Governance Regulation and Wall Street Flashcards
What is regulation full disclosure by SEC?
It was regulation implemented by SEC even before Sarbanes Oxley act to put measure in place to curb the earning guidance game
By requiring any firm when announcing strategic news must wire it by news agents at the same time for all people who has interest around the world. Avoiding such that analyst in MS has vital info and inform it only to his customera
What is Sarbanes Oxley act ?
It is the US legislation response to Enron, Tyco collapse due to fraudulent actions an loopholes in corporate governance. Basically it increases accountability and financial checks by requiring signature from managers and execs from all stage. No matter where the account is Executives are responsible and required to sign off the accounts. I didn’t know it was happening” is no longer a valid defense ( Bark Simpson defense)
Does earnings management game by management ended? Is this indirect ramification by SOX act?
Study by McKinsey in 2005 found that the number of firms which provide earnings guidance has reached probably peak it is not rising anymore whereas firm which are permanently discounting EPS guidance continues to rise. Suggesting that it might be the end o EPS management game but over 80% percent of the survey participant firms not intended to change the frequency of EPS guidance on the future.
Just because Warren Buffet announced to focusing on long term strategy doesn’t mean EPS management game will stop, because most investors can afford to invest small investment and hope for short term gain because they aren’t gonna wait to grow their small investments. Therefore all they focus is the next quarters earnings hence the game continue
Direct ramification for Wall Street , discuss about Global Settlement ?
Global settlement agreement
SEC was determined to make financial institutions and wall street as a whole to pay for the past mistakes and be more accountable for the future actions. Investigation by regulators concluded that IBs have too much influence interest on security research.
SEC and NY State General Attorney made an agreement with leading underwriters that they should separate their research arms from its underwriting activity by what is known as Chinese wall policy.
The total fine was 1.435 bn
The issue was that researchers’ objectivity changed due to a host of pressure from their employer and positions that potentially conflict their interest
CFA argues that misconduct and lack of independence of researchers ability to conduct independent research weakened investors confidence
Conflicts of interests in banking that involved analysts?
Analysts were paid by their contribution to IB
Analysts provided research on firms underwritten by their firms (bizarre)
Analysts invested in pre-IPO for companies that they were later involved with
Analysts tipped bankers off about changes in ratings
Analysts owned shares that they were covering ie selling shares that they had a buy rating on.
