(b) Explain the meaning of the term ‘Efficient Market Hypothesis’ and discuss the implicat
题目
(b) Explain the meaning of the term ‘Efficient Market Hypothesis’ and discuss the implications for a company if
the stock market on which it is listed has been found to be semi-strong form. efficient. (9 marks)
参考答案和解析
正确答案: (b) The term ‘Efficient Market Hypothesis’ (EMH) refers to the view that share prices fully and fairly reflect all relevant available information1. There are other kinds of capital market efficiency, such as operational efficiency (meaning that transaction costs are low enough not to discourage investors from buying and selling shares), but it is pricing efficiency that is especially important in financial management. Research has been carried out to discover whether capital markets are weak form. efficient (share prices reflect all past or historic information), semi-strong form. efficient (share prices reflect all publicly available information, including past information), or strong form. efficient (share prices reflect all information, whether publicly available or not). This research has shown that well-developed capital markets are weak form. efficient, so that it is not possible to generate abnormal profits by studying and analysing past information, such as historic share price movements. This research has also shown that well-developed capital markets are semi-strong form. efficient, so that it is not possible to generate abnormal profits by studying publicly available information such as company financial statements or press releases. Capital markets are not strong form efficient, since it is possible to use insider information to buy and sell shares for profit. If a stock market has been found to be semi-strong form. efficient, it means that research has shown that share prices on the market respond quickly and accurately to new information as it arrives on the market. The share price of a company quickly responds if new information relating to that company is released. The share prices quoted on a stock exchange are therefore always fair prices, reflecting all information about a company that is relevant to buying and selling. The share price will factor in past company performance, expected company performance, the quality of the management team, the way the company might respond to changes in the economic environment such as a rise in interest rate, and so on. There are a number of implications for a company of its stock market being semi-strong form. efficient. If it is thinking about acquiring another company, the market value of the potential target company will be a fair one, since there are no bargains to be found in an efficient market as a result of shares being undervalued. The managers of the company should focus on making decisions that increase shareholder wealth, since the market will recognise the good decisions they are making and the share price will increase accordingly. Manipulating accounting information, such as ‘window dressing’ annual financial statements, will not be effective, as the share price will reflect the underlying ‘fundamentals’ of the company’s business operations and will be unresponsive to cosmetic changes. It has also been argued that, if a stock market is efficient, the timing of new issues of equity will be immaterial, as the price paid for the new equity will always be a fair one.
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