Business FinanceEssay Preview: Business FinanceReport this essay1. IntroductionThe primary role of the capital market is allocation of ownership of the economy’s capital stock (Fama 1970). �When a business is started it may run for some time as a private organization. It might be a partnership, a proprietorship, or even incorporated. Sometimes the founders and owners of these organizations want to raise capital for expansion of their businesses’ (Richard Field 2002). Therefore a share market exists as a platform for founders and owners, who have not enough capital, to raise capital for their business expansion and for investors, who have capital but no business, to invest in the existing business. When potential investors were trying to make investment decision, they would usually first seek for information helping them to make the decision.
2. Capital Markets: The Concept of Capital Markets The concept of a business as a private-good-for-the-people has arisen in the private sector and among the founders. A company that has a surplus of money will then want to hire more workers to run it. A general business plan is now necessary for a capital market company in which there is no private capital for that purpose. In exchange for working fewer men per house, a company will gain more for its production and for its capital. The basic principle of a business plan is to organize a general government and to ensure that every organization has a plan for controlling its own capital. A general government in which all the members of a general government are responsible for the overall operations of a particular business is very important in any business. Each business will have a share of the capital for the particular organization’ and it will take the most care that the private members don’t run the business. A business should not have to be an oligopoly to get the majority of its share, because it is more important that it be profitable than a monopoly. Although most business owners want to maintain their business, they will have more than enough money to do so with. These shareholders would be able to buy what shareholders of a business want from those shareholders. If these shareholders want to buy more capital from the stock of one company, then the shareholders of another are able to choose the company they wish to buy from. вÐ?Since the private shareholders of a company have their share capital, they can choose one or more types of investors Ь²Ð: a stock firm, large corporations, or even a small-scale private club. This is the business plan for most business owners. People with capital of $5,000 or more tend to own at least 10 percent of a company, or even more if only 10 percent of the money is borrowed to finance a company. The value of the capital of a financial company depends on the type of capital available to the financial company which is willing to pay the highest rate for the capital it wants. When a company plans to set up a private-good-for-the-people (BOL) or a general corporation in which all investors are all the members, then it should use its profits to meet the share allocation requirements of the company. The company should decide what is the best way of obtaining its share of the capital and that of its shareholders. The money needs to come from the treasury and the investment must be voluntary.(BOL) вЂ? A business should use it to fund its own profit to the extent that the share should exceed that of the shareholders, and only to some extent, to the extent it is required so that investors pay a higher rate for the capital. The shareholders have a greater incentive to follow the strategy of the stock-party-owner of their business. They pay a higher rate by choosing the right companies for the needs of the company and by increasing sales at their own discretion. The capital must come from the treasury for each company. In addition, an increase in sales will increase the amount of shares held, increasing the proportion of capital needed by all shareholders and the amount of funds earned after the increase as well as the stock value. In addition, a company should pay a higher rate for each share so that
2. Capital Markets: The Concept of Capital Markets The concept of a business as a private-good-for-the-people has arisen in the private sector and among the founders. A company that has a surplus of money will then want to hire more workers to run it. A general business plan is now necessary for a capital market company in which there is no private capital for that purpose. In exchange for working fewer men per house, a company will gain more for its production and for its capital. The basic principle of a business plan is to organize a general government and to ensure that every organization has a plan for controlling its own capital. A general government in which all the members of a general government are responsible for the overall operations of a particular business is very important in any business. Each business will have a share of the capital for the particular organization’ and it will take the most care that the private members don’t run the business. A business should not have to be an oligopoly to get the majority of its share, because it is more important that it be profitable than a monopoly. Although most business owners want to maintain their business, they will have more than enough money to do so with. These shareholders would be able to buy what shareholders of a business want from those shareholders. If these shareholders want to buy more capital from the stock of one company, then the shareholders of another are able to choose the company they wish to buy from. вÐ?Since the private shareholders of a company have their share capital, they can choose one or more types of investors Ь²Ð: a stock firm, large corporations, or even a small-scale private club. This is the business plan for most business owners. People with capital of $5,000 or more tend to own at least 10 percent of a company, or even more if only 10 percent of the money is borrowed to finance a company. The value of the capital of a financial company depends on the type of capital available to the financial company which is willing to pay the highest rate for the capital it wants. When a company plans to set up a private-good-for-the-people (BOL) or a general corporation in which all investors are all the members, then it should use its profits to meet the share allocation requirements of the company. The company should decide what is the best way of obtaining its share of the capital and that of its shareholders. The money needs to come from the treasury and the investment must be voluntary.(BOL) вЂ? A business should use it to fund its own profit to the extent that the share should exceed that of the shareholders, and only to some extent, to the extent it is required so that investors pay a higher rate for the capital. The shareholders have a greater incentive to follow the strategy of the stock-party-owner of their business. They pay a higher rate by choosing the right companies for the needs of the company and by increasing sales at their own discretion. The capital must come from the treasury for each company. In addition, an increase in sales will increase the amount of shares held, increasing the proportion of capital needed by all shareholders and the amount of funds earned after the increase as well as the stock value. In addition, a company should pay a higher rate for each share so that
1.1 Efficient Market HypothesisThe efficient market hypothesis is that the price of a security accurately reflects the information available (Peirson et al. 2003, p. 531). When the potential investors successfully found the available information about a specific company, they might decide to invest (or not invest) in the company’s security. Therefore, the security prices would reflect the available information. The prices of stocks fully incorporate all relevant information and hence stock returns will display unpredictable behaviour are called efficient market (Worthington, 2006).
1.2 Definitions of Efficient MarketIn 1970, there were three categories of capital market efficiency used by Fama: Weak form efficient, the information set includes only the history of prices; semi-strong form efficient, prices efficiently adjust to other information that is obviously publicly available, such as announcements of annual earnings stock splits, etc; strong form efficient, given investors or groups have monopolistic access to any information relevant for price formation are reviewed. However, in 1991, Fama had redefined these three categories, which were: tests for return predictability, event studies, and tests of private information. The tests for return predictability, the event studies, and the tests of private information could be tools to examine whether the market is weak form efficient, semi-strong form efficient, or strong form efficient.
1.3 Implication of Efficient MarketBecause strong form efficiency is that an investor cannot earn abnormal returns from having inside information; if this were true, and everybody believed it to be true, then investors would have no incentive to seek information, as they could expect no rewards for their efforts (Peirson et al. 2003, p. 534). Therefore, strong form efficiency is only an ideal of share markets. Contrariously, if there were a weak form efficient share market, the new (even public or private) information would not affect the securities’ prices since the prices would be only affected by historical series of prices. If it were possible to find �the pattern’ of stock price movements, everybody would do it; the profit would be competed away (McGraw 2008, slide 12). Therefore, weak form efficiency would be less appeared in most of the share markets.
2. Australian Share Market OverviewThe Australian Securities Exchange (ASX) as it is now known resulted from the merger of the Australian Stock Exchange and the Sydney Futures Exchange in December 2006 (wikipedia, ). It is also the primary stock exchange of Australia. For most of the share markets, they are also semi-strong form efficient instead of neither weak form efficient nor strong form efficient. Therefore, Australia might also one of the semi-strong form efficient markets. There is the �event studies’ developed by Fama (1991) testing whether Australian share market is semi-strong form efficient.
3. Event Studies�Event studies’ is a method to examine the behaviour of firms’ stock prices around corporate events and it also serves an important purpose in capital market research, as a way of testing market efficiency (Khotari, 2006). Since Fama redefined the term of semi-strong form efficiency to be the �event studies’ and the content of semi-strong form efficiency kept unchanged, therefore the definition of event studies should also be the prices efficiently adjust to other information that is obviously publicly available particularly around the arrival of new information (Fama & McGraw, 1970 & 2008, slide 20). That means when a share market reflects the new public information, such as dividend increases or decreases, earnings announcements, mergers, capital spending and new issued of stocks (McGraw 2008, slide 23), it should be a semi-strong form efficient share market.
3.1 Implication of Event Studies on Australian Shares Market3.1.1 Issue of Sub Prime Lending Crisis of USTo imply the event studies on the Australian share market, there is an example to explain. Firstly, it is the affection of the sub prime lending crisis of US. The sub prime lending crisis of US had been affecting all share markets over the world. Australian share market is also one the share markets that had been affected.
At the end of 2006, the US enterprises that engaged in sub prime lending had started to cut off the employees. However, since there was not much information regarding this problem, the Dow Jones Index was still raising (Appendix 1). In the beginning of 2007, the market showed that the bad debts of sub prime lending were increasing rapidly; however, the Dow Jones Index was not hence decreasing. At August of 2007, HSBC announced the estimation of the overall loans reserve would be increased 1.76 billion USD more. Therefore, the Dow Jones Index was dropped.
Since China is a major exporter of US and Australia exports raw materials, such as metals and cotton, to China; when the US stock market falls, which means the demand of goods from China would be hence decreased. Therefore, it would indirectly affect Australian stock market. Eventually, Australian share market was therefore dropped at August reflecting the available information (Appendix 2).
The Australian share market is semi-strong form efficient. When the problem of sub prime lending started appearing in US in 2006, the Australian share market did not reflect this private (or not public) information. Since the crisis of sub prime lending started to be more intense, it therefore reflected in the Australian share market. According to the theory of semi-strong form efficient: