Stock Exchange Listing Advantages
Disadvantages of Regulation
Introduction to capital markets
Market Index
Market Index:Share prices reflect
all past information
Semi-Strong Form:Share prices reflect
all publicly available
information
Three levels of efficient markets
Strong Form:Share prices reflect
all information
Measuring Share Return
Market Return and Market-Adjusted
Return
Role of accounting in an efficient marke
Understanding the concept of market efficiency
Abnormal Return
Known cash flows
1）Certainty
2）Uncertainty
1、Under ideal conditions
Risk-Adjusted Return
Known interest rates
Known cash flows
Known interest rates
Known states of nature
Known probabilities of states of nature
Uncertainty relates to the occurrence of a
particular state of nature
Under ideal conditions:
.The Balance Sheet always reflects the intrinsic
value of a company's assets
. The value of assets is the present value
(expected present value, under uncertainty) of
future cash inflows from the assets
Since future cash flows are known, the PV of
future cash flows is always equal to the
theoretically true PV of future expected cash
flow.
The income statement always captures the
"true income" generated during the period
While financial information is relevant and
reliable, it does not tell us anything new
Financial statements can always be perfectly
predicted at any point in time
Valuation is trivial
There is no demand for equity analysts or
accountants
Market efficiency is a relative concept
Expectations are on average unbiased
Today’s price tells you nothing about
tomorrow’s price
Market prices follow a random walk
Price changes only likely where there is
unexpected information
This means that only accounting information
that affects expectations of future
cash flows is priced
All information will be used, full disclosure
improves the prediction of future
cash flows
Accounting
Standards
Efficient markets and intrinsic valuation
Measurement Error
Accounting policies only matter if they have
cash flow implications
Management Estimation Errors
Opportunistic manipulation of accounting
numbers
Disclosure of policies on a timely basis is critical
More disclosure, less concern about inside
information
WEEK 1: Introduction
2、Under non-ideal conditions---mearsurement
issues
Information asymmetry occurs when one party
to a transaction is at an informational
disadvantage to the other
Type of information asymmetry where one
party has an information
advantage over the other and withholds this
information
complete
Financial information faithfully represent
economic phenomena if it has three
characteristics
WEEK 2: Capital Market Analysis
Adverse Selection
Type of information asymmetry where a party
to a transaction can observe
her/his action, but the other cannot.
Monitoring cost
Bonding costs
neutral
free from item
1、Missing comparability
Moral Hazard
2、Verifiable
There are other four enhancing characteristics
3、Timeless
Principal (shareholders) own the company, but
do not run the business. That is delegated
to managers (agent) who have more
information about the state of the business
than the
principals
agency costs (welfare reductions)
Because of non-ideal conditions.
*Relevance and reliability must be traded off
Cannot have relevant and reliable information
at the same time
implications for standard-setters
*Recognising or disclosing an asset/liability
Measuring an asset/liability
4、Understandably
Statement of Financial Performance (Income
Statement)
Includes revenues and expenses based on
accrual accounting
Voluntary Disclosure
Disclosure
Statement of Financial Performance (Income
Statement)
Includes revenues and expenses based on
accrual accounting
Mandatory Disclosure
3、Financial statements
Fixed Pay Contracts
Compensation contracts
Statement of Cash Flow
Includes cash transactions including cash in and
out from operating financing, and investing
activities
Information asymmetry and agency costs
Performance-based Contracts
Managers (insiders) have access to all financial
and other proprietary
information related to their company
Opportunistic use of information to benefit at
the cost of less informed investors
key profit drivers (return elements)
firm specific, and involves
Current performance
profit potential
Outsiders’ (shareholders, and other external
stakeholders such as
debtholders) can only access company related
information through
management’s information disclosure
Mandatory disclosure
Voluntary disclosure.
business risks (risk elements)
Access to financial and other information
Forecasted future performance
Its external environment
A firm’s profit potential is determined by:
Reducing Agency Costs: Capital Market
Disclosures
ACF 5130 财报
Measurement of information asymmetry
Industry choice
Strategic choices
Competitive positioning and strategy
Business Analysis: Overview
Good News/Bad News Disclosure
Easier access to capital for such companies
Such firms comparatively have higher valuations
The level of disclosure in a firm’s annual report
(or else where) reduces information
asymmetry.
The reduction in information asymmetry
reduces cost of equity and debt financing (cost
of equity and cost of debt) because of the
consequent reduction in risk.
Technology: e.g., Internet, Big Data, AI. etc
Valuation Implications of Disclosure
Measuring Information Asymmetry: BidAsk Spread
Measuring Information
Asymmetry
Economic factors: e.g., GDP, inflation rates,
unemployment levels, exchange rates,
interest rates
Analyst Following
Investing on a hunch; no analysis
Intuitive Investing
Basic notion is that market prices reflect
intrinsic values
Passive Investing
Market factors: e.g., geographic markets,
regional economic integration, tariff and trade
agreements
Understanding how macro-economic factors
affect firm performance
TEMPLES framework
Political factors: e.g., key legislative changes,
the effect of a new government, changes in
tax policy
Investing Styles and
Equity Analysis
Fundamental
Analysis
Legal factors: e.g., regulation and compliance
Valuation approaches
Environmental factors: e.g., carbon emission by
steel plants
Active Investing
Society factors: e.g., demographics (Rio Tinto
and cave destruction).
Understanding the industry in which the firm
operate is vital.
Aggressive price competition
Varying degrees of competition among firms:
Basic Idea of Intrinsic Valuation
Non-aggressive price competition
Pushing prices towards (or below) the marginal
cost of production
Co-ordinated pricing
Non-price dimensions of products/services can
also play a role
Rivalry among existing firms
分支主题 3
Industry growth rate
Concentration and balance of competitors
Determinants of the intensity of competition
among existing firms:
WEEK 3：Business Analysis
Degree of differentiation in products/services
and switching costs
Scale/learning economies and ratio of fixed to
variable costs
Excess capacity
The threat is higher for profitable industries
Degree of Actual and Potential Competition
The threat is higher when the barriers to entry
are lower.
Threat of new entrants
Understanding how industry-wide factors
affect firm performance
Porter’s Five Forces Analysis
Porter’s Five Forces Analysis
Threat of substitute products/services
Some industries are susceptible to product
substitution especially in periods of economic
downturn.
Bargaining power of buyers
Bargaining Power in Input and Output Markets
Bargaining power of suppliers
Which industry does Wesfarmers operate in?
Limitations of Industry Analysis
Are all the five forces equally relevant?
Competitive positioning/strategy;
The industry is not the only factor that affects
profitability of companies operating in that
industry.
Corporate strategy
Effective cost controls enable same products
to be offered at a lower cost
Their products usually have more elastic
demand
They operate in highly competitive environment
Economies of scale
Understanding business strategy
Economies of learning
Cost leadership
They are less innovative (less R&D)
They sell more traditional products
Tighter controls through more comprehensive
corporate governance
Two types of strategy:
They usually offer less stock-based
compensation to their executives.
Innovation enables value-added product
differentiation
Product differentiators are innovative reflected
in their higher R&D.
Product differentiation
Their products require higher advertising to
make their products known
They have highly skilled employees which may
be reflected in the salary and
remuneration levels
They usually offer higher stock-based
compensation to their executives.