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U30273 Behavioral Finance

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a)One line of research regarding IPO long-run under performance focuses on whether investors are systematically being fooled by accounting tricks and earnings management actions that managers of IPO firms employ around the time that their firms go public, with the goal being making the firms’ accounting performances look better than they are. Teoh, Welch and Wong (1998) and Roosenboom, van der Goot and Mertens (2003) are two papers along that line of research. First describe in detail the accounting actions on which these two papers focus to uncover this kind of activity by firms and then summarise their main empirical findings as to how the levels of these activities relate to long-run performance of IPO firms. 
 
b)  “Winner’s curse” is central to Rock’s (1986) explanation of IPO underpricing. First explain what winner’s curse means in general and specifically in the context of IPO allocations and underpricing. Then, explain how the informational assumptions and setting of the Rock model lead to IPO underpricing in equilibrium.
 
a)You are told that George studied mathematics in university and did especially well in probability and statistics modules that were part of his degree program. Which description of George has higher probability?

A – George works for a data management company

B – George works for a data management company where he performs statistical analysis of big data

Describe and critically discuss prospect theory and the prospective gain/loss based utility. 

  • Define post earnings announcement drift in stock prices. Describe how various cognitive biases and disposition behaviour on the part of investors might be causing this phenomenon. Discuss the empirical checks we have discussed that aim to determine which of the various hypotheses regarding what may be behind  post earnings announcement drift might have greater support from the data. Finally, discuss how momentum profits may arise if post earnings announcement drift happens regularly in stock markets. 
  • Evidence suggests that individuals’ savings are insufficient for their retirement and the resulting pension shortfall is accentuated by poor investment choices.  What psychological theories have been used to explain these phenomena?  How can these theories be used to ‘nudge’ individuals into making better choices?
  • “The presence of arbitrageurs ensures asset prices do not deviate substantially from fundamental values”.  Critically evaluate this claim with reference to both theoretical and empirical evidence. 
  • The following is an excerpt from Piotroski (2000)

 “Prior research (Rosenberg, Reid, and Lanstein [1984], Fama and French [1992], and Lakonishok, Shleifer, and Vishny [1994]) shows that a portfolio of high BM firms outperforms a portfolio of low BM firms. Such strong return performance has been attributed to both market efficiency and market inefficiency.”

Critically discuss both the market efficiency and market inefficiency based explanations to why we have been observing high book-to-market (BM) firms  outperforming low BM ones. Make sure you include the empirical findings in support of either the market efficiency based argument or the market inefficiency based arguments in your essay. 

U30273 Behavioral Finance

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FIN333 Introduction to Financial Management

Question: We are approaching the end of the course and you should now have a better idea about the roles financial institutions (FIs) play in the economy, the risks they face, and available tools they can use to mitigate such risks. We have also discussed about a number of major events throughout ...

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EM636101 Project Management

Project life is expected to be 10 years from the project inception, at which time the proposed system will be obsolete and will have to be replaced. It is estimated that the machinery has a salvage value of $35,000. The interest rate is expected to be 3% for the entire period of time (all 10 years). ...

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BFA503 Introduction to Financial Management

Questions: 1.    Snowy Hills Lumber Ltd is considering purchasing a new wood saw that costs $50 000. The saw will generate revenues of $120 000 per year for 5 years. The cost of materials and labour needed to generate these revenues will total $68 000 per year, and other cash expenses w ...

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ACFI5070 Business Research Method

Task: Marking Scheme For the generic marking criteria at postgraduate level (Distinction, Merit and Pass) see DMU (2021b).Assignment 1The layout should be professional, with an executive summary/abstract (up to 5%)The report should be free from spelling, punctuation and grammatical errorsAll ext ...

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