Government Influence on Finance
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Questions and Answers

What is a major reason why finance has recently become an active research area?

  • The availability of high-frequency transactions data. (correct)
  • The increase in company profits.
  • The government's influence on financial markets.
  • The rise of financial intermediaries.

    • What is one way the government influences finance?

  • By imposing taxes on investors and financial intermediaries. (correct)
  • By regulating the minimum wage.
  • By investing in the stock market.
  • By providing loans to companies.

    • What is the primary goal of mainstream theoretical research in finance?

  • To understand the role of government in finance.
  • To develop new financial products.
  • To predict stock market crashes.
  • To seek rational explanations for observed phenomena. (correct)

    • What is an example of a research question in finance?

    <p>How do companies decide how much of their profits to distribute as dividends to shareholders?</p> Signup and view all the answers

    What is the purpose of empirical research in finance?

    <p>To test whether rational theories can explain observed practice.</p> Signup and view all the answers

    What is an example of a financial transaction that involves the government?

    <p>Issuing government bonds.</p> Signup and view all the answers

    What is the role of the Financial Services Authority?

    <p>To regulate financial intermediaries.</p> Signup and view all the answers

    What is a common research goal in finance?

    <p>To value a firm's proposed investment.</p> Signup and view all the answers

    What is the main difference between incorporated and unincorporated businesses?

    <p>The legal identity of the business</p> Signup and view all the answers

    What is a characteristic of private limited companies?

    <p>They can only sell their shares or debentures privately</p> Signup and view all the answers

    What is a disadvantage of unincorporated businesses?

    <p>They are subject to unlimited liability</p> Signup and view all the answers

    What is the primary advantage of unincorporated businesses in terms of financial accounts?

    <p>They do not have to be made public</p> Signup and view all the answers

    What percentage of the top 700 companies in the UK are quoted on the stock market?

    <p>80%</p> Signup and view all the answers

    What is the main difference between public limited companies and private limited companies?

    <p>The ability to sell shares to the public</p> Signup and view all the answers

    What is a limitation of unincorporated businesses in terms of growth?

    <p>They are limited in their ability to raise funds</p> Signup and view all the answers

    What is the primary goal of shareholders in a PLC?

    <p>To gain through increases in the company's value</p> Signup and view all the answers

    What is the term used to describe the liability of unincorporated businesses?

    <p>Unlimited liability</p> Signup and view all the answers

    What is debt capital in a PLC?

    <p>Money borrowed by the firm in return for regular interest payments</p> Signup and view all the answers

    What is the most common type of incorporated business?

    <p>Companies limited by shares</p> Signup and view all the answers

    What is the relationship between debt holders and the company's assets?

    <p>Debt holders have first claim on the company's assets</p> Signup and view all the answers

    What is the maximum amount shareholders can lose in a PLC?

    <p>Their initial investment</p> Signup and view all the answers

    Who selects the managers of a PLC?

    <p>The Board of Directors</p> Signup and view all the answers

    What is a characteristic of a PLC that distinguishes it from unincorporated businesses?

    <p>It is difficult and expensive to set up</p> Signup and view all the answers

    What is a potential disadvantage of a PLC?

    <p>It is difficult and expensive to set up</p> Signup and view all the answers

    Which of the following entities typically fall into the first category?

    <p>Firms</p> Signup and view all the answers

    What is the term for the return promised on the sum lent?

    <p>Price of borrowing</p> Signup and view all the answers

    What is the primary function of financial intermediaries in sophisticated financial systems?

    <p>To facilitate the movement of funds</p> Signup and view all the answers

    What is the main purpose of the primary market function of the stock market?

    <p>To allow companies to raise new equity capital</p> Signup and view all the answers

    What motivates investors to trade shares when they believe a share is underpriced or overpriced?

    <p>Information motivation</p> Signup and view all the answers

    What is a characteristic of both public debt/bond markets and stock markets?

    <p>The distinction between primary and secondary markets</p> Signup and view all the answers

    What is the main advantage of having a secondary market?

    <p>It provides liquidity to investors</p> Signup and view all the answers

    What is the purpose of the secondary market function of the stock market?

    <p>To allow investors to buy and sell previously issued equity shares</p> Signup and view all the answers

    What was the main function of jobbers in the pre-Big Bang era?

    <p>To make markets in specific stocks</p> Signup and view all the answers

    What was a major concern in the stock market during the 1970s and 1980s?

    <p>Dominance of a few jobbing firms</p> Signup and view all the answers

    What was the primary role of brokers in the pre-Big Bang era?

    <p>To act as agents on behalf of investors</p> Signup and view all the answers

    What was the impact of fixed commission charges on the market?

    <p>Discouraged price competition and encouraged non-price competition</p> Signup and view all the answers

    What was the significance of Big Bang in 1986?

    <p>A major change in the dealing system on the London Stock Exchange</p> Signup and view all the answers

    What was the result of the dominance of a few jobbing firms?

    <p>Decreased competition in the market</p> Signup and view all the answers

    How did jobbers operate in the pre-Big Bang era?

    <p>As principals in making markets in specific stocks</p> Signup and view all the answers

    What was the significance of Big Bang II in 1997?

    <p>A further change in the dealing system on the London Stock Exchange</p> Signup and view all the answers

    Why do taxation rates on dividends and shares affect share values?

    <p>Because tax rates affect after-tax returns</p> Signup and view all the answers

    What perspective of finance focuses on a firm's operations?

    <p>Corporate finance perspective</p> Signup and view all the answers

    What is the primary difference between corporate finance and accounting?

    <p>Accounting focuses on book value, corporate finance on market value</p> Signup and view all the answers

    Which of the following is NOT a category of financial transactions?

    <p>Assets</p> Signup and view all the answers

    Why do investors fall into different tax brackets?

    <p>Because of varying income levels</p> Signup and view all the answers

    What is the primary difference between corporate finance and financial markets?

    <p>Corporate finance focuses on firms, financial markets on transactions</p> Signup and view all the answers

    What is the relationship between taxation and share values?

    <p>Taxation affects share values due to varying tax rates</p> Signup and view all the answers

    What is the primary goal of corporate finance decisions?

    <p>Maximizing shareholder value</p> Signup and view all the answers

    What is the primary function of financial intermediaries, such as banks, in the financial system?

    <p>To act as a go-between or agent for individual investors and companies</p> Signup and view all the answers

    What is the main difference between investing in a company's equity shares and investing in other securities, such as bonds?

    <p>The type of asset being invested in</p> Signup and view all the answers

    What is the primary focus of the sub-field of finance known as market microstructure?

    <p>The way securities are traded in financial markets</p> Signup and view all the answers

    What is the primary role of financial markets in the financial system?

    <p>To facilitate the flow of funds between individual investors and companies</p> Signup and view all the answers

    What is the primary advantage of investing in a diversified portfolio of securities, such as stocks, bonds, and options?

    <p>Lower risk and increased stability</p> Signup and view all the answers

    What is the primary role of individual investors in the financial system?

    <p>To provide capital to companies through investments</p> Signup and view all the answers

    What is the primary difference between investing in a company's equity shares and investing in its debt securities, such as bonds?

    <p>The ownership stake in the company</p> Signup and view all the answers

    What is the primary function of financial intermediaries, such as pension funds, in the financial system?

    <p>To manage and invest funds on behalf of individual investors</p> Signup and view all the answers

    What is the primary reason why the government issues government bonds through financial markets?

    <p>To finance government expenditure</p> Signup and view all the answers

    What is the key objective of mainstream theoretical research in finance?

    <p>To develop rational explanations for observed financial phenomena</p> Signup and view all the answers

    What is the primary purpose of empirical research in finance?

    <p>To test whether rational theories can explain observed practice</p> Signup and view all the answers

    What is a key aspect of the government's influence on finance?

    <p>The government's role as a player in financial markets</p> Signup and view all the answers

    What is a common area of research in finance?

    <p>Understanding the relative share prices of different companies</p> Signup and view all the answers

    What is the primary function of the Financial Services Authority?

    <p>To oversee the regulation of financial services</p> Signup and view all the answers

    What is an example of a research question in finance that involves understanding company decision-making?

    <p>How do companies decide how much of their profits to distribute as dividends to shareholders?</p> Signup and view all the answers

    What is a key aspect of the government's influence on finance through the Inland Revenue?

    <p>The government's role in imposing taxes on investors and financial intermediaries</p> Signup and view all the answers

    What is the primary function of financial markets?

    <p>To allow units to lend savings to units who wish to borrow funds</p> Signup and view all the answers

    What is the main difference between a primary and a secondary market?

    <p>The primary market is where securities are first issued and new capital is raised, while the secondary market allows sellers to pass ownership to buyers</p> Signup and view all the answers

    What motivates investors to trade shares when they have surplus funds compared with expenditure?

    <p>Liquidity-motivated reasons</p> Signup and view all the answers

    What is the key role of figure 2 in illustrating the stock market?

    <p>It illustrates the two main activities of the stock market</p> Signup and view all the answers

    What is the term used to describe the price of borrowing?

    <p>Return promised</p> Signup and view all the answers

    What is the main advantage of having a secondary market?

    <p>It provides a platform for investors to trade shares</p> Signup and view all the answers

    What is the primary market function of the stock market?

    <p>It allows quoted companies to raise new equity capital</p> Signup and view all the answers

    What motivates investors to trade shares when they believe a share is underpriced?

    <p>Information-motivated reasons</p> Signup and view all the answers

    What was the primary function of jobbers in the pre-Big Bang era?

    <p>To make a market in specific stocks and quote buying and selling prices</p> Signup and view all the answers

    What was a major concern in the stock market during the 1970s and 1980s?

    <p>The increasing dominance of a few jobbing firms</p> Signup and view all the answers

    What was the primary role of brokers in the pre-Big Bang era?

    <p>To act as agents on the investor's behalf and find the best deal</p> Signup and view all the answers

    What was the impact of fixed commission charges on the market?

    <p>It discouraged price competition and encouraged non-price competition</p> Signup and view all the answers

    What was the significance of Big Bang in 1986?

    <p>It changed the dealing system on the London Stock Exchange</p> Signup and view all the answers

    What was the result of the dominance of a few jobbing firms?

    <p>Reduced competition between jobbers</p> Signup and view all the answers

    How did jobbers operate in the pre-Big Bang era?

    <p>As principals, making a market in specific stocks</p> Signup and view all the answers

    What was the significance of Big Bang II in 1997?

    <p>It changed the dealing system on the London Stock Exchange again</p> Signup and view all the answers

    What determines the current equilibrium price of a company's shares?

    <p>The market's valuation of the future monetary return</p> Signup and view all the answers

    What comprises the monetary return for shareholders?

    <p>The remaining value of the shares and dividends paid</p> Signup and view all the answers

    Why do investors make estimates about future dividends and share prices?

    <p>Because they do not know future dividends and share prices for certain</p> Signup and view all the answers

    What happens to a company's share price when new information becomes available?

    <p>The share price changes</p> Signup and view all the answers

    What is an effect of asymmetric information between investors and managers?

    <p>Managers have more information than investors</p> Signup and view all the answers

    What may signal management's confidence in the company's future prospects?

    <p>Announcing a dividend higher than expected</p> Signup and view all the answers

    What is the main concern of corporate finance in terms of financial decisions?

    <p>Long-term operating decisions</p> Signup and view all the answers

    Why do share prices change over time?

    <p>Because investors' expectations about future dividends and share prices change</p> Signup and view all the answers

    What is the primary goal of researching empirical anomalies in finance?

    <p>To develop theories that explain actual data</p> Signup and view all the answers

    What resolves uncertainty about a company's value?

    <p>New information about the company</p> Signup and view all the answers

    Which disciplines are increasingly offering new insights into finance?

    <p>Sociology and psychology</p> Signup and view all the answers

    What is the primary role of the legal framework in finance?

    <p>To provide the institutional backdrop to many financial decisions</p> Signup and view all the answers

    Why are theories assuming some degree of investor irrationality likely to become increasingly important in finance?

    <p>Because they provide a more complete understanding of actual data</p> Signup and view all the answers

    What is the primary difference between corporate finance and management accounting?

    <p>Corporate finance focuses on long-term decisions, while management accounting focuses on short-term decisions</p> Signup and view all the answers

    What is the primary reason why a good working knowledge of theoretical economics is essential for understanding finance?

    <p>Because finance is a subfield of economics</p> Signup and view all the answers

    What is the significance of financial reporting in finance?

    <p>The valuation of many securities relies on reported accounting information</p> Signup and view all the answers

    What is the primary role of academics in the field of finance?

    <p>To subject theories to healthy criticism and rigorous testing</p> Signup and view all the answers

    What skill is vital for empirical research in finance?

    <p>Econometrics</p> Signup and view all the answers

    What is the primary difference between finance and accounting?

    <p>Finance is concerned with the investment of money, while accounting is concerned with the recording of money</p> Signup and view all the answers

    What is the primary goal of researchers in the field of finance?

    <p>To discover empirical anomalies and develop theories to explain them</p> Signup and view all the answers

    What is the primary concern of financial statement analysis?

    <p>To analyze reported accounting information</p> Signup and view all the answers

    What is the relationship between reported values and market values in finance?

    <p>There are crucial differences between reported values and market values</p> Signup and view all the answers

    What is the primary function of the Board of Directors in a PLC?

    <p>To select the managers of the business</p> Signup and view all the answers

    What is the primary advantage of empirical research in finance?

    <p>It allows for the development of theories that explain actual data</p> Signup and view all the answers

    What is the primary characteristic of empirical research in finance?

    <p>It involves the testing of hypotheses on actual data</p> Signup and view all the answers

    What is the primary advantage of a PLC over an unincorporated business?

    <p>Limited liability for shareholders</p> Signup and view all the answers

    What is the relationship between shareholders and the company's assets in a PLC?

    <p>Debt holders have first claim on the company's assets</p> Signup and view all the answers

    What is the primary difference between share capital and debt capital?

    <p>Share capital is permanent, while debt capital is temporary</p> Signup and view all the answers

    What happens to the PLC when existing shareholders sell their ownership shares to new shareholders?

    <p>The PLC continues to operate without changes</p> Signup and view all the answers

    What is the primary goal of shareholders in a PLC?

    <p>To maximize the company's value</p> Signup and view all the answers

    What is a disadvantage of a PLC?

    <p>It is difficult and expensive to set up</p> Signup and view all the answers

    What is the percentage of the top 700 companies in the UK that are quoted on the stock market?

    <p>80 percent</p> Signup and view all the answers

    In 1979, what action was taken by the government regarding the LSE rulebook?

    <p>It was referred to the Restrictive Practices Court</p> Signup and view all the answers

    What was the main concern of the LSE following financial deregulation around the world?

    <p>Loss of business to international competitors</p> Signup and view all the answers

    What was the result of the changes made by the LSE on 27 October 1986?

    <p>The LSE became more competitive</p> Signup and view all the answers

    What role did broker/dealers take on in addition to their traditional role after the Big Bang?

    <p>Market makers</p> Signup and view all the answers

    What was the requirement for broker/dealers operating in different capacities?

    <p>They had to declare their capacity at the time of the trade</p> Signup and view all the answers

    What percentage of dealing was accounted for by three investment houses after the Big Bang?

    <p>75%</p> Signup and view all the answers

    What was the name given to the changes made by the LSE on 27 October 1986?

    <p>Big Bang</p> Signup and view all the answers

    What was the impact of the dominance of a few jobbing firms in the pre-Big Bang era?

    <p>It reduced competition</p> Signup and view all the answers

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