Market Efficiency Theory
For This paper they are three main questions to respond to, and its is critical that the writer detail explain
why responding to the questions. The pliagiarism report should be almost zero. And APA 6th Edition must
be used throughout the entire paper.
Market Efficiency Theory
After reviewing your resources below , consider the following. The theory of market efficiency is based on
the premise that a market is considered efficient when stock prices are an actual reflection of information
known about a company. U.S. markets are generally viewed as semi-strong form market efficient.
� What would happen if U.S. markets became less efficient?
� What might lead to markets becoming less efficient?
� How do markets in other countries compare to the U.S. in terms of efficiency?
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When the money is put in the market, the aim is to generate more profits in return for the
capital invested (Markowitz, 2005). In addition to making profitable returns, the investors in the
market also try to outshine other markets. If the US markets became less efficiency there would
then be fewer returns on average and very high volatility when it comes to the countries
investors. The liquidity would not be able to impend the market approach and this would end up
changing efficiency in terms of production of goods and services (Bernardo et al, 2007). On the
other side, if US market became less efficient, then there would be no accurate information on
market issues and there benefit in the market would be very low. When the market is not
efficient, the market would become very unpredictable for investment and this is likely to affect
the rate of investment. In return, this will affect the market prices, which in turn affect the rate of
investment (Cooper & Nyborg, 2008). Inefficiency in the US market would likely lead to the
market failure, which would negatively affect the allocation of goods and services. When the
market fails, there will be under provision of goods and services due to lack of public goods and
the abuse of monopoly power by few business leaders.
The United States market is likely to become inefficient due to lack of public goods,
which would affect the cost of production of goods and services (Haug& Hirschey, 2008). When
these goods are underproduced, the affect the forces of demand and supply that in turn results
into market inefficiency. The United States market is also likely to become inefficient due to
MARKET EFFICIENCY THEORY 3
environmental concerns since the success of the market depends on the sustainable development.
Since merit goods holds an important part in the United States economy, underproduction of the
merit goods is likely to result into negative externalities that would affect the quality of
education, healthcare, and other important segments of the economy (Statman et al, 2008).
Similarly, overproduction of demerits goods is also likely to result in market inefficiency. Some
of the demerit goods that can negatively affect the United States market are the overproduction
of goods such as alcohol, cigarettes, and prostitution. Market inefficiency in the United States
can also result from the abuse of monopoly power by big corporations as they can easily
manipulate output in their greed to realize huge profits from their customers (Anderson & Smith,
2006). Moreover, the United States market inefficiency can also result from negative and
positive externalities that arise from the spillover effects that are related to the production and
consumption of the goods and services in the market.
When compared with other markets around the globe, the American market seems more
efficient that most developed markets. There is a big difference between the average wealth
growth in the American markets compared to other developed market such as China, Germany,
and Britain. The United States market contains a list of most admired companies such as Apple,
Microsoft, Wal-Mart, among others that enjoys the benefits of their market efficiency. In this
regard, most of these American companies outperform the S&P 500, regardless of the day the
stocks are being purchased (Cooper & Nyborg, 2008). Therefore, this is a clear indication of the
market efficiency that focuses on the intangibles that don’t show up in the company’s balance
sheet.
MARKET EFFICIENCY THEORY 4
References
Anderson, J., & Smith, G. (2006). A great company can be a great investment. Financial
Analysts Journal, 62(4), 86–93.
Bernardo, A., Chowdhry, B., & Goyal, A. (2007). Growth options, beta, and the cost of capital.
Financial Management (Blackwell Publishing Limited), 36 (2), 5–17.
Cooper, I., & Nyborg, K. (2008). Tax-adjusted discount rates with investor taxes and risky debt.
Financial Management (Blackwell Publishing Limited), 37(2), 365–379.
Haug, M., & Hirschey, M. (2006). The January effect. Financial Analysts Journal, 62(5), 78–88.
Markowitz, H. (2005). Market efficiency: A theoretical distinction and so what? Financial
Analysts Journal, 61(5), 17–30.
Statman, M., Fisher, K., & Anginer, D. (2008). Affect in a behavioral asset-pricing model.
Financial Analysts Journal, 64(2), 20–29.
