Orporate finance Essay Example | Topics and Well Written Essays - 4000 words

Orporate finance - Essay ExampleThey excessively relaxed the stationarity assumptions of the random walk model.Fama (1970) continued the formalisation of the fantasy of efficiency in economic terms. He defined an efficient market as one in which prices always fully reflect available breeding. He also stated the conditions that would suffice for efficiency (i) there are no transactions costs in trading securities, (ii) only available information is costlessly available to all market participants, and (iii) all agree on the implications of current information for the current price and distributions of future prices of each security. Though adopting a statistical viewpoint, Fama (1970) differentiated information as weak, semi-strong and strong forms.Later on, Rubinstein (1975), Beja (1976), Beaver (1981), and Latham (1986) adopted the framework of information economics where the definition is expressed in terms of the actions of individuals, as fence to the actions of the market a s defined by Fama (1970). Specifically, according to Beaver (1981) A securities market is efficient with respect to a signal yt if and only if the configuration of security prices Pjt is the same as it would be in an otherwise identical economy (i.e. with an identical configuration of preferences and endowments) except that every individual receives yt as well as that individuals own information. Ray Ball (1994, p. 12-13) has a few criticisms of this school of thought. First, he argues that security prices in the otherwise identical world are ultimately priced employ CAPM, which is implied by Famas (1976) model. Secondly, he critiques that this model has confused properties of market with properties of information.Grossman (1976), Grossman and Stiglitz (1980) and Jordan (1983) associated efficiency with incentives to produce information. ACCOMPLISHMENTSFirst, the theory of business market efficiency has developed prevalent respect for markets. semiempirical evidence pointed to th e efficiency of the stock markets, changing academic and even non-academic attitudes from suspicion to respect. Furthermore, the pioneer work on efficiency coincided with the surge in interest in and respect for markets in general among economists, and subsequently among politicians. The pioneer empirical work thus assumed importance and attracted interest beyond its direct impacts on stock markets. It led the global trend toward liberalising financial and other markets.The theory of stock market efficiency has also changed perceptions about how stock markets work. Before FFJR (1969)s work, market reception to information is viewed from a single point in chronological time to broad