Chapter 13 Corporate financing decisions and ECM S what has happened in recent periods and then assume that this is representative of what may occur in the future Professional investors irrational exuberance. and the dot Com bubble Alan greenspan Robert shiller a professor of Yale, he said that as the bull market developed, it generated optimism about the future and stimulated demand for stock moreover. as investors racked up profits on their stocks, they became even more confident in their opinions
Chapter 13 Corporate— financing decisions and ECM what has happened in recent periods and then assume that this is representative of what may occur in the future. – Professional investors, irrational exuberance, and the Dot. Com bubble • Alan Greenspan • Robert Shiller a professor of Yale, he said that as the bull market developed, it generated optimism about the future and stimulated demand for stock. Moreover, as investors racked up profits on their stocks, they became even more confident in their opinions
Chapter 13 Corporate financing decisions and ECM S The crash of 1987 and relative efficiency October 19, 1987, was commonly called the black Monday. After the crash, everybody want to know: Who were the guilty parties? And Do prices reflect fundamental values? Index arbitrageurs Portfolio insurance to yesterday's price or today's price of comparable ve Investors almost always price a common stock relativ securities The hypothesis that stock price always equals intrinsic value is nearly impossible to test, because it is so
Chapter 13 Corporate— financing decisions and ECM – The crash of 1987 and relative efficiency • October 19, 1987, was commonly called the Black Monday. • After the crash, everybody want to know: Who were the guilty parties? And Do prices reflect fundamental values? – Index arbitrageurs – Portfolio insurance • Investors almost always price a common stock relative to yesterday’s price or today’s price of comparable securities. • The hypothesis that stock price always equals intrinsic value is nearly impossible to test, because it is so
Chapter 13 Corporate financing decisions and ECM S difficult to calculate intrinsic value without referring to prices. However the crash does not undermine the evidence for market efficiency with respect to relative price. Market anomalies and the financial manager A firm's financial manager has said that Great Our stock is clearly overpriced. This means we can raise capital cheaply and invest in Project X. Our high stock price gives us a big advantage over our competitors who could not possibly justify investing in Proiect X Do he/she is correct? Why?
Chapter 13 Corporate— financing decisions and ECM difficult to calculate intrinsic value without referring to prices. • However the crash does not undermine the evidence for market efficiency with respect to relative price. – Market anomalies and the financial manager • A firm’s financial manager has said that: Great ! Our stock is clearly overpriced. This means we can raise capital cheaply and invest in Project X. Our high stock price gives us a big advantage over our competitors who could not possibly justify investing in Project X. Do he/she is correct? Why?
Chapter 13 Corporate financing decisions and ECM 13.5 The six lessons of market eficiency Markets have no memory The weak form of the ema states that the sequence of past price changes contains no information about future changes Economists express the same idea more concisely when they say that the market has no memory. Trust market prices In an efficient market you can trust prices, for they impound all available information about the value of each security,. This means that in an efficient market, there is no way for most investors to achieve consistently superior rate of return
Chapter 13 Corporate— financing decisions and ECM 13.5 The six lessons of market efficiency – Markets have no memory The weak form of the EMH states that the sequence of past price changes contains no information about future changes. Economists express the same idea more concisely when they say that the market has no memory. – Trust market prices In an efficient market you can trust prices, for they impound all available information about the value of each security,. This means that in an efficient market, there is no way for most investors to achieve consistently superior rate of return
Chapter 13 Corporate financing decisions and ECM. To do so, you not only need to know more than anyone else, but also need to know more than everyone else. Read the entrails If the market is efficient, prices impound all available information. Therefore, if we can only learn to read the entrails, security prices can tell us a lot about the future. There are no financial illusions In an efficient market there are no financialillusions Investors are unromantically concerned with the firms cash flows and the portion of those cash flows to which they entitled
Chapter 13 Corporate— financing decisions and ECM To do so, you not only need to know more than anyone else, but also need to know more than everyone else. – Read the entrails If the market is efficient, prices impound all available information. Therefore, if we can only learn to read the entrails, security prices can tell us a lot about the future. – There are no financial illusions In an efficient market there are no financial illusions. Investors are unromantically concerned with the firm’s cash flows and the portion of those cash flows to which they entitled