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Securities Regulation Week 2 Class 2

Information and the market Efficient Markets? Regulatory apparatus Materiality. Securities Regulation Week 2 Class 2. Providing Information. Argument for Mandatory Disclosure. Coordination Problems Agency Cost Positive Externalities Duplicative Information Research.

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Securities Regulation Week 2 Class 2

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  1. Information and the market Efficient Markets? Regulatory apparatus Materiality Securities RegulationWeek 2 Class 2

  2. Providing Information Argument for Mandatory Disclosure • Coordination Problems • Agency Cost • Positive Externalities • Duplicative Information Research

  3. Extreme Inc. (Bonus Hypothetical) Providing Information EXTREME inc. wyoming Class Z “preferred stock” Mandatory disclosure?

  4. Providing Information How Does Information Disclosure Matter? EFFICIENT CAPITAL MARKET HYPOTHESIS (ECMH) In an efficient market, current prices always and fully reflect all relevant information about commodities being traded. Not just capital markets, but also commodities like wheat and other goods.

  5. Providing Information All information concerning historical prices is fully reflected in the current price. Current prices incorporate all historical information and all current public information. Prices incorporate all information, whether publicly available or not. Implication: Prices change only in response to new information. Efficient Capital Markets Hypothesis WEAK SEMI-STRONG STRONG Implication: If true, no identifiable group can earn systematic positive abnormal returns from securities trading.I.e., You can’t beat the market. Implication: Investors can not expect to profit from studying available information because market has already incorporated information accurately into the price.

  6. Providing Information Efficient Capital Markets Hypothesis All Information All Public Information Past Prices

  7. Providing Information New Demand at t =1+ Efficient Capital Markets Hypothesis Positive New Info Released at t=1 Market reacts at t=1+ $ Supply P1+ P0 In most cases, this adjustment is very rapid Demand at t =0 Quantity

  8. Providing Information Efficient Capital Markets Hypothesis Paradox of Efficiency If ECMH is true, why do analysts compete to find out information about companies before other analysts do?

  9. Providing Information Efficient Capital Markets Hypothesis TYPES OF MARKETS & INFORMATION 1. Weak 2. Semi-Strong 3. Strong TYPES OF EFFICIENCY 1. Informational 2. Allocational

  10. Providing Information Efficient Capital Markets Hypothesis P1+ is just an equilibrium price –what if investors have systematic biases? $ Supply P1+ P0 Quantity

  11. Providing Information Both dissipated Anomalies Anomalies that make sense: P/E effect Price to earnings ratio Low p/e stocks show positive cumulative abnormal returns Small capitalization stocks Showed positive CARs

  12. Providing Information Anomalies Anomalies that don’t make sense Seasonal effects Stocks show significant positive CARs in January and on Fridays Positive CARs for sunny days in New York Super Bowl effect Years in which a NFC (or pre-merger NFL) team wins the Super Bowl, stocks show positive CARs

  13. Investment Decisions Efficient market hypothesis is a theory about how information is reflected in securities prices At least for large exchanges, best evidence thus far supports semi-strong form: a. Security price reflects all publicly available information Price changes occur fairly rapidly (minutes or hours, not days) once information is released to public Informational efficiency is not the same thing as fundamental efficiency Summary

  14. The RegulatoryApparatus

  15. Federal Securities Laws Regulatory Apparatus SECURITIES EXCHANGE ACT OF 1934 SECURITIES ACT OF 1933 INVESTMENT COMPANY ACT OF 1940 INVESTMENT ADVISORS ACT OF 1940 TRUST INDENTURE ACT OF 1939 SARBANES-OXLEY ACT OF 2002

  16. Federal Securities Laws Regulatory Apparatus SECURITIES EXCHANGE ACT OF 1934 SECURITIES ACT OF 1933 INVESTMENT COMPANY ACT OF 1940 INVESTMENT ADVISORS ACT OF 1940 TRUST INDENTURE ACT OF 1939 SARBANES-OXLEY ACT OF 2002

  17. Federal Securities Laws Regulatory Apparatus SECURITIES EXCHANGE ACT OF 1934 SECURITIES ACT OF 1933 INVESTMENT COMPANY ACT OF 1940 INVESTMENT ADVISORS ACT OF 1940 TRUST INDENTURE ACT OF 1939 SARBANES-OXLEY ACT OF 2002

  18. Federal Securities Laws Regulatory Apparatus SECURITIES EXCHANGE ACT OF 1934 SECURITIES ACT OF 1933 INVESTMENT COMPANY ACT OF 1940 INVESTMENT ADVISORS ACT OF 1940 TRUST INDENTURE ACT OF 1939 SARBANES-OXLEY ACT OF 2002

  19. Federal Securities Laws Regulatory Apparatus SECURITIES EXCHANGE ACT OF 1934 SECURITIES ACT OF 1933 INVESTMENT COMPANY ACT OF 1940 INVESTMENT ADVISORS ACT OF 1940 TRUST INDENTURE ACT OF 1939 SARBANES-OXLEY ACT OF 2002

  20. Federal Securities Laws Regulatory Apparatus SECURITIES EXCHANGE ACT OF 1934 SECURITIES ACT OF 1933 INVESTMENT COMPANY ACT OF 1940 INVESTMENT ADVISORS ACT OF 1940 TRUST INDENTURE ACT OF 1939 SARBANES-OXLEY ACT OF 2002

  21. Federal Securities Laws Regulatory Apparatus SOX TIA IAA ICA SELF-REGULATORYORGANIZATIONS e.g., NASD, NYSE SA SEA

  22. Securities & Exchange Commission Regulatory Apparatus Corporate Finance General Counsel Market Regulation Chief Accountant InvestmentManagement EconomicAnalysis Enforcement MunicipalSecurities DIVISIONS OFFICES SECURITIES & EXCHANGE COMMISSION

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