Today’s economic climate has caused many companies to “put on a show”, especially when it comes to their financial statements and the shareholders’ equity. Unfortunately, these types of financial statements often miss an important piece of information. The “Loss Ratio” often understates an overall company’s profitability. How can a company attract investors and retain them if its profit margins are too low? This paper explores the tellativeness of short selling on discovering company profitability, identifying companies that overpay their shares prior to the release of a company statement, to utilize their hidden information advantage for company investment inefficiencies. Finally, we discuss two additional strategies to reduce share price volatility.
Over the past decade, financial reporting has become increasingly more complex. In order to create accurate economic growth estimates, managers must now use several different sources to determine firm investment, delayed capital costs, and net worth. While all of these factors are important, it is stock price fluctuations that typically give investors a better sense of a firm’s overall profitability. In this paper, we describe four primary factors related to share price fluctuations and how management can use them to reveal whether a firm is optimizing its firm investment.
Firstly, one of the major contributors to a firm investment’s profitability is the firm size. Many large, well-known firms routinely manage more than 100 billion dollars in assets. By providing solid financial information that is timely, managers can realize positive momentum gains in their stocks. When large firms have built up substantial war chests, investors are more likely to be willing to purchase their stocks. Leverage from other firms, even if it is not a major player in the industry, can also provide positive momentum boosts in a given time frame.
Another way to reveal potential profitability is to analyze the relationship between banks and financial firms. Banks frequently partner with outside financial firms, such as hedge funds, as part of their asset-allocation strategies. When banks work with outside firms, management should determine whether they enjoy effective supervisory practices. A good banking union will likely require a strong regulatory presence, and should monitor the activities of its members. Supervisory improvements can improve a bank’s profit margins through the reduction of non-performing credit, better bank supervision, and increased leverage.
Thirdly, there is also the matter of bank supervision. Most countries have some form of public banking system that is supervised by government officials. Supervision can involve effective prevention of fraud, the regulation of bank practices, and the provision of quality banking products. The existence of a centralised bank supervision system can provide a degree of efficiency that can be seen in firms that are publicly listed. This can encourage banks to continue to add value to the economy while satisfying political demands.
Finally, it is important to remember that firm investment strategies should be subject to changes as regulations and rules are adapted. European governments have been receptive to the need for internationalisation in the banking and finance industries. However, supervisory architecture needs to change to accommodate the different changes taking place internationally. Supervisory changes can allow firms to respond to new regulations more effectively and to take advantage of international opportunities.
