brokerage firm’s financial analysts
As one of the brokerage firm’s financial analysts, I would respond to my colleagues by pointing out that higher ROE is considered positive for a firm, but there should be a close Examination when it increases. For instance, if the value of an item decreases more than the net income, the ROE will increase though this is not positive for a firm. The firm can respond by issuing a debt to repurchase equity, which reduces the item value of equity and increases the ROE. However, it also increases the risk of the firms’ shares because of financial leverage.
According to SEC, companies are allowed to round up the earnings of the estimates to the next whole numbers if the digit following the decimal is five and above. The figures less than four have to be reported in the lowest integers. The regulators, therefore, have probes whether companies have been unlawfully rounding up the earnings. The agency theory is concerned with different stakeholders that have different ideas which do not match the company’s growth. The managers of various companies are trying to gain personal wealth by projecting the companies in a better way to increase market values.
The investment managers are also continually looking for institutional investors to increase their bonuses at the end of each year. A higher dividend per share translates to a confident forecast in a company’s future cash flow. Unfortunately, this idea will not last, and the investors will be forced to offload shares first, and the reaction will be intense because of unrealistic expectations. All the works against financial management goals, which is to increase a company’s profit and market share, make the practices unethical. In case the investors are unable to trust the financial reports of various companies, there is a high probability that they will move money to safer instruments. This, in turn, affects the company when it tries to raise revenues for expansion and therefore affects the economy as a whole.