Slide 1Today’s OutlineInitial Concerns from Last ClassSlide 4Syllabus: ParticipationCourse Project: OverviewCourse Project: FirmSyllabus/Course QuestionsSlide 9Transfer MethodsBrokersTypes of Financial InstitutionsFunctions of Financial InstitutionsMarketsMarket CharacteristicsMarket FunctionsThe Market for StockSlide 18Agency ParadigmAgency ParadigmAgency ParadigmSlide 22Efficient Market HypothesisTypes of EfficiencyAnomalies and CritiqueSlide 26T-S-P (Think-Pair-Share)OverviewBehavioral FinanceBehavioral FinanceFramingAnchoring1 of 3208:32 PMTopic 2: Financial Markets and InstitutionsLarry Schrenk, InstructorFIN 365 Business Finance2 of 3208:32 PM1. Syllabus and Project2. Types of Exchange3. Agency Issues4. Market Efficiency5. Behavioral Finance•Website: HooversToday’s Outline3 of 3208:32 PM•Mathematics •Formulae•Statistics•Accounting Weak•Complicated Concepts•Group Work•Getting HelpInitial Concerns from Last Class4 of 3208:32 PM1. Syllabus and Project5 of 3208:32 PM•Required•Penalty–Up to 10% Deduction from Final Grade•QuestionsSyllabus: Participation6 of 3208:32 PM•Form Groups of 4-5 Students–Groups Assigned Shorty•Excel Spreadsheet•Due Last Day of Class–One Excel Spreadsheet –Submit in Blackboard–One Spreadsheet per Group–No E-mail Attachments•Project Guidelines and ExampleCourse Project: Overview7 of 3208:32 PM•‘S&P 500’ (see Wikipedia for List)–Alternates Must be Approved–No Firms Previous Analyzed in this Course (List)•Firm Criteria:–Solvent and Simple–No Financial Firms–Issues Long-Term Bonds–Paid Dividends for Last Five YearsCourse Project: Firm8 of 3208:32 PM?????Syllabus/Course Questions9 of 3208:32 PM2. Types of Exchange10 of 3208:32 PM•Private Exchange–Direct Transfer–EXAMPLE?•Brokers –Third-Party Mediation–EXAMPLE?•Markets–Public, Anonymous Exchange–EXAMPLE?Transfer Methods11 of 3208:32 PM•Mediates buyer and seller–Distinguish from ‘Agent’–Distinguish from ‘Dealer’•Commission•Financial InstitutionsBrokers12 of 3208:32 PM•Depository–Commercial Banks–Credit Unions•Pension Funds and Life Insurance•Investment Vehicles–Investment Banks–Mutual Funds–Hedge Funds–Exchange Traded Funds–Private Equity CompaniesTypes of Financial Institutions13 of 3208:32 PM•Mediation of Savers and Firms•Pooling of Funds•Efficient Flow of Capital•Risk Reduction/AllocationFunctions of Financial Institutions14 of 3208:32 PM•Public, Centralized Exchange of Good and Services–Physical or Electronic•Financial Markets–Financial Assets Trade•Investable Funds•Return•RiskMarkets15 of 3208:32 PM•Price Discovery•Efficiency•Economic Growth•MonitoringMarket Characteristics16 of 3208:32 PM•Raise Capital•Investment Opportunities•Liquidity•Clearinghouse Market Functions17 of 3208:32 PM•Primary–IPO versus Seasoned Issue–Function?•Secondary–Transfer of Ownership–Function?–Importance for Firm?•Risk and Return ImplicationsThe Market for Stock18 of 3208:32 PM3. Agency Issues19 of 3208:32 PM•Delegation•Actors–Principal–AgentAgency Paradigm20 of 3208:32 PM•Examples:–Politics–LawAgency Paradigm21 of 3208:32 PM•Business Applications:–Executive vs. Shareholder–Bondholder vs. StockholderAgency Paradigm22 of 3208:32 PM4. Market Efficiency23 of 3208:32 PM•Expectation Implications•Informational Efficiency•Fair Price•LuckEfficient Market Hypothesis24 of 3208:32 PM•Weak Form–Historical Prices•Semi-Strong Form–All Public Information•Strong Form–All (public and Private) InformationTypes of Efficiency25 of 3208:32 PM•January Effect•Bubbles–Black Monday, 19 October 1987 •Insider Trading•Technical/Fundamental Analysis•Behavioral FinanceAnomalies and Critique26 of 3208:32 PM5. Behavioral Finance27 of 3208:32 PM•Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice and also participated in antinuclear demonstrations.•Which is most likely:–A. Linda is a bank teller. –B. Linda is a bank teller active in social causes.T-S-P (Think-Pair-Share)28 of 3208:32 PM•A field of finance that proposes psychology-based theories to explain some financial decision making.–http://www.investopedia.com/terms/b/behavioralfinance.asp Overview29 of 3208:32 PM•Bounded Rationality•Heuristics•Market InefficienciesBehavioral Finance30 of 3208:32 PM•Examples:–Framing•The term frame dependence means that the way people behave depends on the way that their decision problems are framed–Anchoring•The concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand.Behavioral Finance31 of 3208:32 PM•Frame 1–Of 600 people infected, a proposed medication will save 200 of those infected.•Frame 2–Of 600 people infected, a proposed medication will allow 400 of those infected to die.Framing32 of 3208:32 PM•Two Questions–What are the last three digits of your Social Security number?–In what year did Attila the Hun threaten to attack Rome?.