OTHER CORPORATE SECURITIES PREFERENCE SHARES

1. OTHER CORPORATE SECURITIES PREFERENCE SHARES Equity security that pays a (normally fixed) dividend. The issuer must pay the preference dividend before paying any dividends on common stock (ordinary shares). Cumulative preference shares carry forward entitlement to unpaid preference dividends. the company must pay all preference dividends to date before paying any further dividends to the ordinary shareholders. CONVERTIBLES Bonds or preferred stocks that give the holder the option (effectively a warrant) to convert the security into the issuing company’s ordinary shares (common stock) according to specified terms during some stated period of years.

2. The different between options and warrants A warrant is really a type of equity call option. The difference is that the company creates its warrants but does not create the options contracts on its equity (stock).

3. CH.4 Shareholder Value in Efficient Markets CONDITIONS CONDUCIVE TO CAPITAL MARKET EFFICIENCY Efficient market: Market in which prices rapidly reflect all relevant information in an unbiased way. A market is efficient if transaction prices fully reflect in an unbiased way all available price-sensitive information. A market is efficient when firm’s share price would reflect all available information concerning the value of its assets including the value generating potential of its existing products

4. in efficient market necessary that dealing costs are not too high, that the relevant information is available to a sufficient number of investors The investors in efficient market can not make abnormal returns . THE EFFICIENT MARKETS HYPOTHESIS Efficiently priced securities fully reflect the present value (PV) of expected cash benefits to security holders. In an efficient market, the aggregation and resolution of differing expectations results in unbiased prices.

5. Fama described such a market as a fair game. In a fair game, the average rate of return that an investor can expect from holding a security equals the market’s discount rate for the security’s expected cash flow. Testing The Efficient Markets Hypothesis researchers divide the evidence on market efficiency into three categories of test: 1- Weak-form( E. M .H) Hypothesis that a stock price already reflects any information in the past price history of the stock. 2- Semistrong-form Efficient Markets Hypothesis That a stock price already reflects all publicly available information relevant to the value of the stock (including price history). 3- Strong-form: tests of the hypothesis that prices reflect all relevant information including information available only to company insiders or to other preferred groups.

6. WEAK-FORM TESTS OF MARKET FFICIENCY Weak-form tests of market efficiency concern any information implied by patterns of past price changes. In an efficient market,charting or otherwise analyzing past price patterns for the purposes of prediction would be useless, or unbenefit. THE RANDOM WALK HYPOTHESIS. Random Walk Hypothesis (RWH): Hypothesis that successive price changes are identically normally distributed, are uncorrelated, and have an expected value equal to zero.

7. THE RANDOM WALK HYPOTHESIS. If the current prices already reflect all relevant information, the prices follow (approximately) a random walk in which each future price change is a random departure or separated from the last price. The price deviation refers to influence of newly arriving information. In random walk theory , the expected future prices equal the last price, the correlation between successive price changes equals zero. New information changes the price; but,, the market cannot expect what is new. For this reason, the resulting price changes would be unrelated to past price changes.

8. ARE SUCCESSIVE PRICE CHANGES RELATED? The serial correlation coefficient measures linear relationship over time between successive price changes. If the successive price follow a trend relate positively to price changes , then the serial correlation coefficient would have a value between 0 and + 1. If the successive price changes follow and tend to reverse the change negatively , the value of the serial correlation coefficient would be between 0 and – 1. if current prices reflect all available information, the market trend nor reaction to this new info. In this case, the value of the correlation coefficient would not be significantly different from zero ( show example p. 78)

9. SEMISTRONG-FORM TESTS OF MARKET EFFICIENCY In this types of markets , investors and financial analysts used information published from companies included in the financial reports and other economic information about the company THE EVENT STUDY METHOD Event study: Empirical method measuring cumulative average abnormal returns during the periods immediately before and after significant company announcements such as stock splits or dividend increases (see abnormal return). Fama devised an ingenious method for measuring the behavior of the prices market before and after publication of new information about stock market’s response to stock splits . Fama study the behavior of the prices market before and after publication of new information.

10. STRONG-FORM TESTS OF MARKET EFFICIENCY the strong-form hypothesis that share prices fully reflect information known only to company insiders or other privileged groups. FUND MANAGEMENT