Orporate finance Essay Example | Topics and Well Written Essays - 4000 words

Orporate finance - Essay Example They also relaxed the stationarity assumptions of the random walk model. Fama (1970) continued the formalisation of the notion of "efficiency" in economic terms. He defined an efficient market as one "in which prices always 'fully reflect' available information". He also stated the conditions that would suffice for efficiency: "(i) there are no transactions costs in trading securities, (ii) all available information is costlessly available to all market participants, and (iii) all agree on the implications of current information for the current price and distributions of future prices of each security." Though adopting a statistical viewpoint, Fama (1970) differentiated information as "weak", "semi-strong" and "strong" forms. Later on, Rubinstein (1975), Beja (1976), Beaver (1981), and Latham (1986) adopted the framework of information economics where the definition is expressed in terms of the actions of individuals, as opposed to the actions of the market as defined by Fama (1970). Specifically, according to Beaver (1981): "A securities market is efficient with respect to a signal yt if and only if the configuration of security prices {Pjt} is the same as it would be in an otherwise identical economy (i.e. with an identical configuration of preferences and endowments) except that every individual receives yt as well as [that individual's own information]." Ray Ball (1994, p. 12-13) has a few criticisms of this school of thought. First, he argues that security prices in the "otherwise identical world" are ultimately priced using CAPM, which is implied by Fama's (1976) model. Secondly, he critiques that this model has confused properties of market with properties of information. Grossman (1976), Grossman and Stiglitz (1980) and Jordan (1983) associated "efficiency" with incentives to produce information. ACCOMPLISHMENTS First, the theory of stock market efficiency has developed prevalent respect for markets. Empirical evidence pointed to the efficiency of the stock markets, changing academic and even non-academic attitudes from suspicion to respect. Furthermore, the pioneer work on "efficiency" coincided with the surge in interest in and respect for markets in general among economists, and subsequently among politicians. The pioneer empirical work thus assumed importance and attracted interest beyond its direct impacts on stock markets. It led the global trend toward liberalising financial and other markets. The theory of stock market efficiency has also changed perceptions about how stock markets work. Before FFJR (1969)'s work, market reaction to information is viewed from a single point in chronological time to broad