Efficient Market Theory :: essays research papers

AbstractAccording to the Efficient Market scheme, it should be extremely uncorrectable for an investor to develop a " strategy" that consistently selects carnations that exhibit higher than general returns all over a period of time. It should also not be likely for a company to " name the books" to misrepresent the value of stocks and bonds. An analysis of modern literature, however, indicates that companies can and do "beat the system" and manipulate information to show stocks appear to perform above average. An understanding of the underlying inefficient " military man" factors in the commercialise equation is necessary in order to invoice for the flaw in Efficient Market Theory.Efficient Market Theory A Contradiction of TermsEfficient Market Theory (EMT) is base on the premise that, given the efficiency of information technology and merchandise dynamics, the value of the normal investment stock at any given time accurately reflects th e real value of that stock. The price for a stock reflects its actual underlying value, financial managers cannot time stock and bond sales to take advantage of "insider" information, sales of stocks and bonds will not depress prices, and companies cannot "cook the books" to artificially manipulate stock and bond prices. However, information technology and market dynamics are establish upon the workings of ordinary people and divers(a) organizations, neither of which are arguably efficient nor consistent. Therefore, we cede the basic contradiction in terms of EMT How can a theory based on objective automatonlike efficiency hold up when applied to subjective human inefficiency?As a case in point, America Online (AOL) offers a classic grammatical case of how investors can be misled by a company that uses the market system against itself. AOL, up until early November of this year, used an report system that effectively "cooked their books" and provided gu ide figures on the company&8217s performance. Instead of accounting for its publicity expenses and costs as a regular expense, as normal companies do, AOL bedcover them over two years. This let AOL report annual profits based on revenue figures derived from denying actual expenses (as cited in Newsweek, November 11 edition).By deferring those costs, AOL over the years reported profits $385 million greater than they would otherwise have been. The company then used these non-existent profits to promote itself as a money-making opportunity for both stockholders and potential investors, artificially increasing its stock prices. This accounting practice is perfectly legal, but the information was kept private for over two years.