EconAir

  INFORMATION AND ECONOMIC THEORY A key strategy for corporate growth and development is innovation.    Innovation generates proprietary information, company-specific knowledge, and new technology.    A company’s products and services embody past innovation and the sum of proprietary information.    One of the assumptions of the perfect competition model is complete information.    All participants in a market know all relevant information.    As discussed in an earlier tutorial,  Introduction to Information and Economic Structure , this assumption is unrealistic in an imperfectly competitive economy dominated by large corporations. Proprietary information that cannot be duplicated by other companies allows a company to differentiate its products and services from those of other companies. Differentiated products and services reduce competition from other companies and limit the ability of a supplier or customer to play off one...

INTRODUCTION I was, for many years, in charge of finding and analyzing acquisitions for a large company.   Then, for two years, I was an independent merger broker and took part in negotiations. MERGERS AND ACQUISITIONS American corporations spend over $1 trillion a year buying other companies.   This is more than they spend on net new investment (minus data center investment).   Even more than they spend on boxes at pro sports stadiums. Buying another company is a risky corporate strategy.   The few studies I have read indicate that 70-80% of acquisitions are failures.   They do not earn the acquirer’s opportunity cost of capital.   Many are a total loss and result in future write-downs.   This failure rate from published research is similar to the information I collected.   My department would use discounted cash flow/net present value analysis to determine the maximum price we would pay for an acquisition (the present v...

THE ECONOMICS OF FINANCIAL MARKETS MARKET-MAKERS, BIASED INFORMATION, AND FORECASTS This tutorial will look at financial markets and how they actually function.  There are two general theories about how financial markets work. The first is the Efficient Market Theory, which assumes all decision-makers are rational – they have access to information, can analyze it, and make investment decisions. Strangely, a major conclusion is that investors cannot predict stock price movements, which are random. The second is Behavioral Finance, which assumes that investors are irrational – they have a number of biases and are influenced by the markets’ past behavior. Both theories based on this supposed distinction that “explain” financial price behavior are irrelevant. What is left out of theoretical models of financial markets is how financial markets actually operate. Between buyers (investors) and sellers (including issuers of new securities), there are market makers like brokerage firms, man...