M.

Mahfuzur Rahman
ID No: 51221074
st
Batch: 21

Introduction
Efficient Capital Markets:
Efficient Capital Markets are those in which market prices reflect
available information.
There is no way to make unusual or excess profits by using the
available information.

It reflects:
Accounting Method does not affect stock prices
Timing decision to issue stocks and bonds is not important
Firms do not get more from speculation in stock and currency

market
Financial managers should pay attention to the information in
market prices

13.1: Can financing decisions create

value?
To create value from capital budgeting firms doing:
Locate an unsatisfied demand for a asset
Create barrier to make it difficult for other firms to

compete
Produce the asset at lower cost
Be the first to develop a new asset

Three ways to create valuable financing opportunities:

Fool Investors
Reduce costs or increase subsidies
Create a new security

13.2: A description of efficient capital

market
The Efficient Market Hypothesis (EMH) has
implications for investors and for firms:
Because information is reflected in prices immediately,

investors should only expect to obtain a normal rate of

return.
Firms should expect to receive fair value for securities
that they sell.

Foundation of Market Efficiency:

1.
2.
3.

Rationality
Independent deviation from rationality
Arbitrage

13.2: A description of efficient capital

market
Foundation of Market Efficiency:
1.

Rationality:
Assumes almost all investors are rational.

2.

Independent deviation from rationality:

All investors can not be rational. Optimistic rationality offset
pessimistic rationality

3.

Arbitrage:
Two types of investors:

Irrational Amateurs

Rational Professionals
Arbitrage of professionals dominates the speculation of
amateurs.

13.3: Different types of efficiency

Efficiency based on differential response rate:
Information on past prices
Publicly available information
All information

Based on above classification efficiency is categorized

into three:
The Weak Form

The Semi-strong Form

The Strong Form

13.5: The behavioral challenge to

market efficiency
A. Rationality:
All investors can not be really rational

B. Independent deviation from rationality:

Responsiveness
Conservatism

C. Arbitrage:
Offsetting speculation of amateur investors by arbitrage of
professionals is too risky.

13.6: Empirical challenge to market

efficiency
There are four challenges:
Limits to arbitrage
II. Earning surprises
III. Size
IV. Value versus growth
V. Crashes and bubbles
I.

Implications for Corporate Finance

Market Efficiency has mainly four implications for
corporate finance:
1)

Accounting choices, financial choices and market

efficiency:
In efficient market accounting method should not affect stock
prices

2)

The timing decisions:

Timing decisions to issue equity is not important as market is
efficient

3)

Speculation and efficient markets:

In efficient market firms can not gain more through speculation
of stocks and currency

4)

Information in market prices:

Market pries reflect all information. So managers should pay
attention in market prices.

Conclusion
The evidence on market efficiency is not one-sided. A
very influential school of thought, known as
behavioral finance, argues that markets are simply not
efficient. Ultimately whether or not capital markets
are efficient is an empirical question.

Thank You