Question

What assumptions about market efficiency are typically adopted in capital markets research? What do we mean by ‘market efficiency’?

Evidence shows that share prices might not fully react to financial accounting information immediately and that abnormal returns might persist for a period of time following the release of information (a case of ‘post-announcement drift’). Does this indicate that securities markets are not efficient and that assumptions about market efficiency should be rejected?

What, if any, effect would the size of an entity have on the likelihood that the capital market will react to the disclosure of accounting information?

Answer 1

1. Market efficiency advocates about capital market research that all the publicly available information as well as the privately available information have already been discounted into the stock price and there is no room for making any additional rate of return because this market efficiency hypothesis will be advocating that there is no room for making any active investment in the market and this will be advocating for passive investment into the market and there are no arbitraging opportunities available.

Market efficiency will mean that market is efficient enough and there is no room for making any additional rate of return and all the informations are are highly discounted in to the stock price about publicly available information and privately available information and investors are rational in nature and there is no arbitrage opportunity so there is a high level of market efficiency existing in the market and it does not support the philosophy of active investment.