Study Guides (238,237)
Canada (115,036)
Finance (313)
FIN 800 (7)

FIN800 Notes

11 Pages
Unlock Document

Ryerson University
FIN 800
Alan Kaplan

FIN800 – Winter 2014 1. Chapter 1 – skip finance theory section 2. Chapter 2 – p. 24-26, 27-end 3. Ch7 – recommended, not required; AGENCY THEORY 4. Ch8 – 146-147, 154-end 5. Ch9 – p. 163-167 6. Ch10 – 179-180, all but Appendix 7. Ch11 – all 8. Ch15 – 287-291; all 9. Ch16 – all 10. Ch17 – all 11. Ch19 – all 12. Ch21 – all 13. Ch23 – conclusion only p. 452 14. Ch29 – all 15. Ch30 – 574-end Ch1 – Ethics in Finance  Finance – generation, allocation, exchange, & management of monetary resources o Personal finance – individuals save, invest & borrow money in order to conduct life o Corporate finance – business/organizations raise capital through issuance of securities & allocate to its most productive uses o Public finance – govt raises revenue through taxation & borrowing, spends to provide services to citizens  Activities facilitated/mediated by financial markets & financial institutions  Finance ethics concern with moral issues & norms that arise in finance theory, financial markets, financial services & financial management  Ethical concerns about fairness, rights, & duties regarding operations Financial Markets  Currencies, commodities, financial instruments (stocks, bonds, futures, options, swaps, derivatives) traded in exchanges  Exchange operate according to established laws, rules, procedures; also private transactions  Ethical requirement of financial markets: BE FAIR o Unfair trading practices: manipulation & fraud o Unfair conditions: unlevel playing field  Results from: asymmetry in info, bargaining power o Unfair contracts: one party taken morally impermissible advantage of another  Prospectus required for issuance to correct asymmetry  Insider trading breach fiduciary duty  Fairness o Substantively = security accurately priced FIN800 – Winter 2014 o Procedurally = sold with full disclosure so buyer assess value  Blue-sky laws – require expert evaluation of securities offered for sale  Ensure fairness in markets via govt, industry & self regulation  Hedge funds – lightly regulated, capital from wealthy & large institutional investors  Sovereign wealth funds – owned by nation states, fund by trade surpluses, control by foreign govt Financial Services (intermediaries)  Banks, insurance companies, brokerage firms, mutual & pension funds, financial planners  FI become agents/fiduciaries – morally & legally defined obligations/duties o Formation of contracts o Ethics of marketplace: avoid fraud, violations of rights, unfair advantage taking  7 principles o Integrity, objectivity, competence, fairness, confidentiality, professionalism, diligence Financial Management  Function within corporation, concerned raising & deploying capital (debt & equity)  Ethical issues: o Ethical obligations/duties of financial managers of corporation o Ethical justification for organizing corporation with shareholder control & objective of shareholder wealth maximization  Corporate governance: property rights & social welfare  Risk management  Disclosure  Bankruptcy or M&A  Executive compensation, Board of Directors Ch2 – Ethical Implications of Finance Key Assumptions in Finance (p. 24-26) - Narrow view of rationality & strong assumptions about wellsprings of human motivation Rationality & Self-Interest  Rationality = maximize utility under a budget constraint; utility = satisfaction  Finance generally assumes that individuals maximize utility by capturing high monetary returns while avoiding financial risk  Social institutions theory (SIT) – what the law says, all stakeholders considered Financial Theory of the Firm  Corporation = property of shareholders, managed by firm for shareholder benefit FIN800 – Winter 2014  Managers of firm = employees = agents of the shareholders (principals)  Interaction of other stakeholders with firm via contracts  Corporation = nexus of contracts (nexus = connection, series of)  All actors face incentives to impose costs on others rather than internalize them  Law, custom & social pressures restrain firms from fully imposing externalities on others  Maximize shareholder wealth under constraints Risk, Risk Aversion, & Expected Return (p.27 to end)  Goal: maximize monetary gain, risky investments must have higher promised return than riskless investments; high risk default = charge higher rate interest  Risk averse = prefer to avoid risk  Diversify = reduce risk; cannot get rid of systematic (market) risk  Capital budgeting, firms should undertake projects with positive NPV Ch7 – Agency Theory (recommended)  Agent act on behalf of principal, to advance principal’s “goals”  Each acts in own pursuit of their own goals, affects agents goals or ability to satisfy these goals Ch8 – Financial Theory of the Firm (p. 146-147, 154 to end) - Know big plan/strategy - nomination/hiring - risk management - Monitor/audit - compensation/paying Modern corporation features: 1. Legal personality (owns its assets, single contracting party) 2. Limited liability (reduce agency cost) 3. Delegated management with board of directors (agent of shareholders) 4. Transferable shares 5. Investor ownership (right to control firm, right to receive firm net earnings) Goal of Firm = Serve best interests of everyone, maximize shareholders’ wealth - Manage relationships with primary stakeholder groups (employees, suppliers, financiers) - Good corporate law, corporate governance - Lower transaction & agency costs to control firm = more residual earnings Ch9 – Fairness in Financial Markets (p. 163-167) Fairness in financial markets - To be treated fairly = treated similar to others with respect to a rule, agreement, or recognized expectation FIN800 – Winter 2014 - Evaluate markets and businesses based on productivity & efficiency ; doesn’t include moral consideration - Moral evaluation examine foundation principles, operations, interactions & practices o Foundation framework must permit individuals to labour, produce, create & trade - Ethical conduct: Fairness o Treatment of persons in relation to some rule, agreement, or recognized expectation o Wrongness of making exceptions in application of rule, playing favourites o If act does not constitute harm then may not be sort of act that must be prohibited Ch10 – Regulation  Defective risk management  Regulators with ample authority failed to constrain FI’s from taking excessive risks  Agencies: Regulate & supervise  Credit default swaps – insurance on debt instruments  Culture can hinder compliance Ch11 – Insider Trading  Insider trading = asymmetric information  No person/company in special relationship (privileged with info) with reporting issuer shall purchase/sell securities of reporting issuer with knowledge of material fact/change that reporting issuer has not generally disclosed  Market Abuse Directive (MAD) prohibits primary & secondary insiders to engage in:  Use their inside info to conduct transaction  Disclose inside info to third party  Recommend transaction to third party  Information efficiency = insider trading + market efficiency (closer to fundamental value)  Market manipulation – non-public info cause price move away from fair price  Utilitarian perspective – balance pros & cons of insider trading with respect to social utility to decide upon its ethical acceptability; increases market efficiency  Property rights perspective – equity linked compensation  Market morality – let free competitive market flourish  Problem  Hurts someone unfairly: Someone losses in transaction; perpetrator stole property  Efficiency: Breakdown in confidence, money allocation & etc  Canada penalties: max $1mil or 3x profit made, whichever greater +/ 2yrs jail Ch15 – Marketing of Financial Services  Financial services & products manage money or gain access to funds  Suppliers: banks, credit card companies, stock brokerages, investment funds, consumer finance company FIN800 – Winter 2014  Marketing financial services improves effectiveness which they developed, targeted, priced, advertised & promoted = enhance competitiveness of firms involved  Marketing – designed to create, communicate & convey through voluntary exchanges, something those targeted will value; market research, product development, segmentation, pricing, distribution, advertising, promotion & sales  Ethical marketing – must seek to convey something of value to customers in ways accord with law and basic ethical values & norms Ethical framework for Marketing 1. Norms identification – basic values & norms; capacity, cognitive, relationship component 2. Norms application – judgement & consequences; how affected, relevant info 3. Norms promotion – encouraging others within context; disclosure, increase penalties on brokers, stronger enforcement Ethical marketing of Mortgages 1. Relation of mortgage broker/lender to borrower 2. Role of informed decisions in marketing different kinds of loans to customers 3. Deception & manipulation of some borrowers in getting them to finance their homes Yield spread premium (YSP) – lenders pay to brokers to obtain mortgages with higher rates of interest than the borrowers would be qualified to obtain; prepayment penalty  mortgage broker gets fee/commission & sell mortgage  increase # of borrowers who could not afford their loans (subprime loans) by lenders who were indifferent to borrowers ability to pay; borrowers were only responsible if default Ethical = markets provide sufficient info to borrower so they understand nature & implications of mortgage being offered Loan flipping – refinance or new loans at higher charging fees benefiting loan officer Credit Card Companies  Ethical: warn users of harm, seek to educate them, limit their access to modest amounts  Not ethical: cause interest rate, offer financial counselling service when debt surpass ability to pay Universal default – failing to make payment on loan, loan company believes borrower take on too much debt = interest Payday Loans (loan shark)  ~$300 borrower must have checking account & a job; high interest rate for short period of time (14 days) FIN800 – Winter 2014  Banks turn away low/middle income neighbourhoods causing them to go to payday loans Ch16 – Financial Codes of Ethics Professionals required submitting their actions to the jurisdiction of 4 distinct institutions 1. The laws of the society in which they practice their profession 2. The regulatory guidelines established by legitimate authorities & state departments of insurance 3. The moral norms of the community which they practice their profession 4. The moral principles promulgated by their profession’s code of ethics Code of ethics create moral duties that govern professionals’ relationships with their clients, fellow professionals & society Profession characteristics - Engage in a vocation (specific place & designated purpose) that’s useful & noble; contribute value to society - Possession of expert knowledge; understand both universal principle & apply in specific situations - Abandon strictly selfish commercial view (one’s self
More Less

Related notes for FIN 800

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.