Financial Theories Overview
Financial Theories Overview
Financial Theories Overview
This paper will include an overview of 10 financial theories incorporating both germinal and current research. In addition, each financial theory will include a general description, current examples, and significant attributes.
Table 1
Financial Theories Financial Theories | Description | Current Examples | Significant Attributes | 1. Efficiency Theory | Eugene Fama defined efficient markets as “a market where there are large numbers of rational profit-maximizers actively competing, with each trying to predict future market values of individuals securities, and where important current information is almost freely available to all participants” (Ball, 2001, p. 23). | Publicly available information is accessible to all investors at zero cost while earnings reports are costly to firms to produce (Ball, 2001). Once these reports are public in databases or corporate websites, they are nearly costless to obtain but may have a cost associated to interpret the information (Ball, 2001).Another example is to use a coupon to obtain a free item. The item is free, but the opportunity cost is not free. In addition, there is a cost associated with the resources used to print the coupon for the potential customer. | According to Ball (2001), this theory has limitations because it neglects the role of information costs and assumes price includes all costs.Theory uses event time to isolate market reactions to stock prices (Ball, 2001).A notable factor contributing to success was Center for Research in Securities Prices (CRSP), which provided comprehensive NYSE data dated from 1926 (Ball, 2001).The following anomalies exist in this theory: price overreactions, excel volatility, price under reactions to earnings, the failure of CAPM to explain returns, the explanatory power of non-CAPM factions, and seasonal patterns (Ball, 2001). The following problems exist when testing the theory: changes in riskless rates
Financial Theories Overview
This paper will include an overview of 10 financial theories incorporating both germinal and current research. In addition, each financial theory will include a general description, current examples, and significant attributes.
Table 1
Financial Theories Financial Theories | Description | Current Examples | Significant Attributes | 1. Efficiency Theory | Eugene Fama defined efficient markets as “a market where there are large numbers of rational profit-maximizers actively competing, with each trying to predict future market values of individuals securities, and where important current information is almost freely available to all participants” (Ball, 2001, p. 23). | Publicly available information is accessible to all investors at zero cost while earnings reports are costly to firms to produce (Ball, 2001). Once these reports are public in databases or corporate websites, they are nearly costless to obtain but may have a cost associated to interpret the information (Ball, 2001).Another example is to use a coupon to obtain a free item. The item is free, but the opportunity cost is not free. In addition, there is a cost associated with the resources used to print the coupon for the potential customer. | According to Ball (2001), this theory has limitations because it neglects the role of information costs and assumes price includes all costs.Theory uses event time to isolate market reactions to stock prices (Ball, 2001).A notable factor contributing to success was Center for Research in Securities Prices (CRSP), which provided comprehensive NYSE data dated from 1926 (Ball, 2001).The following anomalies exist in this theory: price overreactions, excel volatility, price under reactions to earnings, the failure of CAPM to explain returns, the explanatory power of non-CAPM factions, and seasonal patterns (Ball, 2001). The following problems exist when testing the theory: changes in riskless rates
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