Managerial Finance: Capital Market Efficiency and Information

This report delves into the concept of capital market efficiency, evaluating its reflection of share values and its importance for investors. It explores how future profits and expected earnings influence share indexes, emphasizing their significance for valuation. The analysis investigates the impact ...Read More

Running head: MANAGERIAL FINANCE
Managerial Finance
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Table of Contents
Introduction:...............................................................................................................................2
Explaining how the companies’ future/expected profits impact the shares index, while
indicating that current or future profit is more important for value:..........................................2
Explaining how escalation in the US-China trade war is making changes to the Australian
share market:..............................................................................................................................4
Presenting an argument as to whether or not the Australian share market has information
efficiency:...................................................................................................................................7
Conclusion:................................................................................................................................8
References:...............................................................................................................................10

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Introduction:
The assessment aims in evaluating the concept of Capital market efficiency, which
directly reflects the actual value of the shares of an organization. the presence of market
efficiency mainly helps in investors to gather relevant information regarding the company
and make relevant investment decisions on the basis of the news or evidence. The relevant
analysis has been conducted on the impact of relevant new regarding the future or expected
profits have on the shares index. Further analysis has been indicated on the US-China trade
war, which can help in generating high level of income from investment. Moreover, relevant
argument has been portrayed whether the Australian share market has information efficiency.
Explaining how the companies’ future/expected profits impact the shares
index, while indicating that current or future profit is more important for
value:
The expected or future profits of an organization mainly indicate about the overall
revenues or cash income that would be generated during the financial years. This analysis is
mainly based on the current trajectory and the overall growth in sales that has been achieved
by the company. Investors mainly use the information regarding the growth conditions to
calculate the current profits level and the dividend values that would be generated by the
company after the financial year. Hence increment in the sales would directly result in higher
level pf profits that would be achieved by the organization, which in turn might increase the
level of dividend amount that would be paid to the investors. The invers scenario regarding
the future income or profits of the company can be used for evaluating the current values on
of the company when the revenues decline. Thus, it could be understood that future values
are mainly used by the investors to understand the level of income that would be generated by

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the company in the current financial year. Hong et al., (2017) indicated that investors utilize
the information regarding the company performance or anticipation, as a vital data for
evaluating the future income of the company.
Therefore, the financial analyst, individual investors and investment houses mainly
rely on expectations of the company before making any kind of investment decisions. The
investors on the expectation of the dividends mainly start to invest on the shares of the
organization, which mainly boost the share price values of the company before the financial
statement and dividend announcement. Hence, the expected values are mainly a reliable
source of the investors in making relevant investment decisions. However, when the
expectation income or dividend is not meet by the company during the announcement then
massive selling process is mainly seen in the stock market (Abc.net.au, 2019). Consequently,
the companies’ future/expected profits impact the shares index on both positive and adverse
way, as investor try to correct the valuation of the company. In the current market scenario,
the information flow of the company is recently high, where all the specific information of
the company regarding its financial performance and income.
Therefore, it could be detected that the future profits of the organization are more
important than its current values, as the company’s performance and financial progress is
more dependent on the information. The current financial performance of the company is
mainly anticipated by investors who are willing to buy companies shares and determine their
value on the basis of the company current financial conditions. However, after the investment
the company growth in the shares and dividend information is used for continuing the
investment exposure in the organization. Thus, both the current and the future profits of the
organization is mainly analyzed by the investor for detecting the financial performance of the
organization. Fabre (2016) indicated that investors with the help of information are able to

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utilize dividend discount model, which helps in detecting whether the current prices are under
or overvalued.
The investors mainly use the financial data as the seed for detecting the current
trajectory of the organization. However, the anticipation of the future income mainly helps in
fueling the investment exposure of the investors, as they tend to detect the level of income in
form of share price growth and dividends that would be attained over the period of time.
Thus, it can be understood that investors rely on both current and future income for
conducting the relevant investment within the organization.
Explaining how escalation in the US-China trade war is making changes to
the Australian share market:
The US-China Trade war has mainly slowed the world economy, which can be
witnessed by detecting the stock market performance of the countries all around the world.
The trade war has surged an economy slow down all around the world and not even the
Australian economy with its rising stability is facing drawback in their share market. The
slowdown of the global economy is manmade, where the two economic giants are
distributing the flow of the financial sector and creating uncertainties for the investors. This is
mainly leading to the decline in the share markets and is affecting the Austrian economy.

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Figure 1: All Ordinary Index during the US-China Trade War
(Source: Asx.com.au, 2019)
The above figure provides information regarding the six-day US-China Trade war,
where both the countries stated to deploy tariffs on their imports. This news negatively
impacts the Australian share market and resulted in the sharp decline in the All Ordinary
Index of the Australia, which measures the share price performance of major companies in
the region (Loke, 2018). The trade war was mainly regulating the imports of both the country
and undermining their exports, which negatively impacted the economic condition of
Australia, as the country is one of the major trade partners of both the countries. A sharp
decline from 6,928.330 to 6,546.452 was seen during the trading period of July 30th to Aug
6th. The share price performance of the index mainly reflected on the panic conditions of the
investors regarding the uncertainty on the future revenues of the companies relying on
exposure in the international market.
There are other factors also that is complied with the US-China Trade war, as
Australia is currently facing a slowdown in its GDP growth and weakness in their Australian
property market. Andrew Charlton, a director of economic strategy firm AlphaBeta mainly
stated about the slowdown in the economy is being witnessed due to the stifle growth in
Australian and the continuous hampering of the current international trade conditions
(Abc.net.au, 2019). The Australian market is highly reliant on exports, which is been
conducted to both China and US, where any restrictions from the trade war could lead to the
decline in the revenue generation capability of the Australian companies and hamper the
stock market growth of Australia. The Chinese government in retaliation of the US tariff is
devaluating their currency, which is negatively affecting the economic conditions of

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Australia, as the forceful devaluation is hampering the revenue streams of the Australian
companies (Engelberg, Ozoguz & Wang, 2018).
Figure 2: AUD/USD during the US-China Trade War
(Source: Au.finance.yahoo.com, 2019)
The information in the above figure provide relevant clarification regarding the
currency value of Australia in comparison to USD. The analysis has mainly stated that the
AUD performance against USD has mainly declined after the initiation of the US-China trade
war. The devaluation of the currency is mainly hampering the level of revenues that was
being achieved by the Australian government by conducting sales in US and other countries.
The trade war is negatively affecting the purchasing power of the consumers and hampering
the revenues that could be achieved by the Australian companies (Chaudhry & Shahid, 2015).
Therefore, the series of events complied with the US-China Trade wars negatively
hampering the economic conditions of the Australia and resulting in the decline in their share
market performance. The trade war costed around $36 billion in values of shares that was
wiped out during the event (Theconversation.com, 2019). The ASX witnessed a major
decline in its value after reaching the all-time high, where relevant sell off was seen in the

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sector of iron ore stocks which is one of the major exports of Australia. Thus, Australia has
been caught in the midst of the trade war and is facing an economic slowdown, which might
lead to recession if the situation is allowed to escalate more.
Presenting an argument as to whether or not the Australian share market
has information efficiency:
The Australian share market is considered to be one of the most advanced markets
around the world, which mainly requires the listed companies to provide all the relevant
information regarding their actions to the investors for increasing the information efficiency
in the market. There have been many instances after the financial crisis of 2008 that
companies have to provide all the relevant information regarding the current trajectory and
performance of the investors. The scenario before the financial crisis was mainly blur, where
the information flow was not appropriate and companies were able to manipulate their
financial performance. However, after the financial crisis the addition of the strict financial
reporting standard had allowed the Australian companies to project correct valuation of their
performance to the investors. Ma (2017) stated that share market information efficiency is
mainly measured on the price actions that is conducted after the delivery of an information.
The requirements of the ASX is not limited to the financial performance of an
organization, instead is focuses of gathering all the relevant information that an organization
might conduct for achieving their targeted goals and profit levels. The ASX mainly requires
the organization to project all the decisions that might have an impact on their financial
performance and current conditions. This delivery of the information from the company to
the investors is mainly considered the information efficiency, which is high within the
Australian share market. There are many instances in the Australian share market, which can
prove the existence of information efficiency. The latest trade war news that was provided to

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the investors through the ASX has mainly stated about the decline in the values of revenue
specified companies that are more reliant on exports. Thus, the flow of information was
appropriate and weakness in the market was seen where majority of the export’s companies
share price started to decline (Sutcliffe, 2018).
The current news regarding the slowdown in the Australian real estate was mainly
portrayed by the companies, where decline in their sales have been stated due to the reduction
in demand from customers. This information flow from the company to the investors
concerning the revenue conditions of the organization is mainly considered as information
efficiency, where investors acted upon the information and a massive selling was seen. This
flow of information is essential for the organization and ASX, as it helps in regulating the
share price value of the company and portray the fair value of the organization. Thus,
information efficiency is present in the Australian share market, as it helps the investors to
decipher all the relevant information presented in the announcement and make relevant
investment decisions on such information. Ng, Vasvari & Wittenberg-Moerman (2016)
indicated that with the flow of appropriate information, stock market exchange are able to
minimize the occur ace of manipulations that might be conducted by the companies on their
financial report.
Conclusion:
The assessment has mainly evaluated the current economic conditions of Australia
and detected the implications of the US China trade war. In addition, it has been detected that
investors rely on both current and future income of the company to take a complete
investment decision. Investors mainly use the information to fuel the data for their investment
models, which indicate whether the organization in under or overvalued. Further evaluation
has mainly indicated that the economic slowdown of Australis is due to the trade war, which

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is negative affecting the revenue streams and currency values of Australia. The further
analysis of the Australia’s share market has indicated that there is adequate flow of
information to the investors for allowing them to conduct relevant investment decisions on
the basic of the change in the current market conditions.

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References:
Abc.net.au. (2019). ABC News. Retrieved 4 September 2019, from
https://www.abc.net.au/news/2019-08-07/economist-andrew-charlton-warning-
australian-harm-amid-trade-war/11387192
Asx.com.au. (2019). Asx.com.au. Retrieved 4 September 2019, from
https://www.asx.com.au/prices/charting/index.html?
code=XAO&compareCode=&chartType=line&priceMovingAverage1=0&priceMovi
ngAverage2=0&volumeIndicator=Bar&volumeMovingAverage=0&timeframe=
Au.finance.yahoo.com. (2019). Au.finance.yahoo.com. Retrieved 4 September 2019, from
https://au.finance.yahoo.com/quote/%5EAORD?p=%5EAORD
Chaudhry, U., & Shahid, F. (2015). Efficiency Level and Market Respond to Disclosed
Information Examining Efficiency from Informational Point of View Study over
Emerging Markets: Case of Karachi Stock Exchange. Journal of Finance, 3(2), 69-72.
Engelberg, J., Ozoguz, A., & Wang, S. (2018). Know thy neighbor: Industry clusters,
information spillovers, and market efficiency. Journal of Financial and Quantitative
Analysis, 53(5), 1937-1961.
Fabre, G. (2016). The lion’s share: what’s behind China’s economic slowdown?.
In Economic Change in Asia (pp. 25-46). Routledge.
Hong, G. H., Lee, J., Liao, W., & Seneviratne, D. (2017). China and Asia in global trade
slowdown. Journal of International Commerce, Economics and Policy, 8(01),
1750001.

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Loke, B. (2018). China's economic slowdown: implications for Beijing's institutional power
and global governance role. The Pacific Review, 31(5), 673-691.
Ma, S. (2017). The efficiency of China's stock market. Routledge.
Ng, J., Vasvari, F. P., & Wittenberg-Moerman, R. (2016). Media coverage and the stock
market valuation of TARP participating banks. European Accounting Review, 25(2),
347-371.
Sutcliffe, C. M. (2018). Stock index futures. Routledge.
Theconversation.com. (2019). The Conversation. Retrieved 4 September 2019, from
http://theconversation.com/the-china-trump-trade-war-has-spread-to-australia-were-
now-at-risk-of-global-currency-war-121486