recommended

1. DR. MGENI, T
IFM

3. Financial Market Information
Development Phases
1960s
 High water point for the efficient market theory
 Many Financial Economists believed that
financial markets were almost fully efficient in
providing information about the market and its
opportunities
I.E Prices of stocks and bonds were believed to be
efficient in providing reliable information about
the market opportunities to private and public
investors
 The only public policy prescription would be to
prevent government from interfering with the
allocation process

4. Financial Market Information
Development Phases
1970s And 1980s
There was a major change in Perspective
Empirical Research proved beyond doubt that
the process of stocks and bonds could not
predict the behavior of the market
Research showed that market was inefficient
in allocating resources thus proving against
the traditional theories of market efficiency
of economics

5. Financial Market Information
Development Phases (Continued)
 Financial Markets Behavior Became very
unpredictable
 Prices on the Financial Markets no longer
provided reliable economic information for both
private and public investors
 The Prices of stocks and bonds for example no
longer implied the profitability of the financial
intermediaries they represented
 Thus could not allocated savings like how
economic models had claimed across decades

6. Financial Market Information
Development Phases (Continued)
Recent Literature (2000s)
 Literature in banking and financial contracts
have developed a new consensus that markets
are by no means fully efficient in most
industrialized countries
 Allocative inefficiency abounds even in our
highly communicative and computerized turn
of the century world
 Market imperfections imply that emerging
markets operate in a business environment
with a lot of frictions

8. IS MARKET IMPERFECTION AN ISSUE
IN EFMs?
DEFINETELY
• It is an Issue of information
Asymmetry which have a lot of
negative implications to the EFMs
operations

21. Does The Principal Agent Theorem
Work In real life ?
The theorem assumption that the agent shall
always work for the interest of both the
investor (share holder/saver) and the
borrower/customer is not realistic inreal life
The agent serve biased interest and thus do
not always represent equal interest of all
parties
Thus information asymmetry need to be
controlled.

22. INFORMATION ASYMMENTRY
IMPACTS ON FINANCIALMARKETS
QN: What is its implication
in the EFMs ?/Impacts

27. Other Impacts
 Moral Hazards and adverse selection
 Taking advantage of information asymmetry to gain advantage over customer is called
moral hazard
 Adverse selection is when the customer selects a product or service based on wrong
information or insufficient information that I likely to affect the quality of what Is
chosen
 Principal Agency problem-When the principal (the one who need service) trusts an
agent for pursuing hi or her interest based on the information given while the agent
uses the lack of information on the principal to serve a different interest
 Artificial Market forces/ supplied demand i.e a demand created by the product or
service provider or supplier for the ill purpose of making the price to increase.
Example withholding goods for a while
 Inequitable allocation and distribution of resources-Suppliers deciding where to
allocate resources based on how profitable it can be as opposed to how demanded
the product or service is to the place. Example rural areas are neglected while urban
areas are overwhelmed with products and services.
 Credit Rationing-Information asymmetry on the risk of credits cause increase of
borrowers. Banks decided to ration (put) a minimum rate of loan one can take to
reduce the number of borrowers. This unluckily discourage high quality borrowers
because their risks and premiums are maximized when sharing the market with many
small borrowers with no idea of the credit risks they incur

28. GENERAL IMPLICATIONS

29. Control Strategies Of Asymmetry
Information
1. Market screening and Addressing adverse
selection problem
2. Use of Information institutions
3. Market Information monitoring by Financial
market players eg. Banks
4. Family business Information control
5. Corporate governance information control

30. Screening And Adverse Selection
Adverse selection is a general problem in
economic. It is when some one selects a
product or service which is below monetary
value mainly due to information asymmetry
Screening is often its remedy when making
decisions on investments especially when the
investment quality can not be easily
established

31. Effects OF Adverse Selection
1. It tends to lower the price of the commodity
which the seller knows more than the buyer.
Example used cars i.e The more the lemon the
lower the price.
 The adverse price effect for the lemon (A product
perceived as poor due to lack of information about it ) as a
way to pprotect themselves
2. In some cases it can close the market altogether
 The Market closing is usually due to relating the price of
the commodity to its quality. The Lower the price the
greater the likelihood of being offered a lemon value. In
such scenario the sellers with quality goods similar to the
one with lowered price decade not to sale

33. Institutions Of Market Information
(To Address Principal Agency
Problem)
1. Disclosure laws
2. Product liability Laws
3. Independent Accounting/Auditing firms
4. Credit rating agencies
5. Regulatory agencies
6. Investor monitoring laws -Laws which allow hare
holders to monitor the actions of management to
make sure that it is inline with the interest of the
shareholders. This is important in countries like USA
where the management is separated from majority
shareholders
Others wise the principle agency problem will be the
order of the day

34. Corporate Governance Market
Information Control

35. Market Information Monitoring
The Role Of Banks

36. Market Information Monitoring
The Role Of Banks (continued….)
1. Information screening and monitoring in
imperfect monitoring information systems
2. Information processing specialist
3. Indecent years banks have emerged as private
equity investors thus play a pivotal role of
information disseminator to the market
4. Specialist in financial market contract
enforcement
5. Recently banks have become Specialist in capital
legislations by incorporating elements of market
regulatory process

37. W

38. READINGS
The Best model of Corporate Governance in
markets with information asymmetry
(especially EFMs)
Impacts of family business on emerging
financial markets
Impacts of family business on informational
asymmetry in emerging financial markets

39. READING CASES ON INFORMATION
ASYMMETRY AND COTROL
• Argentina’s State Credit Risk agency
• Creative accounting and corporate governance
In Thailand
• Mexico market Information –How free is it?