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Investment Ethics

  • ID: 1772313
  • Book
  • 304 Pages
  • John Wiley and Sons Ltd
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The recent economic crisis further underscores the importance of ethics, which is why finance professionals will turn to this authoritative text. It provides them with an applied and practical understanding. Critical thinking questions offer more thought provoking exercises to get them to learn the material. Related cases in the chapters help spark more thoughtful analysis of the issues that are raised. Numerous projects show how to apply investment theory and analysis as well as integrate ethical considerations. Appendices are also included in relevant chapters that review basics in investments and accounting. This material will help finance professionals examine the ethical practices of the companies and organisations they recommend.
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PREFACE PART I– Ethical Behavior CHAPTER 1– Introduction: The Case for Investment Ethics  Introduction–The Investment Industry– A Legacy of Scandals and a Need for Ethics

 A Brief Overview of the Investment Industry

 Securities Laws and Regulations

 Investment Ethics Are Easier Said Than Done

 Ethics Basics

 Four Fundamental Principles of Investment Ethics

 Costs and Benefits of Being Unethical

 Conclusion–Developing an Ethical Consciousness

 Appendix– Financial Market Regulatory Agencies

CHAPTER 2– Fiduciary Duty of Investment Professionals– The Ethical Treatment of the Client  Introduction– What is A Fiduciary?

 Agency Versus Fiduciary Relationships

 The Role of Laws, Regulations, and Professional Standards

 The Importance of Confidentiality

 Conflicts in Finding the Right Investments

 Conflicts in Trade Management– Best Execution

 Conflicts in Trade Management– Soft Dollars

 Identification and Fair Treatment of Clients

 Conclusion–Disclose! Disclose! Disclose!

 Appendix– Professional Codes of Ethics

Ethical Reporting of Investment Performance

 Introduction to Ethics in Reporting Performance

 Calculating Return: Predicting Future Performance or Measuring Performance for Current Clients?

 Ethical Reporting of Risk Measures

 Management Fees and Other Costs That Can Be Hidden

 Time Periods Used to Estimate Historical Risk & Return Performance

 Other Ways to Distort Historical Performance

 Reporting Performance to Attract New Clients– Cherry Picking Accounts

 Hidden Risks: Leverage, Short–Selling, Liquidity

 Special Considerations with Valuing Securities that Don t Trade

 Conclusion– The Crystal Ball

 Appendix– Review of Investments Basics

CHAPTER 4–Ethical Use of Information  Introduction– Information and The Search for Alpha

 Information Asymmetry

 Private Information–Talent

 Trading On Inside Information

 Trading on Trading by Insiders

 Influential Publications

 Direct Communication with Corporations

 Investment Banking and Chinese Walls

 Mosaic Theory

 Front Running

 High Speed Flash Trading

 Mutual Funds And Information Advantages Arising From Stale Prices

 Market Manipulation

 Conclusion– Information And Fairness

CHAPTER 5–Analyst Integrity  Introduction– Analysts and Their Ethical Obligations

 Investment Recommendations– Pickers


 Buy Side and Sell Side Analysts– Who pays for the research?

 Behavioral Finance and Analyst Ethics

 Star Analysts– Overconfidence and Regret Aversion

 Herding –The Influence of Other Analysts

 Other Behavioral Pitfalls

 Originality of Ideas

 Other Analyst Conflicts

 Conflicts with Employers

 Conclusion– Be Aware!

PART II– Ethical Security Analysis CHAPTER 6–Investing in Companies with Ethical Accounting Practices  Introduction– Reported Accounting Performance– Healthy Cynicism

 The Source of Accounting Distortions–Accruals

 Discretionary and Non–Discretionary Accruals

 Managers Incentives to Manage Earnings

  Cookie Jar Reserves and Big Baths

 Aggressive Revenue Recognition

 SPE s and Hidden Debt

 Quality of Earnings

 Earnings Smoothing:  Is It Ethical?

 Conclusion– Cash Versus Accruals– Be Skeptical!
CHAPTER 7–Investing in Companies with Good Corporate Governance Practices  Introduction–Corporate Governance and its Importance to Ethical Analysts

 Countrywide Financial Corporation– A Case of Weak Corporate Governance and Unethical Business Practices

 The Role of the Board– An Overview

 Who Makes a Good Director?

 Effective Board Structure

 Director Compensation and Shareholdings

 The Nominating Process, Voting Rights, and Potential Conflicts

 Executive Compensation– Structure and Incentives

 Option Grant Abuses

 Golden Parachutes, Golden Hand–cuffs, Golden Coffins

 Horizon Problems And The Firm s Long–Run Profitability

 Shareholders Rights and The Takeover Market

 Conclusion– Shareholder s Rights and Conflicts

 Appendix– Review of Stock Options

CHAPTER 8–Socially Responsible Investing  Introduction– Directing Financial Capital to Benefit Society

 Stakeholder Theory

 Positive and Negative Screens

 Socially Responsible Mutual Funds

 Performance– Can You Do Well By Doing Good?

 Shareholder Advocacy


 The Special Role of Pension Funds, University Endowments, and Foundations

 Community Investing  and Micro Finance Lending

 Islamic Finance

 Conclusion– Obstacles To Doing Well While Doing Good

CHAPTER 9–Cases  Case #1– UBS and Morgan Stanley– An Elaborate Insider Trading Scheme

 Case #2– Emulex and Mark Jakob– Market Manipulation with False Information

 Case #3– Fidelity Traders and Gifts from Jefferies– Soliciting Brokerage from Traders

 Case #4– Heartland Advisors and Bond Funds– Misrepresentation of Bond Values

 Case #5– A.G. Edwards and Variable Annuities– An Inappropriate Investment

 Case #6– Charles Hintz and Sanford Bernstein– Analysts Conflicts with Personal Holdings

 Case #7– Nicholas Cosmo and Agape World Inc .– A Ponzi Scheme

 Case #8– Former CEO of NYSE s, Grasso s,  Pay Package

 Case #9 Nick Leeson and Barings Bank– Rogue Trader

 Case #10– Kellogg s Matched and Washed Trades– Tax Avoidance or Market Manipulation?

 Case # 11– Qwest Communications International – Accounting Fraud and Overstated Revenues

 Case #12– Refco– Misrepresentation and Hidden Debt

 Case #13– Salomon Brothers and the Treasury Market– Cornering the Market

 Case #14– Merrill Lynch and the Internet Boom– Analysts Conflicts

 Case #15– John Mangan and Short Selling –Inside Trading

 Case #16– Merrill Lynch and Bank of America Merger– Bonuses Paid to Merrill Employees –Excessive Compensation?

 Case #17– Canary Capital Partners LLC– Mutual Fund Abuses

 Case #18– Jérôme Kerviel and Société Générale–  Rogue Trader

 Case #19– WorldCom– Capitalizing Operating Expenses, an Unethical  Accounting Practice

 Case #20– The Squawk Box– Front Running

 Case #21– Morgan Stanley– Brokerage Commissions and Brokerage Abuses

 Case #22– Brian Hunter and Amaranth Advisors–Market manipulation of Natural Gas?

 Case #23– The Bayou Group– False Reporting

 Case #24– Morgan Stanley– Analyst s Coverage and Investment Banking Business

 Case #25– Bernie Madoff– The Largest Ponzi Scheme in History?

 Case #26 – Enron– A Case of Extreme Hubris

 Case #27– UnitedHealth– Back Dating Stock Options

 Case #28– First Cash Financial Services– Pay Day Loans and Return

 Case #29 – Johnson & Johnson and the Tylenol Scare– Did Recall Hurt or Help Shareholders?

 Case #30– Infrastructure Funds– An SRI Investment?

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Sarah Peck
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