For the market to be efficient, it must meet the prerequisites of being both informationally efficient and transactionally or operationally efficient. When a market is informationally efficient, all necessary and pertinent information about the market is readily available to all parties involved in the market.
In other words, no parties have an informational advantage over any other parties. Meanwhile, when a market is transactionally efficient, all transaction costs are reasonable and fair. This ensures that all transactions are equally executable by all parties and not prohibitively expensive to anyone. Marketing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification.
I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Burton Malkiel a, b , analyzing the Internet bubble, notes that Internet company values were difficult to determine, and while traders in most cases were wrong after the fact, there were no obvious unexploited arbitrage opportunities. A firm whose stock has appreciated rapidly finds it easier to raise additional funds through a secondary offering because higher prices mean a smaller percentage ownership of the firm needs to be offered to raise a given amount of capital.
Favorable conditions also make it easier for privately held firms to raise funds through an initial public offering IPO of stock. Furthermore, a so-called hot IPO market entices venture capital firms to invest funds in hot industries and sectors in hopes of taking their firms public in such a favorable market. But while favorable market conditions can attract the investment capital necessary to grow a fledgling new industry, the market for technology and Internet-based stocks in the late s appears to have overheated and, in hindsight, directed too much investment capital toward this sector.
Thus, by the late s, the return an investor in this sector could have rationally expected had fallen below what economic conditions could justify, as well as below what most investors actually anticipated. While prices may take long, slow swings away from fundamentals, the EMT is still useful in at least two important ways.
First, over shorter horizons, such as days, weeks, or months, there is considerable evidence that the EMT can explain the direction of stock price changes. That is, the response of stock prices to new information reasonably approximates the change in the intrinsic value of equity. Second, the EMT serves as a benchmark for how prices should behave if capital investments and other resources are to be allocated efficiently. Just how close markets come to this benchmark depends on the transparency of information, the effectiveness of regulation , and the likelihood that rational arbitragers will drive out noise traders.
In fact, the informational efficiency of stock prices varies across markets and from country to country. Whatever the shortcomings of capital markets, there appears to be no better alternative means of allocating investment capital. Thus, academic inquiry in this area is likely to focus more on the conditions that explain and improve the informational efficiency of capital markets than on whether capital markets are efficient.
Steven L. Jeffry M. Netter is the C. From to , he was a senior research scholar at the U. Securities and Exchange Commission. For an excellent review of the debate on market efficiency, see Shiller for the behavioral finance view, and Malkiel a for the proefficiency view. Corporations and Financial Markets , Macroeconomics, Taxes. Jones and Jeffry M. By Steven L. About the Authors Steven L. Fama, Eugene F. Most users should sign in with their email address. If you originally registered with a username please use that to sign in.
To purchase short term access, please sign in to your Oxford Academic account above. Don't already have an Oxford Academic account? Oxford University Press is a department of the University of Oxford.
It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. Sign In or Create an Account. Sign In. Advanced Search. Search Menu. Article Navigation. One consequence is that theoretically at least, there is no right or wrong time to issue new shares since share prices are always fair.
Other considerations than share price must be used to decide on the best time to issue new ordinary shares, such as the number of shares that will need to be issued to raise the required amount of finance, the effect of the new share issue on earnings per share, any dilution of control that might arise, the effect on gearing and financial risk, and so on. A further consequence for both companies and investors, again from a theoretical point of view, is that there are no bargains to be found in capital markets.
There are no incorrectly priced shares from which to make a quick profit and no undervalued companies to take over in order to produce an instant increase in market capitalisation. In fact, if capital markets are highly efficient, all that managers need to do again theoretically is to make good financial management decisions such as investing in all projects with a positive net present value.
This is in order to maximise the market values of their companies and hence to maximise shareholder wealth, which is the primary financial management objective. It is easy to see, therefore, why financial management attaches so much importance to capital market efficiency. Product markets and the problem of monopoly Another market matter is regulation of business.
One example is pricing restrictions. This can be illustrated by looking at the problem of monopoly in product markets and how to respond to it. One possible result of a company being successful in its chosen market is that it gains increasing market share.
This may be due to its competitors going out of business or as a result of taking over its competitors. If the trend continues, a successful company may end up with no real competition at all. It is then in a position to earn monopoly profits by selling at prices higher than would be found in a more competitive market. The positive consequences of monopoly There may be a circumstance in which a monopoly may be desirable, for example when size is necessary for efficient production of a particular product, ie through economies of scale 2.
This has been claimed to be true of utilities such as water distribution and electricity production. It is worth noting in this respect that successive UK governments have felt the need to artificially maintain competition in the markets served by privatised UK utilities, implying that utilities naturally tend towards a monopoly. It has also been suggested that monopoly may be the natural reward for entrepreneurial activity by businesses, or the logical consequence of a focus on shareholder wealth maximisation.
0コメント