Determinants of the structure of Financial Markets

Financial market have the ability to provide the platform for lender and borrower to participate
in a handshake which allow the wealth maximization for all stakeholder. While these institute
work to profit maximization there are certain factor that affect its working in short as well as
long time frame.
Major factor that have cause-effect relation
1) Government
Nation government holds influence on different markets. The fiscal and
monetary policies that government and central bank respectively put in place have
profound impact. Using fiscal policy the government can increase or decrease their own
spending which help ease unemployment and/or stabilize price. The increase or
decrease in interest rate by central bank can effectively slow down or speed up the
growth within the country.
2) International transaction
The flow of fund between countries effect the strength of a country’s economy
and currency. The high inflow and low outflow empower the country financially stable
and vice-versa hold true.
3) Speculation
Positive speculation let the investor pour money in the market to provide
liquidity for new and big project. Negative speculation forces investor to withdraw
money out of market for future opportunity.
4) Supply and demand
Supply and demand for products, services, currencies and other investments
creates a push-pull dynamic in prices. Prices and rates change as supply or demand
changes. If something is in demand and supply begins to shrink, prices will rise. If
supply increases beyond current demand, prices will fall.
Event lead to the Sarbanes-Oxley Act (SOX)

U.S. Congress passed the SOX Act of 2002 on July 30 of that year to protect investors from
fraudulent financial reporting by corporation. The act created strict rules for accountants,
auditors and corporate officers and imposed more stringent recordkeeping regulation. The act
added criminal penalties for violating securities laws.
Whole scandal comes under the limelight due to the financial cost and conflict of interest
associated with it. Enron, Tyco International, Adelphia, Peregrine Systems, and WorldCom are
major corporate that cost investors billion of dollar when share price of these company
collapsed resulting blow to public confidence in the US securities market.
Enron, energy based company, founded by Kenneth lay. The company who achieved a high of
US$90.75 per share in mid-2000, plummeted to less than $1 by the end of November
2001.Company’s employee Andrew Fastow created the complex web of off-balance-sheet
special purpose entities used to conceal Enron’s massive losses in their quarterly balance
sheets. As resulted investor nearly lost $63.4 billion.
Adelphia, a cable television company, was the 5th largest cable company in the US before filing
for bankruptcy in 2002 as a result of internal corruption. The company collapsed into
bankruptcy in 2002 after it disclosed $2.3 billion in off-balance-sheet debt.
Similar to Enron and Adelphia, other company were ca dubious transaction. These transaction
made investor vulnerable and they start to divest their investment.

Event lead to the Global Legal Settlement

A lawsuit against the ten largest investment banks (Bear Stearns, Credit Suisse, Deutsche Bank,
Morgan Stanley etc.) for creation of conflict of interest between investments banking
department and research analyst. The analyst start publishing biased research and firm were
alleged engaged in “spinning”. The act let the analyst do their work in most truthful way by
becoming a shield from these cash rich investment bank. A total of $1.435 billion was assessed
and distributed ($875 Million in penalties and disgorgement. Half of $775 million paid in
resolution of action by the SEC, NYSE and NASDQ, and will be put into fund to benefit
customer of the firm, other half goes to state. $432.5 million to fund independent research, $80
million to promote investor education).
Impact on Firm Ability to do Business

1. Need for Personnel

Higher external auditing fees for the business and public accounting firm to remain
good standing with Public Company Accounting Oversight Board (PCAOB).

2. Increase in Operating Cost

Businesses must develop and implement internal controls to safeguard their
operational and financial information. Setting up internal controls might require the
use of a public accounting firm or professional accountant.

3. Higher Auditing Fees

The PCAOB also requires public accountants to maintain specific continuing
professional education relating to current accounting standards and SOX requirements.

4. Fewer Accounting Services

Public accounting firms must limit the amount of accounting services they offer
to one client. Business owners are usually required to use more than one public
accountant to complete professional accounting services.