Case Study: Business Finance

Business Finance
Name:
Institution:
Date:
Investor herding
There is an underlying reason for resulting to investor herding other than the valuation models. Through investor herding, people deal in securities depending on the actions of their peers (Gitmann & Zutter, 2012). On one hand, it is dependent on investors acting simultaneously, but independent of investment fundamentals. In most cases, herding precedes bubbles in the financial and money markets and there is little regard for proper valuation in investor herding. The Dotcom bubble is a manifestation of herd behavior as many investors and venture capitalists invested in companies with little regard for market fundamentals and business models.
One of the reasons for imitation among investors when they observe the activities of their peers is that they assume that they have inherent information. There may be market anomalies and inefficiencies because of herding behavior. When there is sale of securities from the herd market, there is sudden supply of these securities, which causes a fall in the price of assets. Consequently, the asset ‘s value in the market is less than the fair value before sale of securities, sell of the asset could trigger further sales through imitation from other investors.
Conclusion
Investor herding is a symptom of market inefficiency, and does not follow valuation models. This theory supposes that the behavior of many investors follows the same pattern through watching the activities of their peers. Because of the herd behavior, the valuation of assets is wrong as the behavior ignores market forces and fundamentals. Even though, investors ignore private information and mimic other investors, it seems as if investors are rational, but observation of other inventors challenges the assumption that they all have homogenous behavior.
References
Gitman, L. J & Zutter, C. J. (2012).Principles of managerial finance. Boston, MA : Pearson Education.
ExxonMobil
ExxonMobil reported a net income of $44.88 billion in the year ended December 2012, $ 41. 06 billion in 2011 and $ 30.46 billion in 2010 (ExxonMobil, 2013). I do not believe that it is an evil corporation. The primary responsibility of businesses is to make profits, which then translates to more wealth for stockholders, but there are also legal and ethical considerations that make ExxonMobil to be a good corporation. Thus, at a price of $ 4 per gallon, the company is able to increase profits and build reserves for the company. Starbucks had an operating income of $ 1.997 billion in 2012 and diluted earning per share of $ 1.79(Starbucks, 2013). However, gas prices affect many people than latte, which mostly affects the target market, who are not price sensitive
The dividend payments of ExxonMobil occur for four quarters of a financial year, with the dividends growing at 6%over 30 years (ExxonMobil, 2013). In the year 2013, shareholders will recei...