548-Week 9 MBA.PM Spring 2010

548-Week 9 MBA.PM Spring 2010 - Efficient Capital Markets...

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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Efficient Capital Markets and Capital Structure April 26 and 28, 2010 (LA) or April 27 and 29, 2010 (OCC)
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Overview of Sessions Efficient market theory Arbitrage and alternatives to CAPM Summary of issues in capital structure Modigliani and Miller (M-M) capital structure propositions The debate concerning M-M propositions Debt and residual claims on a firm’s assets
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Efficient Markets Information efficiency vs. other definitions Forms of informational efficiency Weak (past prices) Semi-strong (past public information) Strong (inside or all information) Channels of information Evidence on each
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Information Channels to Market S h a r e h o l d e r s I n v e s t o r R e l a t i o n s A n n u a l R e p o r t Q u a r t e r l y M a i l i n g s D i r e c t C o m m u n i c a t i o n I n t e r e s t e d P a r t i e s M a n d a t o r y F i l i n g s 1 0 - K 1 0 - Q , 8 - K P r o s p e c t u s R e a d e r s o f P r e s s F i n a n c i a l P r e s s W S J , o t h e r s W e e k l y m a g a z i n e s T r a d e p r e s s C u s t o m e r s I n v e s t o r C o m m u n i t y S e l l s i d e a n a l y s t s B u y s i d e a n a l y s t s A d v i s o r y s e r v i c e s P u b l i c C o r p o r a t i o n
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Tests of Market Efficiency Tests of hypotheses that market is efficient are based on whether statistical tests can reject the hypothesis of efficiency Impossible to prove that the market is efficient as you would need to know everything Most evidence suggests that we cannot reject the hypothesis of efficiency in the weak and semistrong form
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Evidence in Support of Market Efficiency Patterns in prices support weak form hypothesis Lack of correlation in prices No other patterns Nonetheless, there are anomalies Event studies support semistrong form Define the arrival of information Behavior of excess returns Strong form does not seem supported
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Implications of Market Efficiency Assets or equity in balance sheets with similar risks and returns should have the same value Should earn no profits from no investment and no risk in equilibrium Can earn risk-adjusted returns from investing capital Can earn returns from taking risk Can’t earning anything without one or both
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Efficient Market Summary Table on page 397
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548-Week 9 MBA.PM Spring 2010 - Efficient Capital Markets...

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