Dot Com Crash
Case Study
Chapter 1: The role of capital market intermediaries in the dot-com crash of 2000
1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? i. Venture Capitalist: provides capital for the company in the early stage of development and ensures company to have a good management team and sustainable business. VC demand high return on investment and sells stock usually to public through IPO. ii. Investment Bank underwriters: provide advisory financial services, make offerings to companies, underwrites the shares and introduce firm to the investors normally in the form of road shows. They help entrepreneurs in the actual process of doing IPO iii. Sell-side analysts: work at the investment bank and brokerage houses. They monitor the performance of public company, determine whether the stock is good or bad, form relationship and talk to the management of the company, following trends in industry and more importantly make buy or sell recommendation on stocks. iv. Buy-side analysts and portfolio managers: do industry research, estimate earnings, do valuation analysis, rate stock price as either ‘buy’ or ‘sell’, need to convince portfolio managers who are responsible to buy and sell securities. v. Accounting profession: audits financial statements of the company, ensure company complies with the established standards and represent true states of the firm. If this is satisfied, unqualified opinion statement will be issued. vi. Regulator-FASB: establish and improve standards of financial accounting and reporting for the guidance of public
2. Are their incentives aligned properly with their intended role? Whose incentives are most misaligned?
The incentives and the intended roles were substantially misaligned thus causing breakdown in capital market. The most misaligned incentives and role were by venture capitalists as they had invested
Chapter 1: The role of capital market intermediaries in the dot-com crash of 2000
1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? i. Venture Capitalist: provides capital for the company in the early stage of development and ensures company to have a good management team and sustainable business. VC demand high return on investment and sells stock usually to public through IPO. ii. Investment Bank underwriters: provide advisory financial services, make offerings to companies, underwrites the shares and introduce firm to the investors normally in the form of road shows. They help entrepreneurs in the actual process of doing IPO iii. Sell-side analysts: work at the investment bank and brokerage houses. They monitor the performance of public company, determine whether the stock is good or bad, form relationship and talk to the management of the company, following trends in industry and more importantly make buy or sell recommendation on stocks. iv. Buy-side analysts and portfolio managers: do industry research, estimate earnings, do valuation analysis, rate stock price as either ‘buy’ or ‘sell’, need to convince portfolio managers who are responsible to buy and sell securities. v. Accounting profession: audits financial statements of the company, ensure company complies with the established standards and represent true states of the firm. If this is satisfied, unqualified opinion statement will be issued. vi. Regulator-FASB: establish and improve standards of financial accounting and reporting for the guidance of public
2. Are their incentives aligned properly with their intended role? Whose incentives are most misaligned?
The incentives and the intended roles were substantially misaligned thus causing breakdown in capital market. The most misaligned incentives and role were by venture capitalists as they had invested