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Chapter 4 Financing Decision and Efficient Market Hypothesis - Coggle…
Chapter 4 Financing Decision and Efficient Market Hypothesis
Financing Decision
include
What type of debt & equity to sell
When to sell them
How much debt & equity to sell
How to creat value thru Financing Decision
Reduce Cost / Increase Subsidies
Enhance profit, increase value of shares
Create New Security
Fool Investor
Sell equity at price above its true value
hard to fool investor since the market is very shrewd
Efficient Capital Market
Stock prices fully reflect available information
if hv new information, the prices immediately adjusted to the information
refers to the precision in which the market prices securities
may not be perfect
Premises of Efficient Market Hypothesis (EMH)
Prices change rapidly to known information
Information disseminates rapidly
Security prices fully incorporated known information
Day to day prices changes follow "random walk" over time
Random walk means random component in the current period unrelated to random component in the past
Cannot predict normal return
Security prices reflect all available information concerning a firm
Implication of EMH to investors and firms
Knowing information when it is released does no good to an investor
Firms should expect to receive fv for the the securities they sell
firms cannot profit from fooling investor in an efficient market
Investment in financial securities are zero NPV
Investor should expect to obtain normal rate of return
Reaction of Stock Price to New Information in Efficient and Inefficient Market
Good news
Bad News
Theory
in efficient market, prices respond instantaneously
After public announcement, no further changes take place in the stock price
Delay response usually takes 30 days to absorb the info
Delay response suggest the market is inefficient
Types of Information
information on past price
Publicly available information
All infomation
Different types of Efficiency
Weak Form
Semi Strong
Strong Form
