The study examines and critical reviews the literature for the different implications based on
the three levels of the Efficient Market Hypothesis for investors and company managers. If
the weak form of the EMH holds, the technical analyse is useless, but ninety percent of
traders in London are using it. If the semi-strong-form holds the fundamental analysis, study
of published accounts, search for undervalued companies are useless and investors should be
focus on diversification and avoiding of transaction costs. Furthermore the semi-strong form
would imply for managers, that accounting disclosure to deceived shareholders is useless, the
company market value is the best indicator for the company value and management decisions,
the company does not need specialists for the timing of issues and there are no opportunities
for a cheap acquisition of another company. At least if the strong-form of the EMH holds, it
would imply that even with insider information it would not be possible to get above average
returns. The literature shows, that the studies of EMH have made an important contribution to
our understanding of the security market. It also shows that in some cases scientific results do
not strong influence the behaviour of manager and investors in the “real world”.
Table of Contents
1. INTRODUCTION
2. EFFICIENT MARKET HYPOTHESIS
2.1 MARKET EFFICIENCY
2.2 THREE LEVELS OF EFFICIENT MARKETS
2.3 MYTH ABOUT THE EMH
3. INFORMATION ABOUT EMPIRICAL RESULTS
4. IMPLICATIONS OF THE EMH FOR INVESTORS
4.1 WHEN THE WEAK-FORM OF THE EMH HOLDS
4.1.1 Technical Analysis is useless
4.2 WHEN THE SEMI-STRONG-FORM OF THE EMH HOLDS
4.2.1 Fundamental Analysis is useless
4.2.2 The study of published accounts is useless
4.2.3 The most tips are worthless
4.2.4 The search for undervalued companies is useless
4.2.5 Portfolio diversification is important to reduce non-systematic risk
4.2.6 Transaction costs should be as low as possible
4.2.7 Unit Trusts do not perform better than their beta
4.3 WHEN THE STRONG-FROM OF THE EMH HOLDS
4.3.1 Insider information are useless
5. IMPLICATIONS OF THE EMH FOR MANAGER
5.1 ACCOUNTING DISCLOSURE TO DECEIVED SHAREHOLDERS IS USELESS
5.2 MARKET VALUE AS INDICATOR FOR COMPANY VALUE AND MANAGEMENT DECISIONS
5.3 COMPANIES DO NOT NEED SPECIALISTS FOR THE TIMING OF NEW ISSUES
5.4 THERE ARE NO OPPORTUNITIES FOR A CHEAP ACQUISITION
6. CONCLUSION
7. BIBLIOGRAPHY
Research Objective and Core Topics
This study aims to perform a critical review of existing literature regarding the implications of the Efficient Market Hypothesis (EMH) for both individual investors and corporate managers. It explores how the three theoretical levels of market efficiency challenge traditional investment strategies and corporate decision-making processes in a real-world context.
- The theoretical foundations and levels of the Efficient Market Hypothesis (weak, semi-strong, and strong).
- Empirical validity of the EMH and the persistent "myth" that it precludes market outperformance.
- Specific consequences for investors, including the efficacy of technical and fundamental analysis.
- Strategic implications for company management, such as accounting transparency and corporate acquisition timing.
- The discrepancy between theoretical market efficiency and observed behavior in financial markets.
Excerpt from the Book
4.2.3 The most tips are worthless
There are many magazines, banks, analysts and other experts, which often recommend stocks, which will outperform other stocks of a similar risk. Based on the actual stock price reflects already all public information, this implies that specialist normally cannot know more (Dobbins, 1979).
There could be an opportunity how these tips are very valuable for investors and useful to get above average returns. But only if the specialist has insider information, which are not already public and he knows how the market will react on this information.
Furthermore, the share price could increase based on the tipsters, if many investors believe in this tips and buy the shares, but these would contradict the rationality assumption of the EMH (Fama, 1970).
Summary of Chapters
1. INTRODUCTION: Provides historical context on the development of the Efficient Market Hypothesis, citing key contributors like Bachelier and Fama.
2. EFFICIENT MARKET HYPOTHESIS: Defines the three levels of market efficiency (weak, semi-strong, strong) and addresses common misconceptions regarding market outperformance.
3. INFORMATION ABOUT EMPIRICAL RESULTS: Discusses the nature of existing empirical studies and the limitations regarding the transferability of their findings across different markets and time periods.
4. IMPLICATIONS OF THE EMH FOR INVESTORS: Details how each form of market efficiency challenges specific investor tools, such as technical analysis, fundamental analysis, and portfolio diversification strategies.
5. IMPLICATIONS OF THE EMH FOR MANAGER: Analyzes how an efficient market impacts corporate strategies, including accounting disclosures, stock valuations, and the management of new security issues or acquisitions.
6. CONCLUSION: Synthesizes the findings, noting that while the EMH is a critical academic framework, human behavior and market anomalies often lead to deviations in the real world.
7. BIBLIOGRAPHY: Lists the academic sources and empirical literature utilized to support the review of the Efficient Market Hypothesis.
Keywords
Efficient Market Hypothesis, EMH, Financial Management, Stock Market, Investors, Technical Analysis, Fundamental Analysis, Market Efficiency, Portfolio Diversification, Insider Information, Corporate Strategy, Asset Pricing, Random Walk, Behavioral Finance, Security Market.
Frequently Asked Questions
What is the core focus of this study?
The study provides a critical review of literature concerning the Efficient Market Hypothesis (EMH) and examines its practical implications for investors and corporate managers.
What are the primary thematic areas covered?
The main themes include the definition of market efficiency levels, the reliability of technical and fundamental analysis, the importance of portfolio diversification, and the impact of market efficiency on corporate financial decisions.
What is the main objective of the assignment?
The goal is to analyze how the EMH is interpreted in academic literature and to evaluate the gap between theoretical market efficiency and real-world market behavior.
Which scientific methods are discussed in the work?
The study relies on a review of empirical research and event studies, such as those conducted by Fama and Jensen, which investigate price adjustments and performance anomalies in financial markets.
What content is addressed in the main chapters?
The main chapters evaluate the impact of market efficiency on investment returns, the utility of various analytical tools, and the constraints placed on management actions like acquisition planning or accounting disclosure.
Which keywords best characterize this work?
Key terms include Efficient Market Hypothesis, investment strategies, fundamental and technical analysis, corporate finance, market risk, and financial market efficiency.
How does the EMH affect the use of technical analysis according to the text?
The text suggests that if the weak-form of the EMH holds, technical analysis based on past price movements is considered useless for consistently generating abnormal returns.
Why does the author argue that company acquisitions may not create value?
The author argues that in an efficient market, there are no "bargains" or undervalued companies to acquire, and therefore acquisitions may not necessarily increase returns for existing shareholders.
Does the text conclude that the EMH always holds in the real world?
No, the text concludes that while the EMH is an important theoretical contribution, factors like human psychology and behavioral deviations mean it does not always represent reality.
- Quote paper
- Sascha Kurth (Author), 2011, Critical Review about implications of the Efficient Market Hypothesis, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/180788
