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The Semi - Strong Form of the efficient market hypothesis

The Semi - Strong Form of the efficient market hypothesis

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Published by ClassOf1.com
One of the major theories that form the basis of financial market is the efficient market hypothesis. The extreme position of those who advocate the efficient market hypothesis claims that all the market requires is basic financial information. The semi-strong form of the efficient market hypothesis states that the market incorporates all the known information about a stock, the current price reflects this information, and this information is incorporated in the price very rapidly.
One of the major theories that form the basis of financial market is the efficient market hypothesis. The extreme position of those who advocate the efficient market hypothesis claims that all the market requires is basic financial information. The semi-strong form of the efficient market hypothesis states that the market incorporates all the known information about a stock, the current price reflects this information, and this information is incorporated in the price very rapidly.

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Published by: ClassOf1.com on Jun 19, 2013
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09/07/2013

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BusinessManagement 
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Sub: Business Management Topic:
 
Marketing
*
The Semi - Strong Form of the efficient market hypothesis
One of the major theories that form the basis of financial market is the efficient market hypothesis.The extreme position of those who advocate the efficient market hypothesis claims that all themarket requires is basic financial information. The
semi-strong form
of the efficient markethypothesis states that the market incorporates all the known information about a stock, the currentprice reflects this information, and this information is incorporated in the price very rapidly. Thus, aninvestor cannot use the known public information to make a more-than-normal return. Let usassume that two otherwise identical firms are presenting income statements, but that one firm usesthe straight-line method in depreciating its equipment while the other firm uses the double decliningbalance method. The differences in accounting are fully explained with supporting schedules in theirrespective reports. The efficient market hypothesis, given the assumptions, suggests that bothcommon stocks would sell for exactly the same price. The market would adjust for the accountingpractices, so only the real differences would remain. In this case, there are no real differences; thus,the stock prices of the two firms would be identical.A person who believes in the
semi-strong form of the efficient market
would argue that moreattention should be directed toward obtaining completeness of disclosure and improving the timingof the announcements containing information rather than toward the form of the presentation. Aperson who doubted that the market was perfectly efficient in the semi-strong form might agreewith the importance of completeness of information disclosure and the importance of timing, but heor she would still argue that the form of presentation made a difference to enough investors so thatthe accounting problems were still a relevant area and the improvement of accounting practices wasa valid endeavor. In addition, since the processing of information has a cost, the accountant has anobligation to refine the information and present it in as good form as is feasible so that informationprocessing costs can be reduced. While one might not agree completely with the
semi-strong form
of 
 
 
Sub: Business Management Topic:
 
Marketing
*
the efficient market hypothesis, it would be incorrect to argue that the market is perfectly fooled bydifferences in accounting practices and makes no adjustment for such differences. If one firm is using
FIFO (first-in
,
first-out)
and a second firm is using
LIFO (last-in, first-out)
, the market is likely to bemaking some type of adjustment for the fact that two different accounting assumptions are beingused. We would expect the market to make reasonably good adjustments where the supplementalinformation is clearly presented, but in some cases, where the information is not clear or is notpublicly available, the adjustments may not be as effective. This brings us to the strong form of theefficient market hypothesis.

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