finc600 discussion and discussion responses 2
This is a two part questions. First I will need the discussion question answer which will be below in bold, 250+ words APA format. For those response I will need three responses of at least 150 words each.
Define the efficient market hypothesis (EMH). What are the implications of EMH for corporate managers?
We learned in our text that an efficient market hypothesis (EMH) sees investors having all available information about an asset. In turn, its price adjusts immediately to a price of near equilibrium. Therefore, the price is integrally tied to available information. Jason Van Bergen of Forbes notes that EMH, like other financial theories, are subjective (2011). Van Bergen notes, â€œThere are no proven laws in finance, but rather ideas that try to explain how the market works.â€ (2011).
Out text notes two important implications of EMH for investors and firms. First, investors must expect a normal rate of return, as prices are immediately updated as new information becomes available. Therefore, there is no advantage to having information first as the investor has no time to act upon the information. Second, there are no opportunities to fool investors in an efficient market. This is because all securities are issued in the present value,meaning firms expect fair value (2017). Ultimately, the EMH eliminates the delayed response to new information, and the overreaction and reversion of new information.
As a corporate manager, implications change depending on what side of the information you are on. If you are a corporate manager at an investment firm, you would have zero advantage over other firms. Therefore, investments must be tailored assets that will have long term growth potential, as short term investing is basically eliminated. As a corporate manager of a company that is traded, your passage of information outside the firm would instantly affect its price. Managers could delay possible losses by waiting to release the information to the market. Ultimately, EMH is just a theory. As Van Bergen notes, it is unlikely we will ever see an efficient market. He notes it is possible under the following conditions: â€œ(1) universal access to high-speed and advanced systems of pricing analysis, (2) a universally accepted analysis system of pricing stocks, (3) an absolute absence of human emotion in investment decision-making, (4) the willingness of all investors to accept that their returns or losses will be exactly identical to all other market participants.â€ 2018. This is highly unlikely to ever occur.
Ross. (2017). Corporate Finance Core Principles and Applications (5th ed.). McGraw-Hill College.
Van Bergen, J. (2011, January 12). Efficient Market Hypothesis: Is The Stock Market Efficient? Retrieved from https://www.forbes.com/sites/investopedia/2011/01/…
EMH or efficient market hypothesis means that everything that is known about an investment, like a stock has already been accounted for and this means that regardless one investor cannot have an edge on another investor because the stock investment is already fair value.
There are three types of EMHâ€s, weak form, semi-strong form, and strong form.
Weak form means that all past information is reflected in the securities. This also means that it does not provide long term advantages.
Semi-Strong form all new information is already put into the value and will not provide an advantage to investors.
Strong form means that public and private information has already been factored in and there is absolutely no advantage an investor can gain.
Some implications for corporate managers are that the incentive for finding a better stock is no longer, the best way for one to earn more is to make riskier investments, if this is a true hypothesis and the market is efficient then future prices cannot be determined by studying the history and the need for fundamental analysis is not needed because all publicly available information is reflected immediately in prices.
Stock prices have many different factors that go into their arranged prices. In fact, all known information goes into the price of a stock. The efficient market hypothesis says that because all the public information is already known between a buyer and a seller, the price the stock is traded on is correct and only unknown or unforeseen information can determine whether a stock will become overvalued or undervalued. This also means that a person cannot, over time, outpace the market because all the information that they have is information that everyone has and it is already being implemented into a stock price.
For instance, the stock for Blockbuster would have dropped dramatically after streaming services like Netflix started to become popular. People that sold that stock were using information about Netflix that was known to everyone already when they made their decision.
There are three forms of EMH; weak form, semi-strong form, and strong form. Weak form assumes that, while public information is reflected in the price of stock, private information is not. It also assumes that new information takes time to adjust the stock prices. If we include private information into the stock price and see new information changing stock prices quickly, that would be strong form. With Semi-strong form, we assume that only public information is used but new public information changes the stock price rapidly.
As a corporate manager, this means that information that is available to you is available to everyone and investments need to focus on long term growth. It essentially means you have no advantage over anyone else.
Efficient Markets Hypothesis – Understanding and Testing EMH. (n.d.). Retrieved from https://corporatefinanceinstitute.com/resources/kn…
Kennon, J. (2019, November 16). Here Is a Look at How Stock Prices Are Determined. Retrieved from https://www.thebalance.com/how-stock-prices-are-de…
Thune, K. (2020, January 22). Does the Efficient Markets Hypothesis (EMH) Work in Reality? Retrieved from https://www.thebalance.com/efficient-markets-hypot…
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