Question

1. Identify the motives of the stakeholders in the markets and any incentives to be unethical.

2. Ways that financial information can be unethically skewed to improve a company’s stock price or value.

3. The problems created by such actions, and how it violates the efficient markets hypothesis?

Answer 1

1.Motives of Stakeholders can be many. The major ones could be power, money, achievement and materialistic need satisfaction. Incentives can lead to unethical behaviours. They can have negative consequences as there can be chances of manipulating the reports or exaggerating on their performance to receive better incentives.

2.There are various ways how financial information can be unethically skewed to improve a company's stock price or value. It can like recording a wrong/incorrect revenue like revenue from an activity which has not taken place or not recording expenses or keeping it to a later date. It could also include skewing up the current earnings and reducing liabilities. This could be by recording revenue received from services which are not completed.

3.Efficient market hypothesis in simple terms satate that the security prices completely reflect all the available information about that security in the market.

Say because the available information is skewed up and as a result the price of a security gets overvalued. As the price increases people tend to sell off and it can lead to say a sector based selloff which can have impact on the investors and other stakeholders of that security. It could also lead to a rally as opposite to selloff