BRE X
BRE-X CASE
Introduction
Bre- X can be seen as a classic case of a bubble. Looking at the company’s financial statement we see negative net incomes, and negative free cash flows. Yet looking at the stock prices they seem to be shooting upwards. What could be inducing investors to purchase the shares? We then see an announcement by an independent analyst who makes a revelation that results to the plummeting of share prices and everyone rushing to dispose their shares in BreX not wanting to be the last to hold the shares. This paper discusses the recurrent themes of financial bubbles and how these features apply to the case of Bre- X. It further analyses the flawed corporate governance practices on the part of the board as well as the regulators.
Information Asymmetry
All investors have some basic rights when it comes to their investment among which one is information disclosure (La Porta et al. 1999: 6). However, whether investors truly get the information they want is hard to decide as the enterprise chooses its own degree and method of information disclosure in the name of managerial discretion and business activities protection. The capital markets information demands necessitates the need for corporate finance reporting and disclosure, however the firms information environment is shaped by its corporate governance practises. Analysts in the mining industry and in this case Bre- X relied heavily on the reports of findings by the company in order to estimate the value of the company’s stock. The reports of findings by the company are usually verified by independent sources. Investors normally rely on the financial analysts in order for them to make decisions.
Bre-X claimed to have found the largest known gold deposit in the world at Busang and their consultant firm PT Kilborn confirms this claim through a report but however fails to state that the samples always were drawn and controlled by the company. The samples were however
doctored
Introduction
Bre- X can be seen as a classic case of a bubble. Looking at the company’s financial statement we see negative net incomes, and negative free cash flows. Yet looking at the stock prices they seem to be shooting upwards. What could be inducing investors to purchase the shares? We then see an announcement by an independent analyst who makes a revelation that results to the plummeting of share prices and everyone rushing to dispose their shares in BreX not wanting to be the last to hold the shares. This paper discusses the recurrent themes of financial bubbles and how these features apply to the case of Bre- X. It further analyses the flawed corporate governance practices on the part of the board as well as the regulators.
Information Asymmetry
All investors have some basic rights when it comes to their investment among which one is information disclosure (La Porta et al. 1999: 6). However, whether investors truly get the information they want is hard to decide as the enterprise chooses its own degree and method of information disclosure in the name of managerial discretion and business activities protection. The capital markets information demands necessitates the need for corporate finance reporting and disclosure, however the firms information environment is shaped by its corporate governance practises. Analysts in the mining industry and in this case Bre- X relied heavily on the reports of findings by the company in order to estimate the value of the company’s stock. The reports of findings by the company are usually verified by independent sources. Investors normally rely on the financial analysts in order for them to make decisions.
Bre-X claimed to have found the largest known gold deposit in the world at Busang and their consultant firm PT Kilborn confirms this claim through a report but however fails to state that the samples always were drawn and controlled by the company. The samples were however
doctored
References: Charles P. Kindelberger, Robert Z. Aliber (2005): Maniacs, Panics and Crashes, A History of Financial Crises, Fifth Edition. Jean- Paul Page, (2005) Corporate Governance and Value Creation, The Research Foundation of CFA Institute J. Richard Finlay (2009). Why Canada’s Stock Markets Attracted Russian Mobsters Like a Magnet. Available: http://finlayongovernance.com/?p=1729