Financial Markets and Corporate Finance
Transcript of Financial Markets and Corporate Finance
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CHAPTER 11CHAPTER 11The EfficientThe Efficient
MarketMarketHypothesisHypothesis
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• Do security prices reflect information ?• Why look at market efficiency?
– Implications for business and corporate
finance – Implications for investment
Efficient Market Hypothesis (EMH
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• !tock prices fully and accurately reflect
publicly available information
• "nce information becomes available#
market participants analy$e it
• %ompetition assures prices reflect
information
EMH and %ompetition
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• Weak
• !emi&stron'
• !tron'
ersions of the EMH
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• Technical Analysis & usin' prices and volumeinformation to predict future prices
– Weak form efficiency ) technical analysis
• Fundamental Analysis & usin' economic andaccountin' information to predict stock prices
– !emi stron' form efficiency ) fundamental
analysis
*ypes of !tock +nalysis
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• +ctive Mana'ement – !ecurity analysis
– *imin'
• ,assive Mana'ement
– -uy and Hold
– Inde. /unds
+ctive or ,assive Mana'ement
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Even if the market is efficient a role e.ists forportfolio mana'ement0
• +ppropriate risk level
• *a. considerations• "ther considerations
Market Efficiency ) ,ortfolio
Mana'ement
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• Empirical financial research that enables anobserver to assess the impact of a particular
event on a firm1s stock price
• +bnormal return due to the event is estimatedas the difference bet2een the stock1s actual
return and a pro.y for the stock1s return in the
absence of the event
Event !tudies
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• Ma'nitude Issue• !election -ias Issue
• 3ucky Event Issue
+re Markets Efficient
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Weak&/orm *ests
• 4eturns over the !hort Hori$on – Momentum
• 4eturns over 3on' Hori$ons
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,redictors of -road Market 4eturns
• /ama and /rench – +''re'ate returns are hi'her 2ith hi'her
dividend ratios
• %ampbell and !hiller – Earnin's yield can predict market returns
• 5eim and !tambau'h
– -ond spreads can predict market returns
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• ,6E Effect• !mall /irm Effect (7anuary Effect
• 8e'lected /irm Effect and 3i9uidity Effects
• -ook&to&Market 4atios
• ,ost&Earnin's +nnouncement ,rice Drift
!emistron' *ests0 +nomalies
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!tron'&/orm *ests0 Inside Information
• *he ability of insiders to trade profitability intheir o2n stock has been documented in
studies by 7affe# !eyhun# :ivoly# and ,almon
• !E% re9uires all insiders to re'ister theirtradin' activity
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Interpretin' the Evidence
• 4isk ,remiums or market inefficiencies;disa'reement here
– /ama and /rench ar'ue that these effects
can be e.plained as manifestations of riskstocks 2ith hi'her betas
– 3akonishok# !hleifer# and ishney ar'ue
that these effects are evidence of inefficient
markets
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Interpretin' the Evidence %ontinued
• +nomalies or Data Minin'• *he noisy market hypothesis
• /undamental inde.in'
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!tock Market +nalysts
• Do +nalysts +dd alue – Mi.ed evidence
– +mbi'uity in results
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• !ome evidence of persistent positive andne'ative performance
• ,otential measurement error for benchmark
returns – !tyle chan'es
– May be risk premiums
• Hot hands phenomenon
Mutual /und ,erformance
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/i'ure <<=> Estimates of Individual
Mutual /und +lphas# <>@ & <<
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/i'ure <<=A ,ersistence of Mutual /und
,erformance