LECTURE13

LECTURE13 - Lecture 13 Lecture Efficient Capital Markets...

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Lecture 13 Lecture 13 Efficient Capital Markets Efficient Capital Markets
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Basic idea and implications for financing decisions In efficient capital markets, asset prices prevent investors making excess profits, relative to the risks, using public information. Financing strategies can create value by allowing firms to exploit tax subsidies or reduce transaction costs. In efficient capital markets, the following are not positive NPV project. altering the timing of issuing bonds or stocks staggering the sales of financial assets to alter their price manipulating accounts, so long as it does not reduce information available to investors “re-packaging” into new securities
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What are informationally efficient capital markets? stock prices, dividends, earnings, earnings forecasts, operating expenses, revenues and investments production levels, market shares, debt levels, taxes paid patents, inventions or product announcements personnel, proposed and announced mergers or acquisitions stock ownership and trading by CEO’s and major shareholders economic data on the economy and individual industries Public information includes current and past information on Asset prices fully reflect the consequences of all relevant available information. Therefore : - announcements of relevant future events alter asset prices now - prices don’t change when the announced event occurs - investors cannot expect abnormal risk-adjusted returns - firms should expect to receive fair market value for securities
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Efficient markets and Information set Past prices < All publicly available information < All relevant information Different information sets produce different notions of informational efficiencies. Weak form Semi-strong form strong form past prices cannot be used to make abnormal profits relative to the risks being borne public information cannot be used to make abnormal profit prices reflect all relevant information
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Weak form efficiency Prices reflect anything past prices say about likely future prices Predictable price movements
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This note was uploaded on 12/20/2011 for the course ECON 448 taught by Professor Bejan during the Spring '06 term at Rice.

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LECTURE13 - Lecture 13 Lecture Efficient Capital Markets...

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