We also need an EDGAR
Tuesday, 1 December 2009
A.F.M. Mainul Ahsan
How does an investor, living outside Dhaka or Chittagong or abroad, supposed to get information about a listed company to make a wise investment decision? For example, to get information about a firm, an investor living in Noakhali or abroad may visit the respective firm's website. Unfortunately, most of the listed firms do not even have a website. Only very few listed firms, mostly banks, have websites with financial statements. On the DSE or SEC website, there are hardly any audited annual financial reports of the listed firms. Thus to invest in stock market in Bangladesh, one has to contact respective firm's register office or DSE, CSE or SEC which is costly and sometime even impossible, given Bangladesh's perspective. Then, how do you take your investment decisions? Is it that you invest based on what you hear in media or from your friends who also gather information just like you? To solve this problem, i.e., lack of relevant information, and also to make the market more efficient and transparent, SEC needs to have an online database like EDGAR.
EDGAR, in general, is an electronic database where an investor will get all the publicly available information for free about a firm listed with the US stock exchanges. Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the SEC. Since May 6, 1996, all listed firms in the US are required to make their filings on EDGAR. Third-party filings with respect to these companies, such as tender offers, are also required to be filed on EDGAR. SEC in Bangladesh should also have an information archive, like EDGAR, where investors and researchers will get all relevant information to take a wise investment decision. Information regarding volumes, prices of every hour etc. should also be included in the archive. All the annual and half-yearly financial statements must be in the spotlight of the archive. We need to remember that only sound flow of timely, broad, and accurate information can help investors to make wise investment decisions.
Information is the single most important factor to take investment decisions. Whenever there is information in the market regarding a company's prospect, investors will act accordingly as regards that stock. An investor's wrong investment decision based on inadequate or wrong information leads him/her to stage demonstrations in front of the DSE. In fact, having superior information and getting to know essence of that information make all the difference between you and your rival investor. Unfortunately, in most cases, investors in Bangladesh make decisions based on what they hear in the street instead of analysing company fundamentals.
In his "An inquiry into the Nature and Causes of the Wealth of Nations", Adam Smith introduced the idea that selfish, greedy individuals, if allowed to pursue their interests largely unchecked, would interact to produce a wealthier society as if guided by an "invisible hand." Having an information database could serve as an "invisible hand." Because informed traders will not buy at any price because they will use their accurate information to estimate what will be their expected gain. If the price at which they are offered to buy by the market maker is higher than their expectation for the price increase, they will not have an incentive to buy.
Furthermore, better information which is easily accessible to the investors makes bubbles more difficult to form and to be sustained. Improved public information has two reinforcing effects: (1) the investor can examine the firm's financial statements and compare the firm's business prospects with its current stock price. (2) The individual investor can be confident that he is not missing relevant information that is available to other market participants. When a price seems to outstrip fundamentals, an investor logically asks whether it is a bubble or whether he does not have excess to important information about fundamentals. So, it is important that information is available not only to the select individuals, but to the general public.
Better transparency is the surest way to make market more efficient and less volatile. Greater transparency increases the willingness of international and local investors to commit capital. Moreover, the enhanced transparency may influence value through pure cash-flow effects by reducing agency costs. For instance, transparency reduces the potential diversion of a firm's cash flows to managers and controlling shareholders and thus increases value of the firm. In contrary, lack of transparency could destroy a market. "Today's financial crisis was driven in part by a lack of accurate, easily usable information to give investors what they need to make informed, responsible decisions," Mark Bolgiano, CEO of XBRL, testified at the US Congress.
In the context of Bangladesh, helping market to function better through more disclosure is a sounder safeguard rather than the time-consuming verdict from the court. And, transparency in the marketplace can be achieved through making information available to general public. A database like EDGAR can serve the pupose of increasing market-wide transperency.
Increasing market efficiency and also reducing cost of investment are of prime importance in today's security market. So, rules that govern the securities business all over the world gain from a simple concept: all investors, whether large institutions or small investors, should have access to certain basic information about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC in Bangladesh requires public companies to release meaningful financial and other information to the public. And to increase transparency, efficiency and also to reduce cost of investing in the DSE, SEC in Bangladesh should have an online database like EDGAR so that investors can easily get access to financial information of a firm and make more investment.
Having Bangladeshi version of EDGAR will also render benefits to firms. As researcher Barry and Brown suggested, cost of capital is a function of "estimation risk," i.e., the better investors are able to assess the prospects for a company, the lower is its expected cost of capital. And a lower cost of equity capital leads to an increase in the market value of the firm's shares. For instance, foreign listings improve firms' information environment. Thus, firms experience an increase in value for cross-listing on a non-domestic exchange, followed by lower cost of capital. Thus, having a database like EDGAR will help firms to experience higher market value.
Because of higher return, our market is getting attention from different quarters of the society. For instance, about one lakh new investors, including non-resident Bangladeshis, have entered the market in last two years with little or no knowledge about the stock market. Since relevent information, for example, annual audited financial report, about a listed firm is expensive and hard to get, investors follow the short-cut, i.e., follow the rumour to invest their life-time's savings. In fact, research shows that it is optimal to imitate when lacking information: the less information you have, the stronger is your incentive to follow the consensus. But in such a situation, aren't you taking a huge risk with your life-time's savings? Investing without relevant information makes an investment as risky as gambling. However, an information archive, like EDGAR, in Bangladesh will provide a common pool of knowledge for all investors, enabling them to judge for themselves whether to buy, sell, or hold a particular share. And this information flow will result in a far more active, efficient, and transparent capital market that facilitates capital formation which is vital to our economy.
The SEC Act, in its preamble, states that the SEC has been established "for the purpose of protection of interest of investors in securities, for the development of (securities) markets and for matters connected therewith or incidental thereto". And Bangladesh version of EDGAR can help SEC to achieve its goal.
The writer is a PhD student at Texas Tech University, USA. He can be reached
at: mainul.ahsan@ttu.edu
How does an investor, living outside Dhaka or Chittagong or abroad, supposed to get information about a listed company to make a wise investment decision? For example, to get information about a firm, an investor living in Noakhali or abroad may visit the respective firm's website. Unfortunately, most of the listed firms do not even have a website. Only very few listed firms, mostly banks, have websites with financial statements. On the DSE or SEC website, there are hardly any audited annual financial reports of the listed firms. Thus to invest in stock market in Bangladesh, one has to contact respective firm's register office or DSE, CSE or SEC which is costly and sometime even impossible, given Bangladesh's perspective. Then, how do you take your investment decisions? Is it that you invest based on what you hear in media or from your friends who also gather information just like you? To solve this problem, i.e., lack of relevant information, and also to make the market more efficient and transparent, SEC needs to have an online database like EDGAR.
EDGAR, in general, is an electronic database where an investor will get all the publicly available information for free about a firm listed with the US stock exchanges. Its primary purpose is to increase the efficiency and fairness of the securities market for the benefit of investors, corporations, and the economy by accelerating the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the SEC. Since May 6, 1996, all listed firms in the US are required to make their filings on EDGAR. Third-party filings with respect to these companies, such as tender offers, are also required to be filed on EDGAR. SEC in Bangladesh should also have an information archive, like EDGAR, where investors and researchers will get all relevant information to take a wise investment decision. Information regarding volumes, prices of every hour etc. should also be included in the archive. All the annual and half-yearly financial statements must be in the spotlight of the archive. We need to remember that only sound flow of timely, broad, and accurate information can help investors to make wise investment decisions.
Information is the single most important factor to take investment decisions. Whenever there is information in the market regarding a company's prospect, investors will act accordingly as regards that stock. An investor's wrong investment decision based on inadequate or wrong information leads him/her to stage demonstrations in front of the DSE. In fact, having superior information and getting to know essence of that information make all the difference between you and your rival investor. Unfortunately, in most cases, investors in Bangladesh make decisions based on what they hear in the street instead of analysing company fundamentals.
In his "An inquiry into the Nature and Causes of the Wealth of Nations", Adam Smith introduced the idea that selfish, greedy individuals, if allowed to pursue their interests largely unchecked, would interact to produce a wealthier society as if guided by an "invisible hand." Having an information database could serve as an "invisible hand." Because informed traders will not buy at any price because they will use their accurate information to estimate what will be their expected gain. If the price at which they are offered to buy by the market maker is higher than their expectation for the price increase, they will not have an incentive to buy.
Furthermore, better information which is easily accessible to the investors makes bubbles more difficult to form and to be sustained. Improved public information has two reinforcing effects: (1) the investor can examine the firm's financial statements and compare the firm's business prospects with its current stock price. (2) The individual investor can be confident that he is not missing relevant information that is available to other market participants. When a price seems to outstrip fundamentals, an investor logically asks whether it is a bubble or whether he does not have excess to important information about fundamentals. So, it is important that information is available not only to the select individuals, but to the general public.
Better transparency is the surest way to make market more efficient and less volatile. Greater transparency increases the willingness of international and local investors to commit capital. Moreover, the enhanced transparency may influence value through pure cash-flow effects by reducing agency costs. For instance, transparency reduces the potential diversion of a firm's cash flows to managers and controlling shareholders and thus increases value of the firm. In contrary, lack of transparency could destroy a market. "Today's financial crisis was driven in part by a lack of accurate, easily usable information to give investors what they need to make informed, responsible decisions," Mark Bolgiano, CEO of XBRL, testified at the US Congress.
In the context of Bangladesh, helping market to function better through more disclosure is a sounder safeguard rather than the time-consuming verdict from the court. And, transparency in the marketplace can be achieved through making information available to general public. A database like EDGAR can serve the pupose of increasing market-wide transperency.
Increasing market efficiency and also reducing cost of investment are of prime importance in today's security market. So, rules that govern the securities business all over the world gain from a simple concept: all investors, whether large institutions or small investors, should have access to certain basic information about an investment prior to buying it, and so long as they hold it. To achieve this, the SEC in Bangladesh requires public companies to release meaningful financial and other information to the public. And to increase transparency, efficiency and also to reduce cost of investing in the DSE, SEC in Bangladesh should have an online database like EDGAR so that investors can easily get access to financial information of a firm and make more investment.
Having Bangladeshi version of EDGAR will also render benefits to firms. As researcher Barry and Brown suggested, cost of capital is a function of "estimation risk," i.e., the better investors are able to assess the prospects for a company, the lower is its expected cost of capital. And a lower cost of equity capital leads to an increase in the market value of the firm's shares. For instance, foreign listings improve firms' information environment. Thus, firms experience an increase in value for cross-listing on a non-domestic exchange, followed by lower cost of capital. Thus, having a database like EDGAR will help firms to experience higher market value.
Because of higher return, our market is getting attention from different quarters of the society. For instance, about one lakh new investors, including non-resident Bangladeshis, have entered the market in last two years with little or no knowledge about the stock market. Since relevent information, for example, annual audited financial report, about a listed firm is expensive and hard to get, investors follow the short-cut, i.e., follow the rumour to invest their life-time's savings. In fact, research shows that it is optimal to imitate when lacking information: the less information you have, the stronger is your incentive to follow the consensus. But in such a situation, aren't you taking a huge risk with your life-time's savings? Investing without relevant information makes an investment as risky as gambling. However, an information archive, like EDGAR, in Bangladesh will provide a common pool of knowledge for all investors, enabling them to judge for themselves whether to buy, sell, or hold a particular share. And this information flow will result in a far more active, efficient, and transparent capital market that facilitates capital formation which is vital to our economy.
The SEC Act, in its preamble, states that the SEC has been established "for the purpose of protection of interest of investors in securities, for the development of (securities) markets and for matters connected therewith or incidental thereto". And Bangladesh version of EDGAR can help SEC to achieve its goal.
The writer is a PhD student at Texas Tech University, USA. He can be reached
at: mainul.ahsan@ttu.edu