Market Efficiency Contradicts the Usefulness of Annual Reports?

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Market Efficiency
the Usefulness of Annual Reports?

One speech, Mr Right presented that the market was efficient in the semi-strong form as investors had no benefit in the disclosure of enterprises financial reports, due to the information included in those reports was the past information with share prices. Therefore, the usefulness of financial reporting to share purchasers and sellers was invalid during their decision making, so there were unnecessary for an investor to study financial reports and accounts of companies.

I. Capital Market Efficiency & Efficiency Market Hypotheses (EMH)

Capital Market Efficiency is the level, to which stock price rapidly and rationally reflects all the available, relevant information, so that it brings the functions of encouraging share buying by the investors if accurate pricing shown in the share market, giving accurate alerts to the directors as the efficient share market reflects the share price which rationally represents the business situation, also assisting the resources allocation to ensure the funds become the most efficient beneficial for the company.

The efficient-market hypothesis (EMH) formed by Eugene Fama, an American economist, at 1970, is supporting the stock market is “informationally efficient”. Basically, there are three forms of hypotheses.

The weak form EMH states that the current stock prices reflect all the past information movements. It means that the market in weak form EMH is not able to predict the future price cause of past information contained in the current stock price.

The semi strong form EMH states that all disclosed available information is fully reflected into the current market price. It means the market is more efficient and reliable than which in weak form EMH, as the public information stated not only past prices movement but also information reported in the company's financial statements, announcement, economic factors, etc. Therefore, the future price is not able to predict anymore to get higher returns.

The strong form EMH states that the public or private information are also fully reflected into the current market price. It means the company’s insider also cannot earn higher returns from the private information as which has been already reflected into the current market price.

II. What Does EMH not Mean?

EMH endorses an extremely ideal capital market environment as the market share buyers and sellers behave objectively and rationally without bias. However, does it mean the EMH theory is currently implied in the real world shares market? In the realistic, how can the investors get the returns and benefits from the market shares and what information they can rely on?

Reverse of EMH, Behavioral finance is against the concept of market efficiency which does believe that stock price rapidly and rationally reflects all the available, relevant information instantaneously at the capital market.

Mr Phung reported that according to conventional financial theory, the world and its participants were, for the most part, rational "wealth maximizers". However, there were many instances where emotion and psychology influence investors’ decisions, causing them to behave in unpredictable or irrational ways.

He also mentioned that behavioral finance was a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people made irrational financial decisions.(2010)

Consequently, behavioral finance can be explained that “January Effect” is anomaly occurred in the capital market, it can also be characterized as a landmark for Wall Street, where the share prices increase in the month of January. It makes the investing opportunity as buying stock at the lower prices on last year December, and selling it on January after increase.

Aronson highlighted that EMH ignored the way markets work, in that many...
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