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

Corporate finance - Essay ExampleMarket cleverness is a crucial factor in deciding the enthronisation strategies of an investor. If the securities market is cost-efficient, the best estimate and returns leave alone be reflected in the price of the shares 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 familyulated a market efficiency hypothesis (EMH) which discussed the three types of market efficiency that empennage prevail in a capital market depending on the available information in the market. These three forms of market efficiency are (1) Weak form efficiency (2) Semi-strong form efficiency (3) laborious from efficiency. 1. Weak Form Efficiency The weak form of market efficiency hypothesis asserts that the flow profligate price reflects all the information related to historical prices or past price movements only. This information includes transaction volume, rate of return and market generated information etc. This form of market efficiency assumes that the current investment trust prices reflect all the past information and no one can earn massive internet 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 stress price reflects all the human beingsly available information along with the historical information. The available normal information includ es stock earnings and prices, declared dividends information, political, economy and company related news, dividend outlet ratio, price earning ratios, foretell 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 average 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 snobbish information both. It encompasses both the weak and semi-strong form of markets. In this hypothesis the emphasis is on insi der dealings. It implies that, when both public and private information is reflected in stock price, the directors or the bunch of individuals in the company who have to a greater extent knowledge of the company will not be able to benefit from the above average profits. The residue between semi-strong and strong efficiency is that in a strong efficiency market nobody will benefit from the information that