FATİH AYIK

OutlineOutline

IntroductionChoice of ConsumptionThe Role of ManagementFinancial Markets and Information

IntroductionIntroduction

The Growth of Financial MarketsThe Share of Banks FallSecurities Markets and Financial

Derivatives increase The role of banks in the economic

system

IntroductionIntroduction Securities markets criticized: they are driven by speculation they consume too many

resources

Financial markets for effective allocation

Choice of ConsumptionChoice of Consumption Financial markets:Enable to consume and to exchangeAllow efficient risk-sharing

Two types of risks:DiversifiableNondiversifiable

Choice of ConsumptionChoice of Consumption

Diversifiable risk can be eliminated

Transfer of non-diversifiable risk

Financial markets offer an array of financial instruments

Choice of ConsumptionChoice of Consumption For example: Extremely risk-averse investors may

invest to risk-free securities.More risk tolerant investors may

invest risky stocks.Intermediate risk preferences may

choose a conbination of bonds and stocks.

The Role of ManagementThe Role of Management Financial markets enable

seperation of ownership A professional maneger can be

delegated Managers do not need:

to know anything to consult shareholders’ own

tastes

The Role of ManagementThe Role of Management Managers need :

to follow only one objective to invest in projects

The Role of ManagementThe Role of Management

Managers’ objective:

is investing in positive net present value projects.

maximizes the market value is in the best interest

Financial Markets and Financial Markets and InformationInformation

The stock market ; aggregates the diverse opinions of market participants conveys how much the equity of a company is worth leads to the more efficent use of assets enables poor management to be disciplined

Financial Markets and Financial Markets and InformationInformation

Stock price may respond in two ways ; Negative way Positive way

Stock price is negative: re-examine calculations re-consider plan

FinancialFinancial Markets and Markets and InformationInformation

Monitoring needs to be done by one party

Duplication: may not result in better monitoring would waste resources.

Financial Markets and Financial Markets and InformationInformation

Stockholders cannot profitably combine to hire a monitor because of bearing the costs of monitoring to the others.