Advanced Global Financial Management

Running Head: ADVANCED GLOBAL FINANCIAL MANAGEMENT
ADVANCED GLOBAL FINANCIAL MANAGEMENT
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1ADVANCED GLOBAL FINANCIAL MANAGEMENT
Table of Contents
Introduction................................................................................................................................2
Literature Review.......................................................................................................................2
Efficient Market Hypothesis..................................................................................................2
Relevance of EMH.................................................................................................................5
Conclusion..................................................................................................................................7
Reference....................................................................................................................................9

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Introduction
“Efficient market hypothesis” is the theory of financial economics, which suggests
that prices of asset reflects all available information. EMH hypothesis states that, when the
new information enters in market then it reflects instantly in the prices of stock, neither
technical analysis nor the fundamental analysis can be helpful for investor to generate the
returns more than those of the random selected stocks portfolios. In technical study, past
prices of stocks is studied for predicting prices of future and in fundamental analysis financial
information is studied. The meaning of EMH suggests that the stocks on the stock exchanges
trade always at its fair value. It helps in giving the investors with the opportunity for either
buying undervalued stocks or selling stocks for the inflated prices. Hence, investors are not in
position for beating market with expect selection of stock and timing of market (Ghazani &
Araghi, 2014).
As per theory of EMH, making riskier investment is the only way to investors for
gaining higher returns. The development of EMH was in 1960s by Eugene Fama. He was the
one who proposed weak and strong forms of EMH. Although the theory of EMH lacks
testability, this theory still provides the basic logic for the contemporary risk-based theories
of the asset’s prices. It is still considered as basis of the modern financial theory (Khuntia &
Pattanayak, 2018). Therefore, this paper includes the discussion on explanation about EMH,
EMH in respect of adequate explanation of the asset pricing in relation to debt and equity of
firm and lastly, relevance of EMH to the corporate managers.
Literature Review
Efficient Market Hypothesis
EMH continues to provide the convincing explanation regarding the way prices of
assets responds to the different information types. It is the proposition that articulates that

3ADVANCED GLOBAL FINANCIAL MANAGEMENT
security’s market prices are reflection of the available information to members of the public.
It states that security’s market price such as trading of shares in any exchanges will fluctuate
or vary in accordance to nature of the information available to members of public (Kilic &
BUĞAN, 2016). The example of this is information on the mergers, business combination
and acquisitions, profitability, declaration of dividend and project of investment, which firm
intends for undertaking are certain information, which influence securities market price.
EMH can be further described in three different ways, which includes allocative, operational
as well as information efficiency (Obayagbona & Igbinosa, 2014).
Allocative Efficiency
The consideration of market as allocative efficient is only when it channels direct
saving towards that project, which is having most efficient portfolio. If in this case, company
is efficient then it becomes easier for raising funds and ultimately it results in fostering the
economy, which arises from efficiency. It is perceived to be optimal, if the savings cannot be
channeled to project or company, which would result to the higher prosperity economy. For
achieving allocative efficiency in financial market, there should be financial intermediaries,
so that allocation of funds is directly from savers to the users (Urquhart & McGroarty, 2014).
Operational Efficiency
Operational efficiency is related with cost of conducting the business or it is the
interest cost that is charged by lender on the borrowed money. If cost of transaction is higher,
then it is translated usually to the higher cost of using financial markets. Hence, transactions
are required always to be at its minimum for increasing operational efficiency. For increasing
operational efficiency, it is required to increase market players, who will continuously
participate in market (Rossi & Gunardi, 2018).
Information Efficiency