Capital Market Efficiency
Capital Market Efficiency and Its Implication for Financial Reporting
MJAROCKS
Capital market efficiency has been a widely debated topic since the term was introduced. The efficient market hypothesis was introduced by Eugene Fama in 1970 and is one of the most important topics that is covered in financial accounting theory. There have been many papers and studies that have backed the efficiency market hypothesis. There have also been many others that have tried to show that the markets are inefficient. Are securities markets efficient or not? I believe that they are, and because they are efficient, there are multiple implications of efficient securities markets for financial reporting.
In 1970, Eugene Fama introduced the efficient market hypothesis. Since there are many definitions and forms of an efficient securities market, I will focus my attention on the semi-strong form. In the semi-strong form, a market is considered efficient when security prices traded on that market at all times fully reflect all information that is publicly known about those securities. This hypothesis or theory has had many proponents for and many against it in recent years. These people have done their own studies and research on the market trying to either prove or disprove that the markets are efficient.
An important statement in the definition of an efficient securities market is publically known. It focuses on the theory that the market prices are efficient and include all publicly known information. It does not rule out that some people will have inside information, and they will know more about the company than the market. Since these people know more than the market, they may be able to earn excess profits on their investments if they choose to take advantage of their inside information. While most insider trading is legal, it is illegal for insiders to trade when they trade with information that is not publicly known to further their own profits. By
MJAROCKS
Capital market efficiency has been a widely debated topic since the term was introduced. The efficient market hypothesis was introduced by Eugene Fama in 1970 and is one of the most important topics that is covered in financial accounting theory. There have been many papers and studies that have backed the efficiency market hypothesis. There have also been many others that have tried to show that the markets are inefficient. Are securities markets efficient or not? I believe that they are, and because they are efficient, there are multiple implications of efficient securities markets for financial reporting.
In 1970, Eugene Fama introduced the efficient market hypothesis. Since there are many definitions and forms of an efficient securities market, I will focus my attention on the semi-strong form. In the semi-strong form, a market is considered efficient when security prices traded on that market at all times fully reflect all information that is publicly known about those securities. This hypothesis or theory has had many proponents for and many against it in recent years. These people have done their own studies and research on the market trying to either prove or disprove that the markets are efficient.
An important statement in the definition of an efficient securities market is publically known. It focuses on the theory that the market prices are efficient and include all publicly known information. It does not rule out that some people will have inside information, and they will know more about the company than the market. Since these people know more than the market, they may be able to earn excess profits on their investments if they choose to take advantage of their inside information. While most insider trading is legal, it is illegal for insiders to trade when they trade with information that is not publicly known to further their own profits. By
References: Jones, Steven L. and Jeffry M. Netter. “Efficient Capital Markets.” The Concise Encyclopedia of Economics. (2012): 1-6. Print Lee, Charles M.C. “Market Efficiency and Accounting Research: A Discussion of ‘Capital Market Research in Accounting’ by S.P. Kothari.” Journal of Accounting and Economics (2001): 233- 253. Print Lee, Charles M.C. “Market Efficiency and the Financial Crisis.” (January 11, 2010). Available at Youtube: http://www.youtube.com/watch?v=ZC389x37mTM. Video. Malkiel, Burton G. “The Efficient Market Hypothesis and Its Critics.” Journal of Economic Perspectives – Volume 17, Number 1 – Winter 2003 (2003): 59-82. Print. Maloney, Micheal T. and J. Harold Mulherin. “The Stock Price Reaction to the Challenger Crash: Information Disclosure in an Efficient Market.” (December 7, 1998). Available at SSRN: http://ssrn.com/abstract=141971. Print. Scott, William R. Financial Accounting Theory, Sixth Edition. Toronto: Pearson Canada, 2012. 108-130. Print.