The Role of Capital Market Intermediaries in the Dot-Com Crash of 2000 Essay Example

is that they provide investment information of companies, industries, and segments for the institutional and individual investors by belonging to investment banks and brokerage houses. Their recommendations on the stocks that some investors heavily rely on it make on huge impact on the investors and so on the market as well.

Buy-Side Analysts and Portfolio

Managers Two main roles for the buy-side are analysts and portfolio managers. Analysts mainly belong to a fund to support the fund manager by researching and analyzing the companies and industries. Their research is not for the general individual investors but it is for their fund manager within the company. Portfolio manager is the main person for a fund who actually manage money and who decide to buy or sell securities.

Mutual Funds

Mutual funds have wide variety of types that invest in stocks, bonds, money market funds and other mutual funds but generally not invest in a high and risk return securities because their customers are mainly individuals who wishes to be provided important services such as portfolio manager, diversification, and liquidity.

What are their respective financial interests?

Venture Capitalists

Their financial interests is a compensation that typically obtaining 20% profit from the investment with a low costs operating management. The investment is tied up in their funds that are invested by their customers.

Investment Bank

Underwriters IPO is one of the largest profits for investment banks. Generally, they obtain 7% of the amount of money through the IPO. The number of IPOs in 2000 was 382 compare with the number in 2001 was 80.

Sell-Side Analysts

Their

compensation was based on their research how the amount of trading fees and sales of investment banks had increased.

Buy-Side Analysts and Portfolio Managers

The buy-side analysts' incentive was based on their recommendations performance. The portfolio managers' incentive was based on the performance of their funds compare with their benchmark return. The compensation of both analysts and portfolio managers were tie together with the interests of investors.

Mutual Funds

Their financial interest is management fees that are payout to the mutual funds' company and managers from the mutual funds assets, typical charge 0.5% to 1% of assets on average. This is not including the expenses of the funds.

How can you align their interest with their ideal role?

Venture Capitalists One solution is to establish moral rule in the industry by regulators or company rules by themselves since after the dot-com crash VCs were criticized by investors and the media that VCs neglected their main role: distinguish good business ideas and entrepreneurial teams from bad ones. Their priority became to earn profit in a short term with questionable business models because of the strong movement of dot-com bubble. This movement changed the process of the VCs from rational investment to irrational and emotional investment.

Investment Bank

Underwriters Pets.com was a good example of riches-to-rags story for the dot-com crash. Nine month after became a public company, the company bankrupted. The process and regulations were obviously had no function to check the company's competencies but had function to seek how the investment banks could earn profit easily through the IPOs. Need more high regulations by SEC and high

moral inside the company so that investment banks can stay calm and avoid the euphoria of the market.

Sell-Side Analysts

The assessment of the sell-side analysts was not an appropriate weight. It was heavily weighted on trading fees and revenues that was generated by their research. The company should address this issue to balance their compensation and moral behavior.

Buy-Side Analysts and Portfolio Managers

The main problem that is needed to address is short-term assessment, one-year term horizon and three-year horizon, to long-term assessment. Even they knew that the dot-com companies were overvalued, they had to invest in the companies to meet their benchmark for their compensation. In addition, ranking within the company for marketing purposes could stimulate the managers to invest in securities without rational reasons.

Mutual Funds

Mutual funds that invested in private companies and IPO of a company during the dot-com booming mostly didn't have a track record but they saw the event as a liquidity event so that they step into the VCs segment. The net companies went to public within 5.4 years ages in 1999 compare with 8 years in 1995. Usually, because mutual funds are highly regulated, except hedge funds, mutual funds should go back to the starting point to see what they are expert in it. As we know, experts know best.