1.There is an underlying assumption that classical economic political theory do not explain current institutional and . This is hardly the case as most institutions influencers operate under this theory. From the market mechanism to equilibrium efficiency. Most top managers in the model markets are under influence of classical economic political theory when marking decisions for the company.
The conventional political, economic method was developed by Adam Smith (considered the father of modern economics). His basis of argument was based on advocating for a non-capitalist institutional running. What he otherwise referred to as freehand operation or the invincible hand. He believed that organizations are supposed to operate without contextual disturbance from the environment that the institution exists. According to Adam Smith and other men who supported this theory, the state and other factors should only be a watchman in the economic contribution of an organization.
There should be very limited government and contextualised factors that interfere with the roles in the economy. With this theory there come two economic lines of thought. Non - contextualized and contextualized line of thinking. Non- the contextualized range of thought reasons from the argument of Adam Smith that policies do not affect or should not affect the running of an organization. The second line of thought proposed by Richard Vice who argue that tendencies in all organization deduce their operations from contextual policies. These contextual policies are based on the environment from which the organization operates. The contextualised model later developed to neoclassical model that introduced the concept of externalities. It is from their externality idea that institutional theory developed. According to the neoclassical economic theory, several external outcomes affected institutions.
They argued that externalities that include individual actions, government policies, allocative efficiency and other factors affected the operations of the institutions. Coase (a neoclassical economist), argues that private internal negotiations can only influence the decisions of the institutions but cannot under the rule the value of externalities. Institutional theory therefore emerges from the same perspective. The argument of the institutional method only emphasizes the reasoning of organization depending on their environment. The approach further diversified the nature of the institutions and their controls over activities. It therefore means that neo institutionalism developed to prove that organization also controlled the environmental externalities. The theory further developed into referring to the externalities as actors. Actors therefore include individual, national states, and organizations that influence the operations of the institution.
They relate to institutions that do not depend on their history and personalities as path dependence institution. From the case study we have two institutional theory perspectives of that the company (JB HI-Fi) has used in releasing its profit downgrade. The attitude of declining to apologize to the ASX is a proof that they are a stand-alone organization that do not need to depend on the ASX for its profit policies. This reasoning takes the perspective of realist institutionalism, who accept the existence of external factors but do not bend their systems in favour with the externalities. In this case the externality is the ASX that demands an apology for profit downgraded.
The second perspective of institutional theory applied in the submission of the profit downgrade is submitting the profit downgrade deep within a presentation. This took the idea of economic, political institutionalism where policies and profits downgrade are influenced by many other factors and therefore cannot exist as standalone. In that case it is difficult to give a stand-alone statement about profits, while it depends on many others factors. Some the coefficients are even related to the ASX themselves, who are requesting for the apology. Example the market interest factor. The two actions on submission of profit grade have therefore acted in line with the institutional theory.
2. Managerial branch of stakeholder theory tries to explain the role that managers take in deciding which stakeholders they would react to first. The stakeholder is different in an organization, and each of them has an important role to play in the company. However various stakeholders vary in what they offer a firm or an institution. Some stakeholders provide financial support, and others offer marketing support and other provides a customer base for the institution. All this stakeholders’ serve the same company but at different levels (Fernando and Lawrence 2014).
Some stakeholders are more important. The ones that offer more than others. These stakeholders are considered authoritative by the organization. The management, therefore, tends to satisfy the expectations and needs of the most potent stakeholders of the particular institution (Kent and Zunker 2017).
Importantly is the relationship that the firm has with the stakeholder. Closer ties would mean satisfaction of the stakeholders’ expectation. However, the expectations of the stakeholders have an impact on the organizations. Bearing this in mind the management of this organizations have to make decisions concerning the most critical stakeholder, whose interest must be met immediately. The managers must also determine the one with the closest relationship so that it can be considered during managerial decisions (Freeman et al 2017).
The organisation is not likely to respond to all the stakeholders the same way. The ones with the most important patterns and considered influential will have the advantage. According to the theory, stakeholder are also entitled to control over the organizations resources. They are therefore allowed to raise concern with anything they must have felt is not going well with the company. The then significant role of management, in this case, is to assess the complaint and come up with a decision that is in the interest of the organization even if it does not incline with the thought of the company. The management must also determine whether it is appropriate to disclose particular strategies to the stakeholders or to maintain them within the organisation. In the case study of the JB Hi-Fi, the stakeholder in question is ASX. The ASX has produced specific demands that it expects the management to meet. The kind of response they get proves a lot about the theory. Firstly being unapologetic about the profit downgrades definitely shows a poor relations between the organisation and the ASX. When the ASX raised a complaint formerly, it would have been better if the management replied once through a standalone statement. From that we can derive the kind of relationship. Secondly, the administration does not consider ASX as one of the most important stakeholders. They believe their customers of the electronic products essential that are why they interfered with the retail price. These signals that though ASX is one of the stakeholders at that moment the customers were preferably vital than them (Hörisch, Freeman and Schaltegger 2014).
Additionally, the concern of the ASX is not one of the most critical issues concerning stakeholders’ expectation. The ASX is concerned about the fall of profit by the JB hi-fi that has never been seen before. However, the management responds by saying that 3% fall from the midpoint of the company’s previous profits does not cause material effect on the price of value of the organizations financial security. They further respond by saying that the results are less than 5% which according to them is negligible. This therefore proves a point of the management stakeholder theory. At times stakeholder expectation is not in the interest of the company, hence the management have to neglect such expectations (Hörisch, Freeman and Schaltegger 2014.
Lastly, the JB hi-fi organization has not disclosed any of their strategies to the ASX. Just like the management stakeholder theory stipulates (Freeman et al 2017).
3.Share prices can be used to determine the future earnings of a company. There can be two ways to forecast revenues. The first one involves the use of future earnings as the use of current earnings. Secondly is the use of share prices that is empirically determined through cash flow. The cash flow is used to determine shareholders price. When shareholder price is established it is therefore used for future analysis (Fernando and Lawrence 2014).
Firstly, the changes in share prices are used in predicting accounting earnings. This is done when stocks that improve incomes are estimated in their availability to enhance them further. Therefore an insight analysis is done over time to determine if the stock prices will be increased. If the stock price increase, it, therefore, means that the future earnings will be better. The same analysis is what the ASX are using to predict the earnings of JB Hi company. With the stock exchange dropping to 3%, the ASX suggest a review of the year full profit guidance. This is because the ASX thinks the company will lose its future earnings and profits predicted by the drop in stock prices rates. Such reductions in the ASX is likely to cause the withdrawal of investors and therefore drop the countries earnings (Fernando and Lawrence 2014).
Secondly. The earnings of a company may be modelled regarding price changes. The relationship is used to determine the strength of the stock exchange. When the stock exchange is active, the companies whose share prices are top are likely to attract investors. This is because of the assumption that high stock price is a reflection of high profits from the company. The future earnings are therefore likely to increase with the coming of investors (Kim and Zhang 2016).
The Australian Stock Exchange (ASX) is strong; this is proven by the level of which there are no drops levels for a long. The case study confirms this by recording that, the profit downgrade of up to 3% that has been established by the JB hi-fi is the first after a very long period (Vijitha, and Nimalathasan 2014).
Prices at any point can be considered a function for the future. Prices reflect the investors’ expectations. The potential richness of costs determines the market of a company. The company market strength is determined by the stock prices it fetches. Increase in stock prices of the company is linked to the number of people who shareholder. The people who have shares reflect the number of people who could be using the product of the company primarily due to market trust. This is only applicable to companies that sell products to their customers. The JB hi-fi company sells electronic products to its customers (Motokawa 2015). The ASX after noticing the drop in stock prices of the company, asks them to review their retail price.
The review on retail price is a warning towards the future earnings of the company. The ASX is worried that the JB hi-fi might lose its market price based on the result of the recent stock price. This is a proof of how share price is used to determine future earnings (Motokawa 2015).
4.Show how the Brunswik Lens Model might be used to explain an investor's decision about whether to buy or sell shares in JB Hi-Fi following their downgrade “announcement”. There are several models that individuals use to make decisions. The models differ regarding their emphasis and complexities. Investors use this basic model to decide on various business and accounting decisions. The Brunswick Lens is one of the models used in making such crucial judgments. The Brunswick's model is based on three steps.
The model discusses decisions on three models;
The necessary information in the decision situation.Before a person makes an informed decision at their disposal, they consider what may aid the process. They are considered potential cues towards making the informed decision. For example in the case of JB hi-fi electronics. If the investor has to decide on whether to invest in the electronics company. According to the Brunswick lens model before jumping into the report about the profit downgrade and the ASX share price percentage drop. The investor should get the accounting information that is in the company. The accounting information will involve inventory checks, current order check, overall profit and loss accountant and the underlying market strategies (Bristow, Mowen and Krieger 2015).
These are the basics of accounting that the investors should consider before making their decision. They, therefore, cannot jump into selling or buying shares especially after the profit downgrade, they should use the necessary information (Briston, Mowen, and Krieger 2015).
Dynamics of the decision
The second part of the model identifies the dynamics. The dynamics are a series of events that complicate the essentials or the basics. These are the part that makes the decision complex. It provides interrelationships of the elements that make it quite difficult to take one decision of the other. In the JB hi-fi company, the profit downgrade has complicated the profit and loss accounts. The shares that have sunk 10 % after the consumer electronics cut of the profit. The investors must now consider why the stock exchanged of the company has flopped in the way it has before making their decision. They also have to believe the profit warning sounded by the ASX (Boley, McGehee, Perdue and Long 2014).
Thirdly derived from the model is an observational decision. This is a decision made by what we shall have seen. The course of action should be based on a proper response. Investors can use the same way on the JB hi-fi decision; they should look at the reaction from the manager to refuse to react to the profit warning given to them by ASX. The kind of response of remaining unapologetic about the signs can make the investors understand the reasoning of the managers, therefore, coming up with a better decision. An observable decision is also referred to as choice behaviour. The choice part insists on the need to observe the choices we have before making the decision (Hall, Pennington and Lueders 2014).
In the case of the JB hi-fi company, what will happen if the investor sells their shares and what if they don’t? The decision is based on the results that are likely to come to an action. The company might lose if the shares are sold, and therefore they need to assess the same (Hall, Pennington and Lueders 2014).
The Brunswick model, therefore, forms a proper model for finding out how to make an appropriate decision on whether to sell or hold shares of JB hi-fi electronic company (Olusanya 2016).
Fernando, S. and Lawrence, S., 2014. A theoretical framework for CSR practices: integrating legitimacy theory, stakeholder theory and institutional theory. Journal of Theoretical Accounting Research, 10(1), pp.149-178.
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