Behavioral finance Assignment Example | Topics and Well Written Essays - 2500 words

Behavioral finance - Assignment Example Modern financial economics are pegged on the assumption that financial practitioners act both meticulously and with rationale. However as evidenced and earlier stated, this is not always the case. These deviations from the norm are not rampant and inherent but follow a systematic chain of events. With this information in mind it is possible to incorporate these systematic human deviations into the standard model of financial markets (Rutledge 264). In so doing, two commonly overlooked mistakes come to the foreground: Financial practitioners tend to indulge in excessive trading with belief that the next trade will rake in more lucrative returns. This is irrational trading and is propelled by emotion rather than rational thinking. The human trait of being too overconfident or corky in this case is the key driving motivation behind this bias. Some financial practitioners are also in the habit of holding on to losing stocks while at the same selling their winning stocks. This again is in stigated by lack of confidence and the need to avoid both failure and regrets coupled with poor judgments. Behavioral finance contributes to asset pricing in two major dimensions. These dimensions are reached upon by use of agents which may in them are not completely rational. These are: I. Limits to arbitrage This argues that the damage caused by irrational traders in their irrational deviations may be difficult, if not impossible to be undone by the more rational trades. The traditional asset-pricing model does not factor in market frictions and greatly undermined trading frictions like transaction cost, bid spread, ask spread etc. These forces have a great impact on asset returns and therefore should not be ignored. The limits to arbitrage create a model where mispricing exist for the simple reason that risk adverse arbitragers are not concerned mainly with the riskless values of an asset, but about the price of assets in periods following these irrational traders. This model con siders the cost of arbitrage more so the volatility returns and states that the habit of mispricing will inevitably dominate markets especially in the cases of highly volatile stocks whereby arbitragers may avoid the risky volatile position. Finding mispricing is a tasking affair and may involve institutional laws that should regulate the type of trade to be done. For instance short selling which is essential to effective arbitrage including cost of borrowing, legal fees and liquidity risk is not allowed in mutual and pension funds. Therefore there should exist a cap on the limits to arbitrage. II. Psychology: This helps in creating a continuum of deviations spurning from full rationality to completely irrational. The known concept of asset pricing therefore is in a very vibrant flux whereby there is a slow paradigm shift from the completely irrational approach to a more accommodating broader outlook based on the psychology of investors. Risk and misevaluations are therefore the two main determinants of the security expected returns. This is roughly based on a concept by Savage (183) which is a decision making method with imminent or existing risks in consideration. This concept is known as the Subjective Expected Utility whereby it is widely

The financial impact upon Menzies Hotel Dissertation

The financial impact upon Menzies Hotel - Dissertation Example Financial Ratios 36 Financial Impact of the Takeover 38 Chapter 6: Conclusions and recommendations 42 Bibliography 45 Appendices 51 Appendix A. Ten people crimes and Organisational result 52 Appendix B. Key Issues to Address in Post-Merger Integration 53 Appendix C. Trompenaars' Theories on culture 54 Appendix D. Survey Questionnaire 55 Tables 57 Table 1.1. Financial Ratios of Menzies Hotels PLC as of January 2005 58 Table 1.2. Financial Highlights Queens Moat Hotels Ltd. as of December 2004 59 Table 2. Criteria on Interviewee Selection 60 Table 3. Summary of responses to Interviews 61 Table 4. Summary of Secondary Data on Relevant Theories 63 List of terms Acquisition: When one business takes control of another, this is known as an acquisition. Investment banks and other financial institutions often have mergers and acquisitions (M & A) departments, to provide financial and other forms of support for these activities. Some acquisitions, like Daimler Benz's of Chrysler in 1998, are disguised as a merger for political reasons. Due Diligence: An internal analysis by a lender, such as a bank, of existing debts owed by a borrower in order to identify or re-evaluate the risk; an independent analysis of the current financial state and future prospects of a company in anticipation of a major investment of venture capital or a stock-exchange flotation; a Venture Capitalist firm's examination by its lawyers and auditors of the records, accounts and any legal documents of an existing business. Four-Star hotel: Stars are used to give the traveller an indication of the very least they can expect from the hotel. A four-star hotel is fully en-suite, with a Restaurant for cooked breakfast and dinner, often smallish with 50-80 bedrooms and friendlier places to... This discussion talks that people-related risks and liabilities have a substantial effect on the acquisition value - and the price. These need to be discovered with due diligence before the deal is closed. Suggests using a 360-degree due diligence to give the buyer a complete look at value and risk.Examined benefits accruing to target shareholders in the five-year period after the combination and recommend getting paid in cash, favor investing in acquirers that use tender offers, and that stock payments be used if overpriced. Target shareholders who receive cash must buy acquirer stock. Shows three ways to determine the value of something through financial valuation: an income approach, a cost approach, or a market approach. Companies that pay attention to revenues and delivering on total return to shareholders instead of focusing exclusively on cost cutting are more successful at acquisitions. Problems with receivables can eat into the cash flow - and future revenues - of a newly fo rmed company. Buyer must ensure all supporting documentation on receivables sent as fast as possible to the new company's consolidated credit group. Should pooling of interests accounting be allowed In essence, when two firms combine, there are two methods that can be used to account for the combined value of the firm? They are the purchase method and the pooling of interests method. In most cases, they yield radically different outcomes - with pooling resulting in a much better-looking income statement for years to come.