating agencies
Dedicated to bond market
\ analyse companies that have issued debt
\ evaluate the solvency riskfor each company and for each kind ofbonds.
\ the rating is key for financing cost
They are dedicated to investors butpaid by issuing companies
\ Avoidable conflict of interest
\ Now put into light with the subprimes, andnow with State debt crisis.
Always disapproved, they are stillkey for many investors
3 main agencies
Fitch
Moodys
Standard & Poors
Notation system
Investment grade : AAA - BBB-
Speculative grade : BB+ - D
Institutional investors can only buyinvestment grade products
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Extra-financial rating agencies
They are dedicated to SociallyResponsible Investment (SRI)
\ Company analysis based onenvironmental and social criteria, andgovernance
\ Methodology and valuation models are
not standard
\ Data collection is made from publicdocumentation
They provide a rating that issometimes used by analysts and
investors
Their impact on share price andvaluation is difficult to measure
\ No real financial theory on this subject
\ Some investors have decided to eliminatelow rated companies
Many local and global agencies
No standard methodology
New requests as for the informationprovided
Making new set of reportingnecessary within corporations
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A widely diverse audience
The publicly traded company has to communicate with very heterogeneousaudiences, according to:
\ Their investment style and time scale
\ Their centre of interest and their level of understanding
\ Cultural patterns
With a guarantee of equal treatment for all
\ timing : communicate to all the same time
\ dissemination means
\ and quality of information
While securing its own interests
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Regulatory environment :
European Directives & AMF
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Regulation
Every financial markets operate within a regulatory and legal framework
\ Framework may be more or less stringent
\ If more stringent, listing and transaction costs grow heavier for every market participant
\ If less stringent, investors may face higher risk in areas such as minority shareholdersprotection, information transparency, market abuse
Every major financial markets worldwide are under the supervision of nationalindependent authorities dedicated to:
\ Define the regulatory framework of transactions
\ Agree and supervise every market participant:companies, brokers and investors
\ Monitor market operations and transactions
\ Investigate and sanction if necessary
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European Regulation integration process
European integration speeds up the market consolidation
\ The adoption of the single currency has fostered cross-border consolidation of the financialindustry
\ With the Economic Union, pan-European industrial groups have emerged\ Many financial affairs have been reported in the recent years, which led to ever tighter
regulatory and legal constraints imposed on every participant
The European Commission is committed to create a unified European capitalmarket
\ Many dedicated Directives: Market Abuse, Transparency, Mifid, IFRS, Prospectus, StatutoryAudit, Investment Services
\ Launch of a new pan-European Authority: ESMA
With the aim to ensure standardised transparency practise and marketefficiency throughout the EU
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New European organisation set up in 2009
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Regulation framework
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Domestic lawCode of Commerce : applies to every companyPublic offering status : specific obligationsAd hoc Laws and Acts : Grenelle, TEPA, NRE
Domestic Authority
Regulation power : General Regulation of the AMFAgreement of investors, brokers, intermediates, listed companies, productsSupervision of markets, transactions, informationPowers of sanction
European Law
Directives & Regulations : Market Abuse, Transparency, Mifid, IFRS, Prospectus,Statutory Audit
Adoption of IFRSApplies to all EU countries, after being transposed into national law
International practisesAccounting standard convergenceCo-ordination between regulatory authorities : IOSCO (OICV)Political Co-ordination : G8, G20
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AMF ID
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Established in 2003(Loi de Scurit Financire)
\ Merger of the Commission des oprations
de bourse (COB), the Conseil desmarchs financiers (CMF) and the Conseilde discipline de la gestion financire(CDGF).
Objective:
\ To strengthen market supervision after the
bursting of the internet bubble\ And to give it greater visibility.
Main functions :
\ to safeguard investments in financialinstruments and in all other savings andinvestment vehicles;
\ to ensure that investors receive materialinformation;
\ to maintain orderly financial markets.
Organisation
\ AMF is an independent public body with legal
personality and financial autonomy.
\ AMF is led by an independent college of qualified
personalities and includes a Sanction Committee
\ AMF is financed by fees due by listed companies
and asset management
\ Approx. 400 staff
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AMF mission statement
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RegulationRegulations approved
by the Ministry ofFinance
Instructions andrecommendations
Advisory opinions
AgreementEvery kind of Public Offer:
sale, bid, exchange,repurchase
Ensures that all the requiredinformation is available
(Prospectus/InformationNotice)
Gives no opinion on thequality nor the opportunityof operations approved
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AMF mission statement
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Supervision
Potential stock market
offences (insider trading,price manipulation, breachof duty to discloseshareholding interests)
Information disclosed bylisted companies: schedule,content, misleading
information
broad investigative powers
Sanction
Injunctions
Administrative penalties(
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AMF mission statement
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Communication
Annual report to the
President of the Republicand to Parliament.
Monthly bulletin
Documentary base
Education materials
Ombudsman (mdiateur)
Co-operation
the Parliament
the Government
the Legal Authorities
professional associations
foreign counterparts
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Categories of Regulated Information anddisclosure deadlines
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Annual financial report (Registration Document) 4 months
Half-yearly financial report 2 months
Quarterly financial reporting 45 days
Corporate governance and internal control procedures report 4 months
Statutory auditors compensation 4 months
Total number of voting rights / shares making up the share capital 1 month
Share buyback programme 1 month
Weekly statements on share buybacks 7 days
Press release related to the AGM 35 days before
Press release related to the prospectus in case of an issue of afinancial instrument
asap
Permanent information / privileged information asap
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Examples of primary information providers
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http://www.hugingroup.com/ir_distributionservices.aspx?lang=en-UShttp://www.hugingroup.com/ir_distributionservices.aspx?lang=en-UShttp://www.lesechoscomfi.com/http://www.lesechoscomfi.com/http://www.lesechoscomfi.com/http://www.latribunewire.com/http://www.latribunewire.com/http://www.businesswire.com/portal/site/home/http://www.businesswire.com/portal/site/home/http://www.actusnews.com/http://www.actusnews.com/ -
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http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/ -
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Content
Annual ReportFY + 4 months
Annual accounts (parent company & consolidated)
Board meeting report
Persons responsible for the document
Auditors reports
Chairmans report on Internal Control procedures
NRE law information (social & environment information)
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Transparency Directive
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Content
H1 reportH1 + 2 months
Digest consolidated accounts
H1 Board meeting report
- H1 main events and impacts on accounts
- Main risks and uncertainties for H2
- Transactions between related parties
Persons responsible for the document
Auditors report
Transparency Directive
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Content
Quarterlyinformation
Q1, Q3 + 45days
Main events during the period and impact on the financial
situation of the issuer.
General comments (could be only qualitative) on theconsolidated financial situation of the issuer.
Turnover breakdown by IFRS business segment and byquarter + cumulative approach
Transparency Directive
No obligation to release full quarterly accounts
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Aim of the Prospectus Directive:
\ to provide investors with information necessaryto enable them to make an informedinvestment decision
\ to facilitate cross-border operations thanks toa single passport
What is a Prospectus ?
\ In the case of a Public Offer of Securities on aRegulated Market, a specific set of informationis required
Information about the issuer
Information about the operation
\ The Prospectus is valid only when approved bythe competent supervisory authority of thecorresponding EU country.
Prospectus Content
\ Prospectus = Registration Doc. + Note on thefinancial instruments to be issued + summary
\ Agreement process: draft prospectus issubmitted for approval by AMF (check amongothers if the needed documentation isincluded). operation cannot start before it
gest the agreement number
\ Dissemination process : should be madeavailable free of charge to anybody asking forit (press, web site, hard copy, AMF, )
Single Passport
\ Once a Prospectus have been certified by
one supervisory authority, it is regarded asvalid in all EU countries
\ Companies can then issue securities in foreigncountries (ex. a listed company in Franceissuing bonds in the UK)
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Prospectus DirectiveFrom July 2005 for listed companies on a regulated market
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1. Persons responsible for the referencedocument
2. Statutory auditors
3. Selected financial information
4. Risk factors
5. Information about the issuer
6. Business overview
7. Organisational structure
8. Property, plant and equipment
9. Operating and financial review
10. Capital resources
11. Research and development, patents andlicences
12. Trend information
13. Profit forecasts or estimates
14. Administrative, management and supervisorybodies and senior management
15. Remuneration and benefits
16. Board practices
17. Employees
18. Major shareholders
19. Related party transactions
20. Financial info. concerning the assets andliabilities, financial position and P&L of theissuer
21. Additional information22. Material contracts
23. Third party information and statements byexperts and declarations of any interest
24. Documents on display
25. Information on holdings
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Prospectus DirectiveRegistration Document : table of contents : appendix 1 of EC regulation 809/2004
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Market Abuse DirectiveFrom April 2004 for listed companies on a regulated market
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Aim of the Market Abuse Directive:
\ to improve the rules relating to market integrity throughout the EU.
\ to restore confidence on the financial market, after the burst of the Internet bubble.
\ to preserve the competitiveness of European stock exchanges
Consequence : Implementation of an European legal framework to uniformthe concepts, the definition and the obligation
\ Inside information
\ Market manipulation
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Market Abuse DirectiveFrom April 2004 for listed companies on a regulated market
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Market manipulation :
\ (a) transactions or orders to trade:
which give false or misleading signals
about demand, offer or price of anasset
which secure the price of an assetat an abnormal or artificial level,
\ (b) fictitious transactions or orders, or anyother form of deception or contrivance;
\ (c) dissemination of information through
the media, including the Internet, whichgives false or misleading signals,including rumours and false or misleadingnews
Inside information :
\ information of a precise nature which hasnot been made public, relating, directly orindirectly, to one or more issuers of
financial instruments
\ and which, if it were made public, wouldbe likely to have a significant effect onthe prices of those financial instruments orrelated derivative.
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Examples of market manipulation
Secure a dominant position over the supply of or demandin order to fix, directly or indirectly, purchase or sale prices
the buying or selling of financial instruments at the close of the marketwith the effect of misleading investors acting on the basis of closing prices,
taking advantage of occasional or regular access to the traditional or electronic mediaby voicing an opinion about a financial instrument (or indirectly about its issuer)while having previously taken positions on that financial instrumentand profiting subsequently from the impact of the opinions voiced on the price of thatinstrument, without having simultaneously disclosed that conflict of interest to the publicin a proper and effective way.
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k t b i ti
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Market Abuse DirectiveManagement of inside information
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inside information (released through the regulated information process)
\ Whenever an issuer has precise information at its disposal concerning itself, that would havea material impact on the share price if it were known by the market, the disclosure of thatinformation to the public is necessary as soon as possible.
\ An issuer may under his own responsibility delay the public disclosure of inside information,such as not to prejudice his legitimate interests provided that such omission would not be
likely to mislead the public and provided that the issuer is able to ensure the confidentiality ofthat information.
The issuer is required to establish and keep updated an inside information list
\ All persons having access to inside information.
\ It could be composed of employees (finance department, development, executivecommittee, ) and external stakeholders (auditors, lawyers, .).
\ It has to be sent to the AMF upon request
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E ti t t ti
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Executive management transactionsGeneral Regulations of the AMF - from 2005
Regulation is set up to prevent insiders trading and market manipulation
Executive management and board members are always insiders
They are submitted to specific disclosure rules
\ Transactions shall be declared to the issuing company and to the AMF
(7 trading days notice after the execution of the transactions)\ A summary of those transactions shall be included in the Management Report part of the
annual report
A wide range of persons is subject to this regulation
\ Board, Executive Committee, executive managers
\ Their family members: parents & children or other members living in their house\ Any company or legal entity related to them (holding, trust)
A ti h i
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Anti-rumour mechanismGeneral Regulations of the AMF - from October 2006
In the case that the market in an issuers securities shows significant unusualvariations in price or volume
AMF is entitled to to request that any entity in respect of which there isreasonable cause to think that it is preparing a takeover bid make adeclaration of intent
\ If the concerned entity denies to prepare such operation (or fails to answer),that entity may not launch an offer on the company concerned before 6 months
\ If the entity declares its intention of making a takeover bid,it must release a PR detailing the characteristics of the bid within the time set by the AMF.
\ Failing this, the entity is deemed to have no intention of making a takeover bid.
The publication of the PR marks the beginning of the pre-offer period.
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Valuation modelsand key consequences
for the corporation
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Wh t d i t d b t?
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What do investors wonder about?
What does the company?business, sector, size, position on market,geographic footprint
Who controls the company ?identity, financial soundness,shareholders intentions, topmanagement, auditors
Is the company profitable ?profitability level and ratio, debt
position, dividend policy
What are the companys prospects ?macro-economic projections, marketgrowth, competitive advantage...
How is the company stock marketevolving ?who are the buyers/sellers, whichfrequency, which way, how much is itvalued by the market
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Growth Profitability Gearing Dividend Cash Capex Prospects Price
Wh t i th i t t i
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What is their constant aim:estimate the fair value of any asset class
3 major valuation methods
\ Historical value of assets + sum-of-the-parts
\ Relative value models determine value based on the observationof market prices of similar assets
\ Absolute value models that determine the present valueof an asset's expected future cash flows (DCF method)
Every method rely on a wide range of information and hypothesis
\ Reliability and integrity of financial information
\ Good understanding of activities and strategic issues
\ Growth prospects / competitive environment
\ Business plan
By nature, management is better informed than investors=> information asymmetry
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Case st d
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Case study
Zodiac
Beneteau
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Conclusion
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Conclusion
Financial communication aims to address investors concerns
\ What is the fair value of the company?
\ Is there a gap between the fair valkue and the stock price?
While preserving specific interest:
\ of the company: confidentiality, financing costs
\ of the majority shareholders: valuation and control
\ of the staff members: employees share plans, impeachment process
And making sure they comply with the legal and regulatory framework