Chapter: 13 Corporatefinancing decisions andECMI launching the new production. That is the npv is positive. The key assumption thus far is that x has not released any information about the new system, so the fact of its existence is“ 'inside” information only Now consider a share of stock in X. in an efficient market its price reflects what is known about X current operations and profitability, and it reflects market opinion about X's potential for future growth and profits. If the market agree with X's assessment of the value of the new project, Xs stock price will rise when the decision to launch is made public
Chapter 13 Corporate—financing decisions and ECM launching the new production. That is the NPV is positive. The key assumption thus far is that X has not released any information about the new system, so the fact of its existence is “inside” information only. Now consider a share of stock in X. in an efficient market, its price reflects what is known about X current operations and profitability, and it reflects market opinion about X’s potential for future growth and profits. If the market agree with X’s assessment of the value of the new project, X’s stock price will rise when the decision to launch is made public
Chapter: 13 Corporatefinancing decisions andEL Reaction of Price stock 22 Overreaction and price to new correction Information in 18 efficient and inefficient 14 Delayed reaction market 10 Efficient market reaction 8-64-20+2+4+6+8
Chapter 13 Corporate—financing decisions and ECM Reaction of Price stock price to new information in efficient and inefficient market 22 18 14 10 -8 -6 -4 -2 0 +2 +4 +6 +8 Overreaction and correction Efficient market reaction Delayed reaction
Chapter 13 Corporate financing decisions and ECM S Efficient market reaction is the price instantaneously adjusts to and fully reflects new information; there is no tendency for subsequent increases and decreases. Delayed reaction is the price partially adjusts to the new information; 8days elapse before the price completely reflects the new information Overreaction is the price overadjusts to the new information; it"overshoots'"the new price and subsequently corrects The efficient market hypothesis a body of theory called the efficient market hypothesis holds(1)that stocks are always in equilibrium and(2) that it is impossible for an investor to consistently "beat the market. 3
Chapter 13 Corporate— financing decisions and ECM Efficient market reaction is the price instantaneously adjusts to and fully reflects new information; there is no tendency for subsequent increases and decreases. Delayed reaction is the price partially adjusts to the new information; 8days elapse before the price completely reflects the new information. Overreaction is the price overadjusts to the new information; it “overshoots” the new price and subsequently corrects. – The efficient market hypothesis A body of theory called the efficient market hypothesis holds (1) that stocks are always in equilibrium and (2) that it is impossible for an investor to consistently “beat the market
Chapter 13 Corporate financing decisions and ECM Efficient market hypothesis is the hypothesis that securities are typically in equilibrium-that they are fairly priced in the sense that the price reflects all publicly available information on each security. If a market is efficient, then there is a very important implication for market participants: All investments in an efficient market are zero NPV investments That is if prices are neither too low nor too high, then the difference between the market value of an investment and its cost is zero In a efficient market, investors get exactly what they pay for when they buy securities, and firms receive exactly what their stocks and bonds are worth when they sell them
Chapter 13 Corporate— financing decisions and ECM Efficient market hypothesis is the hypothesis that securities are typically in equilibrium – that they are fairly priced in the sense that the price reflects all publicly available information on each security. If a market is efficient, then there is a very important implication for market participants: All investments in an efficient market are zero NPV investments. That is if prices are neither too low nor too high, then the difference between the market value of an investment and its cost is zero. In a efficient market, investors get exactly what they pay for when they buy securities, and firms receive exactly what their stocks and bonds are worth when they sell them
Chapter 13 Corporate financing decisions and ECM S What makes market efficient is competition among investors. Many individuals spend their entire lives trying to find misprice stocks. If you know more about some company than other investors in the marketplace, you can profit from that knowledge by investing in the company's stock if you have good news and selling it if you have bad news. The logical consequence of all this information being gathered and analyzed is that mispriced stocks will become fewer and fewer. Because of the competition among investors, the market will become increasingly efficient
Chapter 13 Corporate— financing decisions and ECM What makes market efficient is competition among investors. Many individuals spend their entire lives trying to find misprice stocks. If you know more about some company than other investors in the marketplace, you can profit from that knowledge by investing in the company’s stock if you have good news and selling it if you have bad news. The logical consequence of all this information being gathered and analyzed is that mispriced stocks will become fewer and fewer. Because of the competition among investors, the market will become increasingly efficient