1. What is the intended role of each of the institutions and intermediaries discussed in the case for the effective functioning of capital markets? In an effective functioning of capital markets, the institution and intermediaries help investors and companies to make decisions. This is because they do not have enough information or infrastructure to know how the capital markets work. In details, here are the examples of role of players in the institutions and intermediaries. Venture capitalist: the main role of VCs was to distinguish good business ideas and entrepreneurial teams from bad ones. VCs also provide a high rate of return to their investors for the associated risk. Secondly, Investment Bank Underwriters provide advisory financial services and underwrite the shares and introduce them to investors. Thirdly, the regulators establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information.
2. Are their incentives aligned properly with their intended role? Whose incentives are most misaligned? Not really. This is because they act in their own interest. I think venture capitalists are most misaligned incentives. Based on the functions of them, they provided capital to public companies with doubtful business model and did not scrutinizing these companies. Moreover, the partner in VC’s firm generally had a great percentage of their net worth tied in their funds.
3. Who, if anyone, was primarily responsible for the internet stock bubble? In my opinion, Venture Capitalists were primarily responsible for the internet stock bubble. Funds in companies of VC were financed by venture capital and IPO’s of stocks. At that time, the stocks is novel and the new firms were hard to value, which leading to the stock’s price overvalued at first. Moreover, the huge demand from investors wanting was leading to next big jump; the stock price would soar...
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