SEMINAR 4 - Semester 1 2015
Deegan Topic 6:
Chapter 10: Reactions of capital markets to financial reporting Talin Raya – s2900133
QUESTION 1 – Question 10.9 (NEW):
If individuals have access to insider information and are able to make large gains on a securities market as a result of using information that is not widely known, then is this an indication that the market is inefficient?
Individuals that have access to insider information have a significant advantage over those that don’t in regard to share trading. For example, if a market is completely efficient, security prices will instantly and fully reflect all relevant available information, regardless of the circumstances (insider or public information). Therefore, although illegal, if an insider was able to make substantial gains on a security market, it undoubtedly means the specific market is inefficient.
An inefficient market is a market where security prices do not fully reflect all information that is available, whether public or nonpublic (insider). Market inefficiency usually is caused by:
Structural factors, such as unfair competition, lack of market transparency, regulatory actions, etc. Behavioral biases by economic agents.
Calendar effects, such as the January effect.
Basically, if a market in inefficient, insider trading will allow those individuals to make large gains on the securities market. (145 words)
QUESTION 2 – Question 10.16 (NEW):
Evidence shows that share prices might not fully react to financial accounting information immediately and that abnormal returns might persist for a period of time following the release of information (a case of ‘post-announcement drift’). Does this indicate that securities markets are not efficient and that assumptions about market efficiency should be rejected?
The assumption of market efficiency states that, it is not possible for an investor to outperform the market because all available information is already built into all...
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