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Corporate Financial Management 3e
Emery Finnerty Stowe
Capital Market Efficiency
Learning Objectives
Explain why it makes sense that capital markets should be efficient.
Describe factors that help make capital markets efficient.
Describe sufficient conditions for a perfect capital market.
Explain how market imperfections affect capital market efficiency.
Chapter Outline
Efficiency
Liquidity and Value
Arbitrage: Striving for Efficiency
Signaling and Information Gathering
The Collective Wisdom
Value Conservation
Perfect Capital Markets
What is the Conclusion on Market Efficiency?
Capital Market Efficiency and The Principles of Finance
Self-Interested Behavior
Self-interested capital market transactions push market prices toward being fair prices.
Two-Sided Transactions
petition to get and use information to take advantage of arbitrage opportunities eliminates such opportunities.
Signaling
Information about the transactions of others provides a measure of current market value and expected future value.
Risk-Return Trade-Off
Financial assets are gauged primarily on risk and return, and investors choose the highest return for the given level of risk.
Capital Market Efficiency and The Principles of Finance
Capital Market Efficiency
People applying the principles of finance (self-interest, two-sided transactions, signaling) in an environment with similar assets, low transactions costs, and petition results in capital market efficiency.
Valuable Ideas
New ideas are valuable, even in an efficient market.
Comparative Advantage
Capital market efficiency allows a firm to concentrate on parative advantage, rather than day-to-day financing.
Efficiency
Even if capital markets are not perfect, they can be efficient.
Efficiency refers to the amount of wasted energy. Efficient machines work without “frictions,” without a loss of energy.
Frictions in Capital Markets
Frictions in the capital markets prevent these markets fr