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FinancialMarketsChap3 - Chapter 3 Competitive market a...

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Chapter 3 - Competitive market : a market that brings about the efficient production of a good or service at the lowest possible cost - Market failure : The term used by some economists for the inability of a competitive market to remain so without the help of government, or the inability of an uncompetitive market, it not aided by the government, to become competitive - Disclosure regulation : A form of regulation that requires issuers of securities to make public a large amount of financial information to actual and potential investors - Asymmetric information : Occurs when the investors in a firm do not have the same access as managers to information relevant to a financial evaluation of the firm - Agency problems: Difficulties that can arise when a firm’s managers, who are acting as agents for the firms owners who are principals, follow their own interests to their owner’s expense and to their disadvantage - Insider trading: The purchase of sale of a firm’s security by its officers (or others) who are seeking to benefit from their knowledge of nonpublic information about the firm’s financial prospects Key Points 1: Standard explanation for governmental regulation of markets for goods and services: The market, left to itself, will not produce its goods or services in an efficient manner and at the lowest possible cost. What disclosure is and its importance : See definition above – Also, disclosure is important because with out, investors’ comparatively limited knowledge of the firm would allow agents to engage in activities to the detriment of the investor, so it puts the investors on equal footing with the agents and allows them to appropriately value a company What the term asymmetric information means : See above The reasons why a government might regulate financial activity by certain persons and the behavior of certain financial institutions : Gets rid of unfair advantages, such as insider trading, and the fact that people working at exchanges probably have some sort of advantage—rest on possibility that members of exchanges may be able, under certain circumstances, to collude and defraud the general investing public. The reason for regulating financial institutions is that financial institutions have a special role to play in the modern economy in terms of helping people save, etc. If these institutions failed, the disturbance to the economy would be severe - Securities Act of 1933: Primarily deals with the distribution of new securities and has two primary objectives > (1) requires that investors be given adequate and accurate disclosure concerning securities distributed to the public; (2) prohibits fraudulent acts and practices, misrepresentations, and deceit in sale of securities - Securities Exchange of 1934 : Deal with disclosure provisions to provide current information about publicly traded companies.
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