Chapter 13 Corporate financing decisions and ECM S 13.3 The form or different types of EMH Financial theorists generally define three forms, or levels, of market efficiency: The weak-form of EMh states The weak-form of eMh states that all information contained in past price movements is fully reflected in current market price. Therefore information about recent trends in stock prices is of no use in selecting stocks- the fact that a stock has risen for the past several days. PI=PI-1+ expected return +random error t
Chapter 13 Corporate— financing decisions and ECM 13.3 The form or different types of EMH Financial theorists generally define three forms, or levels, of market efficiency: • The weak-form of EMH states The weak-form of EMH states that all information contained in past price movements is fully reflected in current market price. Therefore information about recent trends in stock prices is of no use in selecting stocks– the fact that a stock has risen for the past several days. Pt = Pt − 1+ expected return + random error t
Chapter 13 Corporate financing decisions and ECM S The semistrong-form of EMH The semistrong-form EMH states that current market prices reflect all publicly available information. If this is true, no abnormal returns can be gained by analyzing stockS. The strong-form of EMH The strong-form of EMH states that current market prices reflect all pertinent information, whether publicly available or privately held. Some common misconceptions about the EMh
Chapter 13 Corporate— financing decisions and ECM • The semistrong-form of EMH The semistrong-form EMH states that current market prices reflect all publicly available information. If this is true, no abnormal returns can be gained by analyzing stocks. • The strong-form of EMH The strong-form of EMH states that current market prices reflect all pertinent information, whether publicly available or privately held. • Some common misconceptions about the EMH
Chapter 13 Corporate financing decisions and ECM S The efficacy of dart throwing Price fluctuations Stockholder disinterest 13.4 puzzles and anomalies--what do they mean for the financial manager? High returns on the stocks of small firms. Why Do investors respond slowly to new information? The earnings announcement puzzle
Chapter 13 Corporate— financing decisions and ECM • The efficacy of dart throwing • Price fluctuations • Stockholder disinterest 13.4 puzzles and anomalies—what do they mean for the financial manager? High returns on the stocks of small firms. Why ? – Do investors respond slowly to new information? • The earnings announcement puzzle
Chapter 13 Corporate financing decisions and ECM S In this puzzle, investors underreact to the earnings announcement and become aware of the full significance only as further information arrives. ° The new- issue puze When the firms issue stock to the public, investors typically rush to buy. But researchers have found that these early gains often turn into losses. Stock market anomalies and behavioral finance Attitudes toward risk
Chapter 13 Corporate— financing decisions and ECM In this puzzle, investors underreact to the earnings announcement and become aware of the full significance only as further information arrives. • The new—issue puzzle When the firms issue stock to the public, investors typically rush to buy. But researchers have found that these early gains often turn into losses. – Stock market anomalies and behavioral finance • Attitudes toward risk
Chapter 13 Corporate financing decisions and ECM Attitudes toward risk psychologists have observed that when making risky decisions, people are particularly loath to incur losses, even if those losses are small Losers tend to regret their actions and kick themselves for having been so foolish. To avoid this unpleasant possibility, individuals will tend to avoid those actions that may result in loss. Beliefs of about probabilities Most investors do not have a PhD in probability theory and may make systematic errors in assessing the probability of uncertain outcome. Psychologists have found that when judging the possible future outcome, individual commonly look back to
Chapter 13 Corporate— financing decisions and ECM Attitudes toward risk psychologists have observed that when making risky decisions, people are particularly loath to incur losses, even if those losses are small. Losers tend to regret their actions and kick themselves for having been so foolish. To avoid this unpleasant possibility, individuals will tend to avoid those actions that may result in loss. • Beliefs of about probabilities Most investors do not have a PhD in probability theory and may make systematic errors in assessing the probability of uncertain outcome. Psychologists have found that when judging the possible future outcome, individual commonly look back to