(e) The efficient market hypothesis has a number of implications for managers of a stock exchange listed company.
Irrelevance of short-term appearance
Some managers believe they can fool shareholders by the use of creative accounting, where figures
and policies are manipulated to show a more impressive short-term performance than is justified. In
addition, they may make decisions that are good for the short-term (such as deferring R&D
expenditure, or choosing projects on the basis of ARR rather than NPV) which will often be at the
expense of the longer-tem wealth of the shareholders.
However, in an efficient market, investors assimilate new information (such as publication of earnings
figures) rationally, which implies that they can see behind such tricks and interpret the true position.
Thus share prices will not rise on the release of artificially inflated profit figures.
Irrelevance of exact timing of share issues
A company board who are contemplating a new share issue will often delay the issue if they feel that
the market is currently undervaluing their company's shares, in the hope that the market will rise to a
more normal level. This goes completely against the EMH – in an efficient market the share price will
fully and rationally reflect the company's current position and future prospects and will only move
once new information becomes available, when it could just as easily move down as up. This implies
that there is no point in 'fine-tuning' the timing of new share issues.
The exception to this would be if the company directors had inside information, which might
encourage them to accelerate or delay the issue according to whether the news was good or bad. |
