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1、,Irwin/McGraw-Hill,Chapter 12,Fundamentals of Corporate FinanceThird Edition,Corporate Financing and the Lessons of Market Efficiency,Brealey Myers Marcusslides by Matthew Will,Irwin/McGraw-Hill,The McGraw-Hill Companies, Inc.,2001,Topics Covered,Investment Decision vs. Financing DecisionMarket Effi
2、ciencyWeak form efficiencySemi-strong form efficiencyStrong form efficiencyLessons of Market Efficiency,Investment vs. Financing,Investment decision are made based on the risk of the project, with total disregard for how the project will be financed (flotation costs being the exception).Financing de
3、cisions are made based on the conditions in the capital markets, with little consideration for the investment being made (project specific funding being the exception. IRBs are a good example).,Market Efficiency Theory Capital markets reflect all relevant information. You cannot consistently earn ex
4、cess profits.,Market Efficiency,Market Efficiency,Efficient Capital Markets - Financial markets in which security prices rapidly reflect all relevant information about asset values.,Random Walk - Security prices change randomly, with no predictable trends or patterns.,Random Walk Theory,The movement
5、 of stock prices from day to day DO NOT reflect any pattern. Statistically speaking, the movement of stock prices is random (skewed positive over the long term).,Random Walk Theory,$103.00,$100.00,$106.09,$100.43,$97.50,$100.43,$95.06,Coin Toss Game,Heads,Heads,Heads,Tails,Tails,Tails,Random Walk Th
6、eory,Random Walk Theory,Market Efficiency,Technical Analysts - Investors who attempt to identify over- or undervalued stocks by searching for patterns in past prices.,Fundamental Analysts - Analysts who attempt to fund under- or overvalued securities by analyzing fundamental information, such as ear
7、nings, asset values, and business prospects.,Efficient Market Theory,Last Month,This Month,Next Month,$907050,EIs Stock Price,Cycles disappear once identified,Market Efficiency,Weak Form Efficiency - Market prices rapidly reflect all information contained in the history of past prices.Semi-Strong Fo
8、rm Efficiency - Market prices reflect all publicly available information.Strong Form Efficiency - Market prices reflect all information that could in principle be used to determine true value.,Efficient Market Theory,Announcement Date,Market Efficiency,Lessons of Market Efficiency,Markets have no memoryTrust market pricesThere are no financial illusionsDo it yourself diversificationSeen one stock, seen them allReading the entrails,