Dot Com Crash
1) What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets?
The main role of intermediaries is to fill the information gap between the investors who wish to invest money for higher returns and companies who need financing.
Role of Venture Capitalists: The main role of VC is to screen good business ideas from the bad ones, invest in a good firm and nurture them until the company exits through a trade sale or through an IPO.
Role of Investment Bank Underwriters : Their role was to help companies price the offerings, underwrite the shares and market them to the investors.
Role of Sell-side Analysts : These analysts need to form relationships with the management of the companies they are analyzing, follow the industry trends and finally making a buy or sell recommendations on the stocks and publish it publicly.
Role of Buy-Side Analysts and Portfolio Managers: Buy-side analysts role is similar to that of Sell-side , but they don’t publish their analysis to the public, rather they give it to Portfolio managers.
Portfolio managers are the ones who actually manage the money, took the recommendations from buy-side analysts and finally make decisions on where to invest the money.
Role of Accounting & Regulatory boards: Auditors would scrutinize the company’s accounts for their accuracy. The auditor’s opinion is an additional level of assurance for investors on the financial health of the company. Regulatory boards role was to establish and improve the standards of financial accounting and reporting.
2) Are the incentives aligned properly with their intended role? Whose incentives are most misaligned?
Most of the incentives are not properly aligned with their intended role. The least misalignment happens for FASB and the retail investors. FASB is just a regulatory board and the accounting rules are common across all the companies. Also for retail investors, the incentive is
The main role of intermediaries is to fill the information gap between the investors who wish to invest money for higher returns and companies who need financing.
Role of Venture Capitalists: The main role of VC is to screen good business ideas from the bad ones, invest in a good firm and nurture them until the company exits through a trade sale or through an IPO.
Role of Investment Bank Underwriters : Their role was to help companies price the offerings, underwrite the shares and market them to the investors.
Role of Sell-side Analysts : These analysts need to form relationships with the management of the companies they are analyzing, follow the industry trends and finally making a buy or sell recommendations on the stocks and publish it publicly.
Role of Buy-Side Analysts and Portfolio Managers: Buy-side analysts role is similar to that of Sell-side , but they don’t publish their analysis to the public, rather they give it to Portfolio managers.
Portfolio managers are the ones who actually manage the money, took the recommendations from buy-side analysts and finally make decisions on where to invest the money.
Role of Accounting & Regulatory boards: Auditors would scrutinize the company’s accounts for their accuracy. The auditor’s opinion is an additional level of assurance for investors on the financial health of the company. Regulatory boards role was to establish and improve the standards of financial accounting and reporting.
2) Are the incentives aligned properly with their intended role? Whose incentives are most misaligned?
Most of the incentives are not properly aligned with their intended role. The least misalignment happens for FASB and the retail investors. FASB is just a regulatory board and the accounting rules are common across all the companies. Also for retail investors, the incentive is