Corporate finance Essay Example | Topics and Well Written Essays - 1500 words - 2

Corporate finance - Essay ExampleMarket expertness is a crucial factor in deciding the investment strategies of an investor. If the securities securities industryplace is efficient, the best estimate and returns will be reflected in the footing of the sh ares and there will be no undervalued securities that would offer higher return than expected. However, opposite could be the case in the weak efficient markets. (WOOD, DASGUPTA & POSHAKWALE, 1995) THREE FORMS OF MARKET EFFICIENCY BY FAMA (1970) In this aspect the most contributing work was presented by Fama in 1970. He digitulated a market efficiency hypothesis (EMH) which discussed the three types of market efficiency that can prevail in a capital market depending on the available schooling in the market. These three forms of market efficiency are (1) Weak form efficiency (2) Semi-strong form efficiency (3) Strong from efficiency. 1. Weak Form Efficiency The weak form of market efficiency hypothesis asserts that the authenti c rail line price reflects all the entropy related to historical prices or past tense price movements only. This information includes trading volume, rate of return and market generated information etc. This form of market efficiency assumes that the current stock prices reflect all the past information and no one can earn capacious profits by knowing information which is known to everyone in the market. This implies that the future rate of return cant be predicted by using past rate of return and cant provide with huge abnormal returns. In order to predict the movement of prices based on the past information a technique called technical analysis is sued widely. (BHOLE. 1982 CLARKE, JANDIK & MANDELKER, 2001) 2. Semi-Strong Form Efficiency The semi-strong form of market efficiency hypothesis explains that the current stock price reflects all the familiarally available information along with the historical information. The available public information includes stock earnings and prices, declared dividends information, political, economy and company related news, dividend yield ratio, price earning ratios, announce merger plans, available information in companys financial statements, financial situation of competitors and stock splits etc. The assertion behind this form of market efficiency is the same that no one can earn huge profits by knowing information which is known to everyone in the market that is the information is public. In this way the public information is already absorbed into market prices and the investors cant yield above add up profits in such investments and markets. (BHOLE, 1982 CLARKE, JANDIK & MANDELKER, 2001) 3. Strong form Efficiency The strong form of market efficiency hypothesis explains that the currents stock price reflects all the available information including public and private information both. It encompasses both the weak and semi-strong form of markets. In this hypothesis the emphasis is on insider dealings. It implies t hat, when both public and private information is reflected in stock price, the directors or the bunch of individuals in the company who have more knowledge of the company will not be able to benefit from the above average profits. The difference between semi-strong and strong efficiency is that in a strong efficiency market nobody will benefit from the information that