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Efficient Market Theory - Example Papers

Efficient Market Theory


: A Contradiction of Terms Daniel W. L. Wung Baker College Center for Graduate Studies
Table of Contents Table of Contents i Abstract 2 Discussion
References A-1
Abstract According to the Efficient Market Theory, it should be extremely difficult for an investor to develop a “system” that consistently selects stocks that exhibit higher than normal returns over a period of time. It should also not be possible for a company to “cook the books” to misrepresent the value of stocks and bonds. An analysis of current literature, however, indicates that companies can and do “beat the system” and manipulate information to make stocks appear to perform above average. An understanding of the ...

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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 based upon the workings of ordinary people and diverse organizations, neither of which are arguably efficient nor consistent. Therefore, we have the basic contradiction of EMT: How can a theory based on objective mechanical efficiency hold up when applied to subjective human inefficiency?

As a case in point, America Online (AOL) offers a classic example 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 accounting system that effectively “cooked their books” and provided misleading figures on the company' s performance. Instead of accounting for its promotion expenses and costs as a regular expense, as normal companies do, AOL ...

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the Newsweek article is that most normal companies do not use such accounting practices, however legal, to falsely report superior performance. EMT states: Fundamental analysis cannot produce investment recommendations that will enable an investor consistently to outperform a buy-and-hold strategy in managing a portfolio (Malkiel, 1990).

The corollary of the theory must also then be true. An investor cannot be hurt by the market because the stock value of a poor or overvalued performer already reflects that fact in its price. The available information would indicate to investors that certain stocks are overvalued and subject to rapid decline. The availability of public information did ...

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PAPER DETAILS
Added: 2/10/2007 04:33:36 AM
Category: Economics
Type: Premium Paper
Words: 1263
Pages: 5

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SIMILAR ESSAYS
» Efficient Market Theory: A Cont...
» Efficient Market Theory: A Con
» Efficient Market Theory A Cont
» Efficient Market Hypothesis An
» Market Efficiencies
» Estimate Of Intrinsic Value Wit...
» Feasible Ways In Which Humans
» A Shift in the (Macro)Economic ...
» Reducing Greenhouse Gases From ...
» Financial Instability
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