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Stock Market Efficiency and Company Valuation - Literature review Example

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The objective of the paper is to comprehensively assess the state of the UK stock market by focusing on the aspects that are associated with the efficiency of the stock market. A fundamental feature of this analysis is the assessments on Majestic Wine plc…
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Stock Market Efficiency and Company Valuation
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Download file to see previous pages According to Buckle and Thompson (2004, p174), the practical significance of the hypothesis regarding efficient markets is a notion that cannot be ignored. The application of this hypothesis postulates that the stock market’s agreement with its observations can lead to a situation where predicting changes in share prices are no longer considered to be viable as the market prices are an exact representation of each and every data or information that is present (Buckle and Thompson, 2004, p174). The classifications of features that can assist in the development of a well-informed discussion regarding stock market efficiency are based on the categories of return predictability, event studies and private information. Buckle and Thompson (2004, p175) understand that assessing these concepts with respect to the London Stock Exchange can uncover whether its functioning is efficient or not.
Barnes (2012, p46) highlights the theoretical implications of stock market efficiency which is essentially a system where an informationally efficient market is said to be the cause of allocative efficiency. Accordingly, the basis of this efficiency is examined on three forms that were developed by Eugene Fama and were termed as weak, semi-strong and strong (Barnes 2012, p46). According to Barnes (2012, p46) the weak form is described as a situation in which any new information regarding a company is represented by movements in the new price on an immediate basis, henceforth; this notion follows the ideology which states that new share movements cannot be determined through movements in old share prices. Analysts term this phenomenon as the ‘random walk’.
While several examinations on UK Stockmarket have aimed to establish its efficiency, numerous competing literature has uncovered evidence which invalidates these claims. Dimson and Mussavian (1998, p92; 2000, p9) understand that the findings of numerous studies that report the presence of anomalies are indicative of features that oppose the principle of market efficiency. Researches that have pointed towards the occurrences of such characteristics that are largely inconsistent with economic ideologies aim to comprehend the trends in pricing efficiency within stock markets. A piece of empirical evidence which represents the phenomenon of the ‘random walk’ and the presence of its corresponding concept which is known as the ‘weak-form efficiency’ with respect to the UK stock market can be observed in the research which was conducted by Kendall (1953, p11-25).
Kendall (1953, p11-25) noted that fluctuations in stock and commodity prices in a sample size that amounted to 22 reflected unsystematic changes that took place within small gaps in a given period of time, moreover, the magnitude of change in the prices was also understood to be significant which consequently represented the inexistence of a systematic effect.
Similarly, the ramifications of the random walk with respect to the UK stock market are also evidenced in the research of Hon and Tonks (2001, p20) who claim that the distinguishing characteristic of this model can be seen through the repeated modifications in stock prices which basically show no correlation and “deviations from this characteristic essentially imply that the market is not necessarily efficient”. ...Download file to see next pagesRead More
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