Friday, September 29, 2006

Self regulation;Is it possible ? (I)

Market allocate resources following available information ,for economic agent to make the right decisions to maximize profits. When that information is reliable and opportune, the results are better than when the information is late and unreliable. Efficient market theory argues , that prices reflect all the information needed to make decisions .Therefore ,it is a matter of knowing the prices which include all the proper information, to decide where it is more profitable to invest in one sector or another.-
However, there are some complications with information, when there is a gap between the time it takes data to becomes information at the organizational levels, and the time it becomes public. In that case, prices will not include the whole information, but only a part of it, such that anyone who buy a financial asset because of current positive information available, might turn out to make losses later on when the real information is available and it might be negative. Let me remind that data is one thing and information is another. To have access to data does not mean to have information. Information imply a judgment which is complementary to data. I might watch a lot of numbers about the financial situation of any firms, but that does not necessarily means privilege information. Data without the qualitative judgment is just that: data. Therefore is the qualitative judgment complementing data, which make some information to be privileged. While data are everywhere, qualitative judgment is rather scarce and some times confidential, such that privileged information has a high price. Let take Parmalat case .It was not the numbers itself which indicates that the firm was in trouble, but the impressions (judgment) that there was not way to overcome the shortage of cash following the loss of credibility, following the fraud .For every data there is a judgment, which is transform it in information.-
What about Privileged information?. This is the most common situation in the inner circle of business evaluation opportunities .This is so not just because of the nature of such activities , but because any projects have its own dynamic closer to their original owner ,than to the potential users or beneficiaries of it. The problem is this : How long it take to close the gap between what it is private information relevant to make decisions and the time it becomes public?. For example, If the directory of any firm approves and decides to implement an expansion program which imply heavy investment on equipment and construction, this will have an impact on firm market value, such that any one who knows about it in advance will have the chance of making profitable decisions buying financial assets of that firms. It is the same whether any one who knows in advanced the positive financial result of a firm, and decides to buy financial assets of that firm .Again ,it will have the chance of making profits using privileged information .
In both cases, it is very important to take that step as faster as possible, otherwise there are consequences on prices and the efficiency of markets transaction. Because privilege information is scarce ,there are incentives to trade wit it. Here it is the point when the regulator dilemma arises. They have two options ;To let the system regulate itself ,or to apply corrective regulation on any situation related to overlapping self related interest , and privileged information procedures to make it public and the like. Of course , it is better self regulation. But is it possible?.-

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