Business Valuation (3) Flashcards
What are shares in unquoted companies?
Companies are not traded via the stock market. Reduces their value relative to shares in quoted companies
What are unquoted companies not required to comply with?
Stock market listing rules or corporate governance codes, increasing their perceived risk and further depressing their value
What is meant by thin trading?
A lack of liquidity in the market
What potential investors generally have?
Plenty of publicly available information when deciding whether to buy/sell quoted shares
Why may unquoted companies have less information available?
As they may not be required to publish accounts (or have exemptions from producing group accounts or showing a statement of cash flows) and are also unlikely to be watched by analysts or news agencies
An example of information asymmetry?
Managers have full information about the true value of the business, but potential investors have very little
What does DVM assume?
Perfect market assumptions
What are perfect market assumptions?
Many buyers/sellers of the share
Zero transaction costs
Freely available information
What is market capitalisation?
The total market value of a quoted company
Why is speculation by investors significant?
It is a major factor in the behaviour of share prices
What does behavioural finance try to explain?
How decision makers take financial decisions in real life
Why their decisions might not appear to be rational
What is the market paradox?
For markets to be efficient, investors have to believe that they are inefficient. If they believed them to be efficient, they would not buy or sell shares
What is herding?
The desire to conform and not to act differently from others
Investors lacking confidence in their own judgments
What are noise traders?
Investors who do not base buy/sell decisions on rational analysis
Characteristics of noise traders?
Poor timing, follow trends and over-react to good and bad news
Effects of loss aversion?
Avoid investments with the risk of making losses
Prefer to invest in companies that look likely to make stable
Why can momentum effect in stock markets affect optimism
Investors believe recent price rises will continue into the future which increases willingness to invest in companies that show prospects for growth
Issue with overconfidence in an investor?
A tendency to hold a false or misleading assessment of their skills, intellect or ability
What is an illusion of control?
An investor who believes their actions will have direct effect on the stock market
Issue of a bias towards optimism?
Leads investors to have an unrealistically positive view of themselves and their futures
When do investors exhibit confirmation bias?
If they have a tendency to seek information that supports their beliefs. Therefore only choosing information that benefits that particular view
Irrational investors effect on companies?
Prices for an individual company’s and the market as a whole being valued either very high or very low
