Efficient Market Theory :: essays research papers

AbstractAccording to the Efficient Market goernance, it should be extremely laborious for an investor to develop a "system" that consistently selects expresss that exhibit higher than practice returns everywhere a period of time. It should also not be realizable for a company to " put off the books" to misrepresent the value of stocks and bonds. An analysis of watercourse literature, however, indicates that companies can and do "beat the system" and manipulate information to shed light on stocks appear to perform above average. An understanding of the underlying inefficient " valet de chambre" factors in the foodstuff equation is necessary in order to study for the flaw in Efficient Market Theory.Efficient Market Theory A Contradiction of TermsEfficient Market Theory (EMT) is found on the premise that, effrontery the efficiency of information technology and mart dynamics, the value of the normal investment stock at any given time accurate ly reflects the real value of that stock. The price for a stock reflects its actual underlying value, financial managers cannot time stock and bond gross sales to take advantage of "insider" information, sales of stocks and bonds will not depress prices, and companies cannot "cook the books" to artificially manipulate stock and bond prices. However, information technology and market dynamics are establish upon the workings of ordinary people and different organizations, neither of which are arguably efficient nor consistent. Therefore, we realise the basic contradiction of EMT How can a theory based on objective mechanistic efficiency hold up when applied to subjective human inefficiency?As a case in point, America Online (AOL) offers a classic lesson of how investors can be misled by a company that uses the market system against itself. AOL, up until early November of this year, used an be system that effectively "cooked their books" and provided chea pjack figures on the company&8217s performance. Instead of accounting for its procession expenses and costs as a regular expense, as normal companies do, AOL col them over two years. This let AOL report annual profits based on revenue figures derived from denying actual expenses (as cited in Newsweek, November 11 edition).By deferring those costs, AOL over the years reported profits $385 million greater than they would otherwise have been. The company then used these non-existent profits to promote itself as a money-making opportunity for both stockholders and potential investors, artificially increasing its stock prices. This accounting practice is perfectly legal, but the information was kept private for over two years.