Presentation on Corporate Financing Decision and Efficient Capital Market

8/10/2019 Presentation on Corporate Financing Decision and Efficient Capital Market

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M. Mahfuzur Rahman

ID No: 51221074Batch: 21st


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IntroductionEfficient Capital Markets:

Efficient Capital Markets are those in which market prices reflectavailable information.

There is no way to make unusual or excess profits by using theavailable information.

It reflects:Accounting Method does not affect stock prices

Timing decision to issue stocks and bonds is not important

Firms do not get more from speculation in stock and currencymarket

Financial managers should pay attention to the information inmarket prices


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13.1: Can financing decisions create

value?To create value from capital budgeting firms doing:

Locate an unsatisfied demand for a asset

Create barrier to make it difficult for other firms tocompete

Produce the asset at lower cost

Be the first to develop a new asset

Three ways to create valuable financing opportunities:Fool Investors

Reduce costs or increase subsidies

Create a new security


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13.2: A description of efficient capital

marketThe Efficient Market Hypothesis (EMH) has

implications for investors and for firms: Because information is reflected in prices immediately,

investors should only expect to obtain a normal rate ofreturn.

Firms should expect to receive fair value for securitiesthat they sell.

Foundation of Market Efficiency:1. Rationality

2. Independent deviation from rationality

3. Arbitrage


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13.2: A description of efficient capital

market

Foundation of Market Efficiency:

1. Rationality:

Assumes almost all investors are rational.

2. Independent deviation from rationality:All investors can not be rational. Optimistic rationality offset

pessimistic rationality

3. Arbitrage:Two types of investors:

Irrational Amateurs

Rational Professionals

Arbitrage of professionals dominates the speculation ofamateurs.


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13.3: Different types of efficiencyEfficiency based on differential response rate:

Information on past prices

Publicly available information All information

Based on above classification efficiency is categorizedinto three:

The Weak Form The Semi-strong Form

The Strong Form


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13.5: The behavioral challenge to

market efficiencyA. Rationality:

All investors can not be really rational

B. Independent deviation from rationality: Responsiveness

Conservatism

C. Arbitrage:

Offsetting speculation of amateur investors by arbitrage ofprofessionals is too risky.


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13.6: Empirical challenge to market

efficiencyThere are four challenges:

I. Limits to arbitrage

II. Earning surprisesIII. Size

IV. Value versus growth

V. Crashes and bubbles


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Implications for Corporate FinanceMarket Efficiency has mainly four implications for

corporate finance:

1) Accounting choices, financial choices and marketefficiency:In efficient market accounting method should not affect stock

prices

2) The timing decisions:Timing decisions to issue equity is not important as market is

efficient

3) Speculation and efficient markets:

In efficient market firms can not gain more through speculationof stocks and currency

4) Information in market prices:Market pries reflect all information. So managers should pay

attention in market prices.


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Thank You

Documents

Presentation on Corporate Financing Decision and Efficient Capital Market