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1 – 10 of over 93000

Abstract

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the-market” doctrine] to prove classwide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes.

Market efficiency cannot be presumed without proof because even large publicly traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court.

Instead, to invoke fraud-on-the-market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news – a hallmark of a semi-strong form efficient market), have any merit. Even then, to claim classwide reliance, plaintiffs must prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do.

These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.

Details

The Law and Economics of Class Actions
Type: Book
ISBN: 978-1-78350-951-5

Keywords

Article
Publication date: 1 February 1994

RayBall

The nature and extent of our knowledge of stock market efficiency are examined. The development of “efficiency”, as a way of thinking about stock markets, is traced from Roberts…

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Abstract

The nature and extent of our knowledge of stock market efficiency are examined. The development of “efficiency”, as a way of thinking about stock markets, is traced from Roberts (1959) and Fama (1965) onward. The early work successfully introduced competitive economic theory to the study of stock markets and paved the way for a flood of empirical research on the relation between information and stock prices. This literature irreversibly altered our views on stock market behavior. The theory and evidence of seemingly‐rational use of information lay in sharp contrast to prior beliefs. It was associated with a widespread increase in respect for stock markets, financial markets, and markets in general, at the time. Researchers began developing and using a variety of formal models of security prices. Nevertheless, “efficiency” has its limitations, both theoretically (as a way of characterizing markets) and empirically (by stretching the quality of the data, the estimation techniques used, and our knowledge of price behavior in competitive markets). Extensive evidence of anomalies suggests either that the market systematically misprices securities or that the theoretical or empirical limitations are binding, or both. The less interesting research question now is whether markets are efficient, and the more interesting question is how we can learn more about price and transactions behavior in competitive stock markets. The concept of an “efficient stock market” has stimulated both insight and controversy since Fama (1965) introduced it to the financial economics literature. As a construct, “efficiency” models the stock market in terms of the reaction of prices to the flow of information. Like all theory choices, modelling the market in this fashion involved tradeoffs. The benefits included opening the literature to an abundance of high‐quality researchable data, covering a variety of information, and the resulting insights obtained on the role of information in setting prices. The opportunity costs included temporarily closing the literature to alternative ways of viewing stock markets, for example by modelling public information as a homogenous good and thus ignoring factors such as differences in beliefs among investors, differences in information processing costs, and the “animal spirits” that might drive group behavior. The costs also included reliance on particular asset‐pricing models of how an “efficient” market would set prices. Not surprisingly, the ensuing deluge of research has produced some startling evidence, for and against the proposition that financial markets are “efficient”. Strongly‐conflicting views and puzzling anomalies remain. The early evidence seemed unexpectedly consistent with the theory. The theory, and its implications, also seemed clear at the time. After a period that seems short in retrospect, the growing body of evidence in favor of the efficient market hypothesis emerged as one of the most influential empirical areas of economics. Fama's (1970) review described a flourishing, coherent and confident literature. This research had an irreversible effect on our knowledge of and attitude toward stock markets, and financial markets generally. It coincided with an emergence of interest in, and respect for, all markets among economists and politicians, and influenced the worldwide trend toward “liberalizing” financial and other markets. The research consistently appeared to show an unbiased reaction of stock prices to public information. The property of “unbiased reaction” to public information, which formed the basis of the early definitions of “efficiency”, was seen to be an implication of rational, maximizing investor behavior in competitive securities markets (Fama 1965, p.4). Reduced to a basic level, the reasoning was that any systematicallybiased reaction to public information is costlessly publicly observable, and thus provides pure profit opportunities to be competed away. Characterizing the market in terms of its reaction to information is only one of many feasible ways of modelling stock price behavior, but it introduced economic theoryto the empirical studyof stock prices, which had received little serious attention from economists prior to that point. Despite the subsequent spate of anomalies, the early efficiency literature not only adapted standard economic theoryto provide the first formal economic insights into how stock prices behave, but it helped pave the way for an outporing of theoretical and empirical work on stock markets and capital markets in general. Subsequent empirical research was not as consistent with the theory. Evidence of “anomalous” return behavior now is widespread and well‐known. It generallytakes the form of variables (for example, size, day‐of‐the‐week, P/E ratio, market/book value ratio, rank of scaled earnings change, dividend yield) that are significantly but inexplicablyrelated to subsequent abnormal stock returns. Much of this evidence has defied rational economic explanation to date and appears to have caused many researchers to strongly qualify their views on market efficiency. Disagreement has not been not confined to the evidence. The literature has produced a variety of research designs, ranging from the “market model” of Fama, Fisher, Jensen and Roll (FFJR, 1969) to Shiller's (1981a,b) variance‐bounds tests. The very term “efficiency” has engendered controversy: there is a modest literature on precisely what efficiency means, on the role of transaction costs, and on whether efficient markets are logically feasible. Making sense of this literature requires careful definition of “efficiency” in this context and careful analysis of the type of evidence that has been offered in relation to it. This involves an assessment of the strengths and weaknesses of both the theory of efficient markets, as a way of characterizing stock markets, and of the data and research designs used in testing it. Not surprisingly, a mixed conclusion emerges. While the concept of efficient markets was an audacious departure from the comparative ignorance and suspicion among economists of stock markets that preceded it, and provides valuable insights into their behavior, the concept has its limitations, in terms of both its internal logical coherence and its fit with the data. Section 1 ofthis survey sketches the development of the efficient market theory, reviewing the principal contributions in terms of their usefulness in guiding and evaluating empirical research. Section 2 addresses the limitations inherent in what is knowable about stock market efficiency, given the present state of theory about how security prices might behave in an “efficient” market. It argues that there are binding limitations in the theoryof asset pricing, some of which are known and others of which are unknown or even unknowable. These limitations must be borne in mind when choosing whether to interpret the data as evidence of: (1) market efficiency, under the maintained hypothesis that a specific research design, including a specific model of asset pricing used to benchmark price behavior, correctly describes pricing in an efficient market; or (2) the ability of our models and research designs to encapsulate how prices behave in an efficient market, under the maintained hypothesis of efficiency. Against this background, section 3 then provides an assessment of the accomplishments of the theory of stock market efficiency, including an interpretation of the evidence. It focuses on the nature and influence of the evidence and does not attempt to provide a comprehensive literature taxonomy. The final section offers conclusions. The principal conclusion is that the theory of efficient markets has irreversibly enhanced our knowledge of and respect for stock markets (and perhaps for all financial market or even for markets in general) but that, like all theories, it is fundamentally flawed.

Details

Managerial Finance, vol. 20 no. 2
Type: Research Article
ISSN: 0307-4358

Open Access
Article
Publication date: 12 June 2023

Sajid Ali, Syed Ali Raza and Komal Akram Khan

This research paper aims to explore asymmetric market efficiency of the 13 Euro countries, i.e. Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherland…

Abstract

Purpose

This research paper aims to explore asymmetric market efficiency of the 13 Euro countries, i.e. Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherland, Portugal, Slovakia, Slovenia and Spain, concerning the period before global financial crisis (GFC), after GFC and period of COVID-19 pandemic.

Design/methodology/approach

Multifractal detrended fluctuation analysis (MF-DFA) is applied to examine the persistence and anti-persistency. It also discusses the random walk behavior hypothesis of these 13 countries non-stationary time series. Additionally, generalized Hurst exponents are applied to estimate the relative efficiency between short- and long-run horizons and small and large fluctuations.

Findings

The current study results suggest that most countries' markets are multifractal and exhibit long-term persistence in the short and long run. Moreover, the results with respect to full sample confirm that Portugal is the most efficient country in short run and Austria is the least efficient country. However, in long run, Austria appeared to be highly efficient, and Slovakia is the least efficient. In the pre-GFC period, Greece is said to be the relatively most efficient market in the short run, whereas Austria is the most efficient market in the long run. In the case of Post-GFC, Netherland and Ireland are the most efficient markets in short and long run, respectively. Lastly, COVID-19 results indicate that Finland's stock market is the most efficient in short run. Whereas, in the long run, the high efficiency is illustrated by Germany. In contrast, the most affected stock market due to COVID-19 is Belgium.

Originality/value

This study will add value to the present knowledge on efficient market hypothesis (EMH) with the MF-DFA approach. Also, with the MF-DFA approach, potential investors will be capable of ranking the stock markets of Eurozone countries based on their efficiency in the period before and after GFC and then specifically in the period of COVID-19.

研究目的

本研究旨在探討13個歐元區國家在環球金融危機前後, 以及2019新型冠狀病毒病肆虐時期之不對稱市場效率; 這13個國家包括: 奧地利、比利時、芬蘭、法國、德國、希臘、愛爾蘭、義大利、荷蘭、葡萄牙、斯洛伐克、斯洛維尼亞和西班牙。

研究設計/方法/理念

研究人員使用多重分形去趨勢波動分析法、來探討持續性與反持續性。這分析法也用來討論正在研究中的13個國家的非平穩時間序列的隨機漫步假說; 而且, 廣義赫斯特指數被用來估算長期/短期投資與大/小波動之間的相對效率。

研究結果

研究結果間接表明了大部份國家的市場都是多重分形的; 而且, 它們無論以短期抑或以長期來審視觀察, 均能展示持久性。再者, 就整體樣本而言, 研究結果確認了在短期來看, 葡萄牙是效率最高的國家, 而奧地利則效率最低。唯以長期來審視觀察, 奧地利則似乎效率很高, 而效率最低的則是斯洛伐克。在環球金融危機爆發前, 就短期而言, 希臘被認為是相對效率最高的市場, 而長期而言, 效率最高的則是奧地利。至於在環球金融危機爆發後, 就短期而言, 荷蘭是效率最高的市場, 而就長期而言, 效率最高的則是愛爾蘭。最後, 2019新型冠狀病毒病的結果顯示, 就短期而言, 荷蘭的股票市場是效率最高的, 而長期而言, 德國則展示了其高效率性。而受疫情影響最大的股票市場則是比利時。

研究的原創性/價值

研究採用了多重分形去趨勢波動分析法、來探討股票市場的效率, 並以此分析法來討論有關國家的非平穩時間序列的隨機漫步假說, 這使我們對效率市場假說有進一步的認識; 就此而言, 本研究為有關的探討增添價值; 而且, 有意投資者在使用多重分形去趨勢波動分析法下, 能夠基於歐元區國家的股票市場在環球金融危機前後, 以及更明確地在2019新型冠狀病毒病肆虐時期的效率, 來把這些股票市場分等級。

關鍵詞

環球金融危機、2019新型冠狀病毒病、效率市場假說、多重分形去趨勢波動分析.

Details

European Journal of Management and Business Economics, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2444-8451

Keywords

Book part
Publication date: 22 March 2022

Roland Eisenhuth and David Marshall

The economic doctrine of market efficiency plays an essential role in securities fraud litigation. In lawsuits alleging violations of SEC Rule 10b-5, the plaintiffs typically must…

Abstract

The economic doctrine of market efficiency plays an essential role in securities fraud litigation. In lawsuits alleging violations of SEC Rule 10b-5, the plaintiffs typically must argue that the market for the relevant security is efficient, and therefore that the “fraud on the market” doctrine applies. However, the term “market efficiency” is often applied imprecisely. In this chapter, we discuss properties of efficient markets that have been proposed in academic research, legal scholarship, and case law. We explore what must be assumed about capital markets for each of these properties to hold. We then ask how, in practice, each property could be rebutted.

Details

The Law and Economics of Privacy, Personal Data, Artificial Intelligence, and Incomplete Monitoring
Type: Book
ISBN: 978-1-80262-002-3

Keywords

Article
Publication date: 1 January 1997

Allen N. Berger and Timothy H. Hannan

Prior research on the structure‐performance relationship has not investigated all of the relevant relationships among market structure, profits, prices, and explicitly calculated…

Abstract

Prior research on the structure‐performance relationship has not investigated all of the relevant relationships among market structure, profits, prices, and explicitly calculated measures of firm efficiency. This paper replicates the four approaches in the literature, adds several innovations, and applies the analysis to banking data. We find more support for the structure‐conduct‐performance hypothesis than for the relative‐market‐power and efficient‐structure hypotheses, although the data are not fully consistent with any of these theories. We also find support for Hick's quiet‐life hypothesis, which implies that firms with market power adhere less rigorously to efficiency maximization. J.E.L. Classification Numbers G21, G28, L41, L89 The opinions expressed do not necessarily reflect those of the Board of Governors or its staff. The authors thank Dean Amel, Jim Berkovec, Myron Kwast, Nellie Liang, LenNakamura, Steve Rhoades, and participants in the meeting of the Federal Reserve System Committee on Financial Structure and Regulation for helpful comments, and Ken Cavalluzzo, Jalal Akhavein, John Leusner, and Seth Bonime for outstanding research assistance.

Details

Managerial Finance, vol. 23 no. 1
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 1 April 1985

GERALD BROWN

Summary The ability of valuers to correctly assess available information and impound it into valuations is essential for the operation of an efficient property market. If valuers…

Abstract

Summary The ability of valuers to correctly assess available information and impound it into valuations is essential for the operation of an efficient property market. If valuers are doing a good job then they will take into consideration that information which is relevant to the type of valuation being undertaken. In this sense the market is efficient. No market is, however, completely efficient otherwise it would be impossible to earn abnormal returns. There is, therefore, sufficient incentive for investors to acquire costly information in order to improve performance. These issues are central to understanding the role of valuation models and clearly point to the need to improve both the collection and economic interpretation of information.

Details

Journal of Valuation, vol. 3 no. 4
Type: Research Article
ISSN: 0263-7480

Article
Publication date: 16 January 2009

J. David Cummins and Xiaoying Xie

The purpose of this paper is to determine the market‐value relevance of frontier efficiency scores and to test hypotheses from corporate control and production theory by analyzing…

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Abstract

Purpose

The purpose of this paper is to determine the market‐value relevance of frontier efficiency scores and to test hypotheses from corporate control and production theory by analyzing the market response to US property–liability (P–L) insurer acquisitions and divestitures.

Design/methodology/approach

Cost and revenue efficiencies are estimated based on accounting data for US P–L insurers using data envelopment analysis. The market‐value response to acquisitions and divestitures is estimated using a standard market model event study. Regression analysis is used to measure the relationship between abnormal returns (dependent variable) and efficiency (independent variable), along with a set of control variables.

Findings

The results show that acquirers, targets and divesting firms all have significant positive abnormal returns around announcement dates. We also find that efficient acquirers and targets have higher cumulative abnormal returns (CAR) but inefficient divesting firms have higher CARs.

Research limitations/implications

The findings are consistent with insurance acquisitions and divestitures being driven primarily by value‐maximizing motivations, consistent with corporate control and production theory.

Practical implications

Frontier efficiency scores based on accounting data provide value‐relevant information for insurance managers.

Originality/value

This is one of only a few papers that relate frontier efficiency to market values and is the first paper to do this for the insurance industry. It is also one of only two existing papers that analyze the value relevance of efficiency scores in the context of mergers and acquisitions.

Details

Managerial Finance, vol. 35 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 1 February 1993

Richard Dobbins

Sees the objective of teaching financial management to be to helpmanagers and potential managers to make sensible investment andfinancing decisions. Acknowledges that financial…

6362

Abstract

Sees the objective of teaching financial management to be to help managers and potential managers to make sensible investment and financing decisions. Acknowledges that financial theory teaches that investment and financing decisions should be based on cash flow and risk. Provides information on payback period; return on capital employed, earnings per share effect, working capital, profit planning, standard costing, financial statement planning and ratio analysis. Seeks to combine the practical rules of thumb of the traditionalists with the ideas of the financial theorists to form a balanced approach to practical financial management for MBA students, financial managers and undergraduates.

Details

Management Decision, vol. 31 no. 2
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 3 September 2021

Alexandros Kalaitzakis, Petros Lois and Spyros Repousis

The purpose of this study is to empirically examine the efficiency of Greek fixed-odds (offline) betting market as offered by OPAP for the period 2016–2019.

Abstract

Purpose

The purpose of this study is to empirically examine the efficiency of Greek fixed-odds (offline) betting market as offered by OPAP for the period 2016–2019.

Design/methodology/approach

Using a four-year data sample of OPAP's opening and closing odds for football matches from all over the world and applying linear probability and probit models, the market efficiency is examined and the existence of possible anomalies is investigated.

Findings

The main findings of research suggest that although the odds are dominated primarily by favorite-longshot bias and secondarily by draw bias, this mispricing cannot prove profitable. However, the opening odds, the margin levels and the market structure provide information that is not fully captured by the closing odds, giving bettors profit opportunities. Thus, findings show that the semi-strong market efficiency is questionable. Finally, competition reduces commissions leading to more efficient odds.

Practical implications

The conclusions of this study are useful for football betting market and, particularly, for government authorities, bookmakers and bettors. Findings can be extended in future research to prediction tasks.

Originality/value

To the best of the authors’ knowledge, this is the first study about the Greek football betting market. The contribution to the literature lies on the one hand in the examination of a monopolistic land-based betting market, which is being squeezed and threatened by the more competitive online betting market, and on the other hand in the simultaneous examination of the opening and closing odds.

Details

EuroMed Journal of Business, vol. 17 no. 4
Type: Research Article
ISSN: 1450-2194

Keywords

Article
Publication date: 28 October 2008

Hossein Varamini and Svetlana Kalash

The main purpose of this study is to use the Sharpe Ratio to test the efficient market hypothesis for different market capitalization and investment styles of mutual funds. The…

Abstract

The main purpose of this study is to use the Sharpe Ratio to test the efficient market hypothesis for different market capitalization and investment styles of mutual funds. The results of the study for the entire period of 1994‐2007 as well as the two subperiods (1994‐1999 and 2000‐2007) indicate that small cap funds have provided the highest risk‐adjusted return for the entire period whereas growth funds have exhibited lower returns. The findings, therefore, suggest that the mutual funds market is not always efficient, which makes it possible for an investor or a mutual fund manager to earn excess return on a risk‐adjusted basis.

Details

American Journal of Business, vol. 23 no. 2
Type: Research Article
ISSN: 1935-5181

Keywords

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