Corporate Finance Ch. 13

7/17/2019 Corporate Finance Ch. 13

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13-1

EFFICIENT CAPITAL MARKETS AND BEHAVIORALCHALLENGES

Chapter 13

Copyright 2014 McGraw-Hill Education. All rights rsr!d. "o rproduction or distri#ution without th prior writtn consnt o$ McGraw-Hill Education.


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13-2

KEY CONCEPTS AND SKILLS

Artic!ate the i"p#rta$ce #% capita! "ar&ete%%icie$c'

De%i$e the %#r"( #% e%%icie$c'

K$#) the e"pirica! te(t( #% "ar&et e%%icie$c' De(cri*e the i"p!icati#$( #% e%%icie$c' %#r

c#rp#rate %i$a$ce "a$a+er(


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13-3

CHAPTER O,TLINE

13-1 A De(cripti#$ #% E%%icie$t Capita! Mar&et(

13-. The Di%%ere$t T'pe( #% E%%icie$c'

13-3 The E/i0e$ce13- The Beha/i#ra! Cha!!e$+e t# Mar&et

E%%icie$c'

13-2 E"pirica! Cha!!e$+e( t# Mar&et E%%icie$c'

13- Re/ie)i$+ the Di%%ere$ce(

13-4 I"p!icati#$( %#r C#rp#rate Fi$a$ce


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13-4

13-1 A DESCRIPTION OF EFFICIENTCAPITAL MARKETS

A$ efficientcapita! "ar&et i( #$e i$ )hich(t#c& price( %!!' re%!ect a/ai!a*!ei$%#r"ati#$-

The EMH ha( i"p!icati#$( %#r i$/e(t#r( a$0%ir"(-

Si$ce i$%#r"ati#$ i( re%!ecte0 i$ (ecrit'price( 5ic&!'6 &$#)i$+ i$%#r"ati#$ when it isreleased0#e( a$ i$/e(t#r !itt!e +##0-

Fir"( (h#!0 e7pect t# recei/e the %air /a!e%#r (ecritie( that the' (e!!- Fir"( ca$$#tpr#%it %r#" %##!i$+ i$/e(t#r( i$ a$ e%%icie$t"ar&et-


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13-%

FO,NDATIONS OF MARKETEFFICIENCY

I$/e(t#r Rati#$a!it'

I$0epe$0e$ce #% e/e$t(

Ar*itra+e


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13-&

STOCK PRICE REACTIONS

'toc()ric

-30 -20 -10 0 *10 *20 *30

+ays #$or ,- and

a$tr ,* announcnt

E$$icint ar(t

rspons to /good nws

!rraction to /good

nws with r!rsion

+layd

rspons to

/good nws


7/3513-

STOCK PRICE REACTIONS

'toc()ric

-30 -20 -10 0 *10 *20 *30

+ays #$or ,- and

a$tr ,* announcnt

E$$icint ar(t

rspons to /#ad nws

!rraction to /#ad

nws with r!rsion

+laydrspons to

/#ad nws


8/3513-

13-. THE DIFFERENT TYPESOF EFFICIENCY

8ea& F#r"

Secrit' price( re%!ect a!! hi(t#rica! i$%#r"ati#$-

Se"i(tr#$+ F#r"

Secrit' price( re%!ect a!! p*!ic!' a/ai!a*!e i$%#r"ati#$-

Str#$+ F#r"

Secrit' price( re%!ect a!! i$%#r"ati#$9p*!ic a$0 pri/ate-


9/3513-

8EAK FORM MARKET EFFICIENCY

Secrit' price( re%!ect a!! i$%#r"ati#$ %#$0 i$pa(t price( a$0 /#!"e-

I% the )ea& %#r" #% "ar&et e%%icie$c' h#!0(6

the$ tech$ica! a$a!'(i( i( #% $# /a!e-

Si$ce (t#c& price( #$!' re(p#$0 t# newi$%#r"ati#$6 )hich *' 0e%i$iti#$ arri/e(ra$0#"!'6 (t#c& price( are (ai0 t# %#!!#) a

ra$0#" )a!&-


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8HY TECHNICAL ANALYSIS FAILS

'

toc(

)ric

5i

6n!stor #ha!ior tnds to liinat any pro$itopportunity associatd with stoc( pric pattrns.

6$ it wr possi#l to a(

#ig ony siply #y

$inding /th pattrn in th

stoc( pric o!nts7

!ryon would do it7 and

th pro$its would #

coptd away.

'll

'll

8uy

8uy


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SEMISTRONG FORM MARKETEFFICIENCY

Secrit' price( re%!ect a!! p*!ic!'a/ai!a*!e i$%#r"ati#$-

P*!ic!' a/ai!a*!e i$%#r"ati#$i$c!0e(: Hi(t#rica! price a$0 /#!"e i$%#r"ati#$

P*!i(he0 acc#$ti$+ (tate"e$t(

I$%#r"ati#$ %#$0 i$ a$$a! rep#rt(


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13-12

STRONG FORM MARKETEFFICIENCY

Secrit' price( re%!ect a!! i$%#r"ati#$9p*!ic a$0 pri/ate-

Str#$+ %#r" e%%icie$c' i$c#rp#rate()ea& a$0 (e"i(tr#$+ %#r" e%%icie$c'-

Str#$+ %#r" e%%icie$c' (a'( thatanythingperti$e$t t# the (t#c& a$0&$#)$ t# at !ea(t #$e i$/e(t#r i(a!rea0' i$c#rp#rate0 i$t# the(ecrit';( price-


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13-13

INFORMATION SETS

All in$orationrl!ant to a stoc(

6n$oration st

o$ pu#licly a!aila#lin$oration

6n$orationst o$

past prics


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13-14

8HAT THE EMH DOES ANDDOESNOT SAY

I$/e(t#r( ca$ thr#) 0art( t# (e!ect (t#c&(- Thi( i( a!"#(t6 *t $#t 5ite6 tre-

O$ a/era+e a$ i$/e(t#r )i!! $#t *e a*!e t# achie/e a$

a*$#r"a! #r e7ce(( retr$ A$ i$/e(t#r "(t (ti!! 0eci0e h#) ri(&' a p#rt%#!i# he )a$t(

*a(e0 #$ ri(& a/er(i#$ a$0 e7pecte0 retr$-

Price( are ra$0#" #r $ca(e0- Price( re%!ect i$%#r"ati#$-

The price CHANGE i( 0ri/e$ *' newi$%#r"ati#$6 )hich *'0e%i$iti#$ arri/e( ra$0#"!'-

There%#re6 %i$a$cia! "a$a+er( ca$$#t


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13-1%

8HAT THE EMH DOES ANDDOESNOT SAY

St#c&h#!0er Di(i$tere(t Ma$' are (&eptica! that the "ar&et i(e%%icie$t *eca(e #$!' a %racti#$ #% (hare(

tra0e each 0a' Bt6 a( !#$+ a( tra0er( )h# *e!ie/e there i(a rea(#$ t# i$cr the c#(t #% a tra0eparticipate i$ the "ar&et it re"ai$( e%%icie$t

Frther6 (t#c& price re%!ect( a/ai!a*!ei$%#r"ati#$ >i-e-6 i( e%%icie$t? a( !#$+ a( a$"*er #% i$tere(te0 tra0er( (e thea/ai!a*!e i$%#r"ati#$


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13-1&

13- THE EVIDENCE

The rec#r0 #$ the EMH i( e7te$(i/e6 a$06i$ !ar+e "ea(re6 it i( rea((ri$+ t#a0/#cate( #% the e%%icie$c' #% "ar&et(-

St0ie( %a!! i$t# three *r#a0 cate+#rie(:

1- Are cha$+e( i$ (t#c& price( ra$0#"@ Are therepr#%ita*!e


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13-1

ARE CHANGES IN STOCK PRICESRANDOM@

S"a!! (eria! c#rre!ati#$ c#e%%icie$t( (pp#rt)ea& %#r" e%%icie$c' a$0 ra$0#"$e((

Ca$ )e rea!!' te!!@ Ma$' p('ch#!#+i(t( a$0 (tati(ticia$( *e!ie/e that

"#(t pe#p!e 0# $#t $0er(ta$0 )hat ra$0#"$e((!##&( !i&e

Pe#p!e c!ai"i$+ t# (ee patter$( i$ (t#c& price"#/e"e$t( are pr#*a*!' (eei$+ #ptica! i!!(i#$(-

A "atter #% 0e+ree E/e$ i% )e ca$ (p#t patter$(6 )e $ee0 t# ha/e

retr$( that *eat #r tra$(acti#$( c#(t(-

Ra$0#" (t#c& price cha$+e( (pp#rt )ea&%#r" e%%icie$c'


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13-113-1

8HAT PATTERN DO YO, SEE@


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13-1

EVENT ST,DIES

E/e$t St0ie( are #$e t'pe #% te(t #% the(e"i(tr#$+ %#r" #% "ar&et e%%icie$c'- Reca!!6 thi( %#r" #% the EMH i"p!ie( that price(

(h#!0 re%!ect a!! p*!ic!' a/ai!a*!e i$%#r"ati#$-T# te(t thi(6 e/e$t (t0ie( e7a"i$e price(a$0 retr$( #/er ti"e9partic!ar!' ar#$0the arri/a! #% $e) i$%#r"ati#$-

Te(t %#r e/i0e$ce #% $0erreacti#$6#/erreacti#$6 ear!' reacti#$6 #r 0e!a'e0reacti#$ ar#$0 the e/e$t-


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13-20

EVENT ST,DIES

Retr$( are a0(te0 t# 0eter"i$e i% the' areabnormal *' ta&i$+ i$t# acc#$t )hat the re(t #%the "ar&et 0i0 that 0a'-

TheAbnormal Return#$ a +i/e$ (t#c& %#r apartic!ar 0a' ca$ *e ca!c!ate0 *' (*tracti$+the "ar&et;( retr$ #$ the (a"e 0a' >RM? %r#"

the acta! retr$ >R)#$ the (t#c& %#r that 0a':

AR R RM


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13-2113-21

EVENT ST,DIES: DIVIDENDOMISSIONS

E$$icint ar(t

rspons to /#ad nws


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13-22

EVENT ST,DY RES,LTS

O/er the 'ear(6 e/e$t (t0' "eth#0#!#+'ha( *ee$ app!ie0 t# a !ar+e $"*er #%e/e$t( i$c!0i$+: Di/i0e$0 i$crea(e( a$0 0ecrea(e( Ear$i$+( a$$#$ce"e$t(

Mer+er( Capita! (pe$0i$+ Ne) i((e( #% (t#c&

The (t0ie( +e$era!!' (pp#rt the /ie)that the "ar&et i( (e"i(tr#$+ %#r"

e%%icie$t- St0ie( (++e(t that "ar&et( "a' e/e$ha/e (#"e %#re(i+ht i$t# the %tre6 i-e-6$e)( te$0( t# !ea& #t i$ a0/a$ce #% p*!ica$$#$ce"e$t(-


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13-23

THE RECORD OF M,T,AL F,NDS

I% the "ar&et i( (e"i(tr#$+ %#r" e%%icie$t6 the$$# "atter )hat p*!ic!' a/ai!a*!e i$%#r"ati#$"ta! %$0 "a$a+er( re!' #$ t# pic& (t#c&(6their a/era+e retr$( (h#!0 *e the (a"e a(

th#(e #% the a/era+e i$/e(t#r i$ the "ar&et a( a)h#!e-

8e ca$ te(t e%%icie$c' *' c#"pari$+ theper%#r"a$ce #% pr#%e((i#$a!!' "a$a+e0 "ta!

%$0( )ith the per%#r"a$ce #% a "ar&et i$0e7-


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13-2413-24

THE RECORD OF M,T,AL F,NDS

5a(n $ro 9u#os )astor and :o#rt ;. 'ta#augh7 /Mutual ;und )r$oranc and 'ingly


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13-2%

THE STRONG FORM OF THE EMH

O$e +r#p #% (t0ie( #% (tr#$+ %#r" "ar&ete%%icie$c' i$/e(ti+ate( i$(i0er tra0i$+-

A $"*er #% (t0ie( (pp#rt the /ie) that i$(i0er

tra0i$+ i( a*$#r"a!!' pr#%ita*!e- Th(6 (tr#$+ %#r" e%%icie$c' 0#e( $#t (ee" t# *e

(*(ta$tiate0 *' the e/i0e$ce-


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13-2&

13-2 THE BEHAVIORAL CHALLENGE

Rati#$a!it'

Pe#p!e are $#t a!)a'( rati#$a!-

Ma$' i$/e(t#r( %ai! t# 0i/er(i%'6 tra0e t## "ch6

a$0 (ee" t# tr' t# "a7i"ie ta7e( *' (e!!i$+)i$$er( a$0 h#!0i$+ !#(er(-


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13-2

THE BEHAVIORAL CHALLENGE

I$0epe$0e$t De/iati#$( %r#" Rati#$a!it'

P('ch#!#+i(t( ar+e that pe#p!e 0e/iate %r#"rati#$a!it' i$ pre0icta*!e )a'(:

Repre(e$tati/e$e((: 0ra)i$+ c#$c!(i#$( %r#" t## !itt!e0ata

Thi( ca$ !ea0 t# ***!e( i$ (ecrit' price(-

C#$(er/ati(": pe#p!e are t## (!#) i$ a0(ti$+ their*e!ie%( t# $e) i$%#r"ati#$-

Secrit' price( (ee" t# re(p#$0 t## (!#)!' t# ear$i$+((rpri(e(-


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13-2

THE BEHAVIORAL CHALLENGE

Ar*itra+e Spp#(e that '#r (peri#r6 rati#$a!6 a$a!'(i( (h#)(

that c#"pa$' ABC i( #/erprice0-

Ar*itra+e )#!0 (++e(t that '# (h#!0 (h#rt the(hare(-

A%ter the re(t #% the i$/e(t#r( c#"e t# their (e$(e(6'# "a&e "#$e' *eca(e '# )ere ("art e$#+ht#


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13-2

13- EMPIRICAL CHALLENGES

Li"it( t# Ar*itra+e


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13-30

EMPIRICAL CHALLENGES

Cra(he( O$ Oct#*er 16 146 the (t#c& "ar&et 0r#ppe0 *et)ee$

. a$0 .2 perce$t #$ a M#$0a' %#!!#)i$+ a )ee&e$00ri$+ )hich !itt!e (rpri(i$+ $e)( )a( re!ea(e0-

A 0r#p #% thi( "a+$it0e %#r $# appare$t rea(#$ i(i$c#$(i(te$t )ith "ar&et e%%icie$c'-

B**!e( C#$(i0er the tech (t#c& ***!e #% the !ate 1(-


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13-31

13- REVIE8ING THE DIFFERENCES

Fi$a$cia! Ec#$#"i(t( ha/e (#rte0 the"(e!/e(i$t# three ca"p(:

1- Mar&et e%%icie$c'

.- Beha/i#ra! %i$a$ce3- Th#(e )h# a0"it that the' 0#$;t &$#)

Thi( i( perhap( the "#(t c#$te$ti#( area i$ the%ie!0-


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13-32

13- IMPLICATIONS FORCORPORATE FINANCE

Beca(e i$%#r"ati#$ i( re%!ecte0 i$ (ecrit'price( 5ic&!'6 i$/e(t#r( (h#!0 #$!' e7pect t##*tai$ a $#r"a! rate #% retr$-

A)are$e(( #% i$%#r"ati#$ )he$ it i( re!ea(e0 0#e( a$

i$/e(t#r !itt!e +##0- The price a0(t( *e%#re thei$/e(t#r ha( ti"e t# act #$ it-

Fir"( (h#!0 e7pect t# recei/e the %air /a!e %#r(ecritie( that the' (e!!-

Fair"ea$( that the price the' recei/e %#r the (ecritie(the' i((e i( the pre(e$t /a!e-

Th(6 /a!a*!e %i$a$ci$+ #pp#rt$itie( that ari(e %r#"%##!i$+ i$/e(t#r( are $a/ai!a*!e i$ e%%icie$t "ar&et(-


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13-33

IMPLICATIONS FOR CORPORATEFINANCE

The EMH ha( three i"p!icati#$( %#rc#rp#rate %i$a$ce:

1- The price #% a c#"pa$';( (t#c& ca$$#t *e

a%%ecte0 *' a cha$+e i$ acc#$ti$+-.- Fi$a$cia! "a$a+er( ca$$#t


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13-34

8HY DOESN;T EVERYBODY BELIEVE@

There are #ptica! i!!(i#$(6 "ira+e(6 a$0appare$t patter$( i$ chart( #% (t#c&"ar&et retr$(-

The trth i( !e(( i$tere(ti$+- There i( (#"e e/i0e$ce a+ai$(t "ar&ete%%icie$c': Sea(#$a!it'

S"a!! /er(( !ar+e (t#c&( Va!e /er(( +r#)th (t#c&(

The te(t( #% "ar&et e%%icie$c' are )ea&-


35/35

J,ICK J,I

De%i$e capita! "ar&et e%%icie$c'-

8hat are the three %#r"( #%e%%icie$c'@

8hat 0#e( the e/i0e$ce (a're+ar0i$+ the e%%icie$c' #% capita!"ar&et(@

8hat are the i"p!icati#$( %#rc#rp#rate %i$a$ce "a$a+er(@

Documents

Corporate Finance Ch. 13