The Influence Of The Efficient Market Hypothesis Finance Essay
The Efficient Market Hypothesis (EMH) is one of the basic financial theory, which serves as the connecting link of financial management and capital market. It is also the foundation of other important theoretical models. Consequently, this essay will give certain appropriate analysis and discussion to the influence of the Efficient Market Hypothesis (EMH) on either financial accounting or corporate financial practices. Firstly, we should review the precise meaning and the characteristic of the Efficient Market Hypothesis (EMH), and the report critically evaluates the influence of Efficient Market Hypothesis(EMH) .In the discussion, some related management theories and examples would be given to support my views.
Discussion and Analysis
The Meaning of the Efficient Market Hypothesis(EMH)
The Efficient Market Hypothesis(EMH), which is proposed by Eugene Fama of University of Chicago, Illinois in 1960s(Siegel, 2009). Fama took the thought that the Efficient Market Hypothesis(EMH) demonstrates the role of securities prices in showing all the details that affect the value(Siegel, 2009). At any given time, securities prices have reflected the intellectual difference and experience of the investors, as well as the whole market information. Then the investors cannot obtain higher than the market average level of investment income through traditional analysis methods. This view has been applied to theoretical models and empirical studies of financial securities prices in large amounts, generating significant controversy and primary opinions into the pricing discovery process(Andrew.W, 2007).
The Characteristic of the Efficient Market Hypothesis(EMH)
Firstly, the securities prices of the efficient market could fully reflect the whole information(Robert, 2000). Because the securities market has plenty of securities analysts, they are looking for opportunities to get extra profits all the time. When the new information once is released, these analysts can gain information almost at the same time, analyze and immediately take initiative actions. Then the the securities prices will change to bring out new information.
Secondly, the securities prices of the efficient market could reflect their reliable value(N. Gregory, 2003) . In the efficient market, securities prices at any time is equal to securities value. Because any deviation between price and value reflects lack of market efficiency. The deviation can be found out immediately by experienced securities analysts, and they will use this opportunity to make money. Indeed, this behaviour promotes the market to be more efficient.
Thirdly, securities prices of the efficienet market would change at random. In the efficient market, any new information will have an important impact on securities prices. The new information cannot be anticipated and is called amazing information. And the information which can be predicted, should not be the new information. Consequently, the movement of the securities prices is blind and random.
At last, the market investors of the efficienet market cannot obtain the supernormal profits. In the securities market, with the effective information, securities prices will adjust quickly and accurately, and the behaviour of the investors are always hysteretic, comparing with the movement of the securities prices . It is impossible to get excess profits just through analysing information, and the market investors can only obtain general average profit.
The Influence of the Efficient Market Hypothesis(EMH) on either Financial Accounting or Corporate Financial Practices
Fundamentally, the Efficient Market Hypothesis(EMH) has great effect on either financial accounting or corporate financial practices. The financial decision-making would limit the behavior and conditions of the corporate, and the corporate status would be reflected in market price. Under the modern economic condition, capital market is a mirror of the corporate, and a corrector as well. Specifically speaking, the influence of the Efficient Market Hypothesis(EMH) on either financial accounting or corporate financial practices can be found mainly in the following respects.
Firstly, the market has no memory. Weaker efficient capital market shows, the movement of the securities prices is irrelevant to the former trend. And this is called "the market without memory" by economists. But the certain actions what the financial experts take seem to come out either way. For example, they generally do not want to issue shares with falling prices, but only to prefer the rebound. This is the widespread method -when the market is optimistic, catch the chance(William, 2009). However, it is profitless according to the point of view "the market without memory".
Next, the net present value(NPV )of the securities investment is zero. According to the fair game theory, if all the securities are fully fungible, the NPV of any securities investment should be zero(Ken, 1994). For example, the investor spends $1,100 buying the one-year corporate bonds with 10% interest rates, and the expectation of the investor to the net present value(NPV) of the actual cash- inflow is $1,100, namely the net present value(NPV) is zero.
Lastly, it is significant for the financial analysts to fully believe the market price(Panl and William, 2004). In the efficient capital market, the securities prices shall include all the available information. In consideration of the timely adjustment of the price to the information, most investors indeed can not acquire high profit for a long time. The more profit you would like to acquire, the more information you have to grasp. In other word, if you want to acquire higher yield, you need to know more than others. The financial analysts ,who are responsible for making interest rate policy , financing, or returning the liabilities ,should attach great importance to this aspect. Consequently, the securities prices of the market can be generally evaluated by reasonable means. And remember to be prudent enough to make decisions about overestimating or undervaluing of the securities prices.
The Efficient Market Hypothesis(EMH) is one of the basic financial theory, and it is also the foundation of other important theoretical models. If the market is invalid, many financial management theories and financing methods can not be established. However, the Efficient Market Hypothesis(EMH) has great effect on either financial accounting or corporate financial practices. Therefore, in practice, financial experts and managers should pay attention to the influence of Efficient Market Hypothesis(EMH) and make right decisions.
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