Monday, December 9, 2019
Principles of Managerial Finance Methods
Question: Discuss about the Principles of Managerial Finance Methods. Answer: Introduction: This study deals with managerial finance and its usefulness in the financial markets (Pratt 2013). In this assignment, proper emphasis has been given on understanding impose of short selling restrictions on financial securities by the financial market regulators. This background of the top selected decides whether restrictions had been successfully achieved for the purpose. The main purpose was to curb excess stock price volatility. The main objective of the report is to elucidate the reasons behind the restrictions imposed on short-term securities (Weil, Schipper and Francis 2013). There are certain findings that have been undertaken by using secondary sources of information such as journal articles. For evaluation purpose, six academic journal articles are selected that gives an overview of explanation to the research topic on how the restrictions on short selling was successful on curbing the excess stock price volatility (Saunders and Cornett 2014). Financial market regulators compulsory short selling limitations on financial securities The expression short selling has different meaning in diverse jurisdictions. Market practices even vary in diverse markets. It is necessary for understanding constitute of short selling activity as a consistent approach to short selling (Deegan 2013). Regulatory tools used for controlling short-selling activities In order to mitigate the risk associate with short selling, Market Authorities had imposed various tools like price restriction rules for exercising various levels of controls in the short-selling transaction chain. Most of the jurisdictions even adopt control that restrict short-selling whereas other permit short-selling. For instance, National Market Authorities had believe the fact that failed trades arise from marketplace making behavior that are not subject to severe resolution requirements but rather allow more time for closing out positions because of unsuccessful trades. It is argued that short selling is subject to margins like price restraint rules or pre-borrowing requirement whereby the National Authorities considers creation of exceptions to the limitations for the activities. As rightly put forward by Deegan (2013), short selling is apparent for gaining main advantages of facilitating in a more rapid pricing structure of overestimated securities. The other regulatory concern is that short-selling is used for assisting the market mistreatment. It does not mean that short selling is offensive in itself. Financial regulators often constitute manipulative activity that varies between jurisdictions (Gitman, Juchau and Flanagan 2015). The first journal article is taken from Journal of Finance and titled as Short selling and earnings management (Fang, Huang and Karpoff 2015). Experiment had been conducted where the SEC ordered a pilot agenda by selecting the pilot stocks that are exempted from short-sale cost tests. In this, there had been selection of pilot firms that takes into consideration the discretionary accruals as well as likelihood that marginally beaten the earnings targets as it decreases with a period of time. Therefore, the result outcome explains that short advertising or its view curbs income administration as it help in detecting fraud and improving the price efficiency at the same time (Kolasinski, Reed and Thornock 2013). The second journal article is titled as Financial crisis only impose short-term economic costs but also creates enormous regulatory risks (Calomiris 2013). Financial crisis is at present absorbing the worldwide financial system that is already producing huge proposals used for authoritarian improvement from all of the accommodation. From the preceding fiscal crisis, the Great Depression had brought important fiscal authoritarian changes that are discredited by economists as well as economic historians as they are counterproductive. For instance, United States had removed the authoritarian missteps by allowing the banks for paying marketplace attention charge on deposits as well as offering financial services to the customers (Gitman, Juchau and Flanagan 2015). The third journal article is taken from Journal of Banking and Finance and titled as Costs and benefits of financial regulation: Short-selling bans and transaction taxes (Lensberg, Schenk-Hopp and Ladley 2015). This article explains the effect of fiscal regulations in a balance representation that is delegated with collection organization. It has been noted that fund managers mostly trade with stocks as well as bonds in an order-driven marketplace that is subject to business taxes and constraints on short selling and influence. In other words, the results that are generated are obtained on the balance properties of collection option that involves trade activities as well as market excellence and price dynamics that are under various systems (Kolasinski, Reed and Thornock 2013). The forth journal article is titled as Can short-restrictions actually increases informed short-selling (Kolasinski, Reed and Thornock 2013). It is tested that short selling regulations actually increased informed short selling activities. It is found that more unconstructive price reactions to short-interest announcements actually pose no reliance that impact short sales volume. For most of the stocks that are excluded short sales, it has been noted that increase in the price has affected short sale quantity that has no dependable change in the price response to short-interest announcements. The fifth journal article is taken from Journal of accounting and economics and tiled as In short supply: Short-sellers and stock returns ( Beneish, Lee and Nichols 2015). This article examines the financial determinants of short-sale contribute as well as its penalty for prospect stock income. On the contrary, lendable supply actually increases with the predictable borrowing expenses as well as decreases with the fiscal statement that constructs and indicates overvaluation. There has been a rising loan fee that actually helps easy in supply constraints. The sixth journal article is tiled as Short-selling attacks and creditor runs (Liu 2014). This article highlights the mechanism through which short selling of a bank stock trigger the failure of the bank. By using the model, it is helpful in gaining information from stock prices as it will grow increasingly in facing the stock prices variations (Gitman, Juchau and Flanagan 2015). Conclusion At the end of the study, it is concluded that restrictions on short selling has been beneficial for curbing the price volatility. This has been further proven when the study conducted analysis by reviewing six journal articles that explains the restrictions on appropriate way. Some of the activities that fall under the categories include bona fide hedging as well as arbitrage activities and market making at the same time. Therefore, the study clearly explains each of the attributes of short selling restrictions and its impact in the near future. Bibliography Beneish, M.D., Lee, C.M. and Nichols, D.C., 2015. In short supply: Short-sellers and stock returns. Journal of accounting and economics, 60(2), pp.33-57. Calomiris, C.W., 2013. Financial crises not only impose short-term economic costs butalso create enormous regulatory risks. The financial cri-sisthat is currently gripping the global economy is already producing voluminous proposals for regulatory reform from all quarters. Previous financial crisesmost obviously the Great Depressionbrought significant financial regulatory changes in their wake, most of which were subsequently discredited by econo-mists and economic historians as counterproductive. Reacting to the Spending Spree: Policy Changes We Can Afford, p.17. Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia. Fang, V.W., Huang, A.H. and Karpoff, J.M., 2015. Short selling and earnings management: A controlled experiment. The Journal of Finance. Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU. Kolasinski, A.C., Reed, A. and Thornock, J.R., 2013. Can short restrictions actually increase informed short selling?. Financial Management, 42(1), pp.155-181. Lensberg, T., Schenk-Hopp, K.R. and Ladley, D., 2015. Costs and benefits of financial regulation: Short-selling bans and transaction taxes. Journal of Banking Finance, 51, pp.103-118. Liu, X., 2014. Short-selling attacks and creditor runs. Management Science, 61(4), pp.814-830. Pratt, J., 2013. Financial accounting in an economic context. Wiley Global Education. Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill Education,. Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning. Wong, A. and Carducci, B., 2016. Do sensation seeking, control orientation, ambiguity, and dishonesty traits affect financial risk tolerance?. Managerial Finance, 42(1), pp.34-41.