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E assign the responsibility for monitoring managers

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Unformatted text preview: having to worry about the effect on market prices will lead to beCer long term decisions. a.  b.  ¨༊  I agree with the statement I do not agree with this statement I agree with this statement I do not agree with this statement Neither managers nor markets are trustworthy. RegulaIons/ laws should be wriCen that force firms to make long term decisions. a.  b.  I agree with this statement I do not agree with this statement Aswath Damodaran 38 Are markets short term? Some evidence that they are not.. 39 ¨༊  ¨༊  ¨༊  Value of young firms: There are hundreds of start- up and small firms, with no earnings expected in the near future, that raise money on financial markets. Why would a myopic market that cares only about short term earnings aCach high prices to these firms? Current earnings vs Future growth: If the evidence suggests anything, it is that markets do not value current earnings and cashflows enough and value future earnings and cashflows too much. AVer all, studies suggest that low PE stocks are under priced relaIve to high PE stocks Market reacIon to investments: The market response to research and development and investment expenditures is generally posiIve. Aswath Damodaran 39 If markets are so short term, why do they react to big investments (that potenIally lower short term earnings) so posiIvely? 40 Aswath Damodaran 40 But what about market crises? 41 ¨༊  ¨༊  Markets are the problem: Many criIcs of markets point to market bubbles and crises as evidence that markets do not work. For instance, the market turmoil between September and December 2008 is pointed to as backing for the statement that free markets are the source of the problem and not the soluIon. The counter: There are two counter arguments that can be offered: ¤༊  ¤༊  The events of the last quarter of 2008 illustrate that we are more dependent on funcIoning, liquid markets, with risk taking investors, than ever before in history. As we saw, no government or other enIty (bank, BuffeC) is big enough to step in and save the day. The firms that caused the market collapse (banks, investment banks) were among the most regulated businesses in the market place. If anything, their failures can be traced to their aCempts to take advantage of regulatory loopholes (badly designed insurance programs… capital measurements that miss risky assets, e...
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