The most basic definition of an efficient capital market is one in which the prices of securities reflect all available information. This definition forms the basis of the efficient market hypothesis, which asserts that financial markets are in fact efficient and incorporate all available information into the price of securities. As a result, investors should be able to earn no more than a normal rate of return; prices will adjust immediately in response to new information, thereby eliminating the opportunity for an abnormal return. For firms, the efficient market hypothesis implies that they should receive a fair price for the securities that they sell. It also implies that firms will be unable to deceive investors into paying more for securities than the present value of those securities.
For this week’s discussion, you will assess the implications of the efficient markets hypothesis. In your response, address the following:
Do you believe that markets are efficient? If so, why? If not, why not?
What are the implications of the efficient market hypothesis for corporate managers?