presentation on corporate financing decision and efficient capital market
TRANSCRIPT
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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