Corporate Financing and Market Efficiency. Where to get money for good projects. Today’s plan. Review WACC Investment Decision vs. Financing Decision Does the stock price follow a random walk? Three forms of Market Efficiency Weak form efficiency Semi-strong form efficiency
Where to get money for good projects
FIN 351-lecture 8
Liabilities and equity
Market efficiency is concerned about whether capital markets have all information about the cash flows and risk of projects.
Efficient Capital Markets – If capital markets are efficient, then security prices reflect all relevant information about asset values ( cash flows and risk)
Coin Toss Game
Weak Form Efficiency - Market prices reflect all information contained in the history of past prices, or you cannot use past stock prices to predict future prices
Technical Analysts - Investors who attempt to identify over- or undervalued stocks by searching for patterns in past prices.
EI’s Stock Price
Cycles disappear once identified
Fundamental Analysts - Analysts who attempt to fund under- or overvalued securities by analyzing fundamental information, such as earnings, asset values, and business prospects.
Strong Form Efficiency - Market prices reflect all information that could in principle be used to determine true value.