Analysis of Corporate Finance: Efficient Market Hypothesis and Returns

This report provides a detailed analysis of the Efficient Market Hypothesis (EMH) and its practical application within financial markets. The study focuses on assessing market efficiency by examining the performance of two FTSE 100 companies, Sainsbury and Tesco, in response to significant news events. The report explores the three forms of EMH (weak, semi-strong, and strong) and their implications for investors. The analysis includes an assessment of shareholder returns for Sainsbury and Tesco over a five-year period, comparing their average monthly returns and standard deviations. The findings suggest that the UK financial market exhibits a strong form of EMH, where news and events are quickly incorporated into share prices. Furthermore, the study concludes that Tesco generated comparatively better returns than Sainsbury during the analyzed period. The report utilizes financial data and graphical representations to support its conclusions, offering insights into the impact of EMH on investment strategies and market behavior.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Introduction......................................................................................................................................2
Discussion and Analysis..................................................................................................................2
Efficient Market Hypothesis........................................................................................................2
Efficiency in Capital Markets......................................................................................................4
Shareholder’s Return...................................................................................................................7
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

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Introduction
The financial analysis has been done for the project by analysing the concepts of Efficient
Market Hypothesis and its application in the financial markets. The project analysis has also
been done by analysing two companies that are listed in the FTSE 100 Index, whose market
efficiency were well analysed in the context of capital market. The companies selected for the
purpose of analysis were the Sainsbury Company and Tesco Plc (FTSE 100 constituents shares
prices - London Stock Exchange 2020). On a further note the analysis has been done for the
Sainsbury Company which turned out to be most effective in terms of total shareholders return
that has been generated by taking the share price difference and the dividends paid by the
company for the sum of five-years.
Discussion and Analysis
Efficient Market Hypothesis
The Efficient Market Hypothesis is also known as the EMH in the community of
investment and the hypothesis stands out to be one of the key reason why the investors may be
willing to choose a passive investment strategy. The Hypothesis of EMH well helps in
explaining a valid set of rationale for buying the passive mutual funds and Exchange Traded
Funds (Does the Efficient Markets Hypothesis (EMH) Work in Reality? 2020).
On a theoretical definition basis the EMH states that all the important, crucial and essential
information in respect to the stock price and investment securities are well factored into the
current market prices that is prevailing in the financial market. Now, if the same hypothesis is
well analyzed it clearly states out none of the analysis could give the investors an edge over other

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set of investors or on the financial market on a whole. The Hypothesis does not require the
investors to act or be rationale, it highlights that all set of investors would be acting in a random
manner, in terms of the fact that the market price and direction are always right. The hypothesis
word which says efficient can also be referred as normal. However, it is important to note that in
different economies and financial market different set of EMH can evolve which are as follows:
 Weak Form EMH: The form of EMH suggests that all the past set of records,
information is priced or incorporated in the current prevailing price of the securities.
Now the fundamental analysis for the securities or asset class can help the investors
with the given set of information to generate a specific set of returns that is well above
the market average set of return in the short-term period of time. However, at the same
time it is important to note that there are no pattern that exist in this form of market.
Thus, neither fundamental nor technical analysis can help produce superior return in the
long-run framework.
 Semi-Strong EMH: The EMH well says that neither fundamental nor the technical
analysis can help the investors generate excess return in response to other returns,
however, it is important to note that at the same time new prices and information are
well instantly priced into the securities.
 Strong EMH: The EMH well says that all the given set of information, records and
data whether it is public or private is well priced or incorporated in the prevailing price
of the securities. It is almost impossible to take advantage of other investors over the
market on a whole. However, it is important to note that the Strong Form of EMH well
says that there might be some of the investors which are in the form of money and

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investment managers are better capable of abnormally generating high set of returns
and these always act in the form of outliners in the average sum of base.
On a key note thus it is important to note that EMH does not say that none of the investors
can well beat or outperform the market, as there are always outliers when considered from a
normal distribution perspective than can turn out to beat the market average, but at the same time
there are outliers that tend to lose a hefty amount or underperform the market.
Efficiency in Capital Markets
The efficiency in the capital market has been well assessed by assessing two key stocks
that is a part or constituent of the FTSE Index which are TESCO and Sainsbury Company. The
efficiency in the stock market has been well assessed with the help of key news and events which
were material in the context of company and the application of the same in the share price
movement that has been seen for the company. The key events which were well related to the
company will be well taken into consideration for the purpose of analyzing the changes in the
stock price of the company.
Sainsbury Company
3rd May 2017: “Sainsbury’s Company warns for increasing costs which hampered the profit
that fell by 8.2%”
The company observed a fall in the annual profitability of the company which has fallen
by around £503 million, by 8.2% (Sainsbury's warns of rising costs 2020). The key reason
behind the increase in the cost of operations has been primarily due to the increase in the cost of
operations such as increase in wages, increasing marketing cost and competition has in turn
affected the business operations. Increase in the volatility of Pound or fall in the value of pound

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made the imports more expensive for the company. The news had a negative effect on the share
price of the company whereby the company had observed a fall of around 5.7% fall in the share
price of the company.
23rd April 2017: “Sainsbury’s Market Share falls from 16.5% to 16.1%”
The supermarket Sainsbury saw a fall in the share price of the company by around 2%
when the Research Group Kantar announced that the Sainsbury market share has decreased from
16.5% to 16.1% in terms of increasing competition and wider access of products to consumers
by different sellers (Sainsbury's warns of rising costs 2020).
28th April 2018: “Sainsbury and ASDA Merger”
Following the announcement made by Retail Giant Sainsbury regarding the merger
between Sainsbury and ASDA investors reacted positively where the share price of the company
soon after the announcement showed a massive increase (Is the Sainsbury share price ready to
recover from the Asda bid? - The Motley Fool UK 2019). However, the merger was blocked by
the Competition and Markets Authority (CMA) after conducting its investigation which well
concluded that it could be worse of if the UK second and third largest supermarkets merge. Soon
after the announcement the share price of the company tumbled down by 5% to 214p which was
then the lowest share price of the company since the year 1989.
TESCO
10th December 2019: “Investors react positively to TESCO £9bn Asian Deal”
The Retail Giant TESCO announced that it is well considering offloading its business
operations in the Malaysian and Thailand Region. The £9bn disposal would be acting as a key

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turnaround in the operations soon after the announcement the share price of the company
(Investors reacted positively to Tesco's £9bn Asian deal – but which supermarket offers the best
growth? 2020). The key turnaround in the share prices of the company in response to several
market events are well shown below which well shows that the market on a whole was quite
efficient in reacting and responding to the stated events.

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Shareholder’s Return
The total shareholder’s return has been calculated by taking the changes in the share price
of the Sainsbury Company along with the dividends paid by the company in this five-year
period. The average monthly return provided by the Sainsbury Company has been around 0.12%
and the standard deviation for the stock has been around 7.43% (Average risk free rate 2015-
2019 | Statista 2020). On the other hand, the average monthly return provided by the Tesco
Company has been around 0.30% and the standard deviation for the stock has been around
6.91% (Yahoo Finance 2020). The graphical representation for both the shares are well shown
below which clearly states that the return generated by Tesco Company has been comparatively
better (Yahoo Finance 2020).
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
1/1/2019
4/1/2019
7/1/2019
10/1/2019
1/1/2020
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Sainsburry Total Shareholder's Return
Date
Return (%)

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Conclusion
The analysis conducted for the project based on the theory of EMH clearly stated out that
several news and events which are related to the company were well incorporated into the
prevailing share price of the company reflecting that the market form of EMH for the UK
Financial market was strong form of EMH. On the other hand, when comparing and evaluating
the total return generated by the shares TESCO was found out to generate a comparative set of
return than Sainsbury Company based on total shareholder’s return for the sum of five year
period.
4/1/2015
7/1/2015
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
1/1/2019
4/1/2019
7/1/2019
10/1/2019
1/1/2020
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
TESCO Total Shareholders Return
Date
Return (%)

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References
Average risk free rate 2015-2019 | Statista 2020. Available at:
https://www.statista.com/statistics/885750/average-risk-free-rate-united-kingdom/ (Accessed: 17
February 2020).
Does the Efficient Markets Hypothesis (EMH) Work in Reality? 2020. Available at:
https://www.thebalance.com/efficient-markets-hypothesis-emh-2466619 (Accessed: 17 February
2020).
FTSE 100 constituents shares prices - London Stock Exchange 2020. Available at:
https://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/summary/
summary-indices-constituents.html?index=UKX&page=4 (Accessed: 17 February 2020).
Investors reacted positively to Tesco's £9bn Asian deal – but which supermarket offers the best
growth? 2020. Available at: https://www.telegraph.co.uk/investing/shares/investors-reacted-
positively-tescos-9bn-asian-deal-supermarket/ (Accessed: 17 February 2020).
Is the Sainsbury share price ready to recover from the Asda bid? - The Motley Fool UK 2019.
Available at: https://www.fool.co.uk/investing/2019/09/26/is-the-sainsbury-share-price-ready-to-
recover-from-the-asda-bid/ (Accessed: 17 February 2020).
Sainsbury's warns of rising costs 2020. Available at: https://www.bbc.com/news/business-
39789912 (Accessed: 17 February 2020).

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Wood, Z. 2019 Sainsbury's-Asda merger blocked by competition watchdog, the Guardian.
Available at: https://www.theguardian.com/business/2019/apr/25/sainsburys-asda-merger-
blocked-by-competition-watchdog (Accessed: 17 February 2020).
Yahoo Finance 2020. Available at: https://finance.yahoo.com/quote/%5EFTSE%3FP
%3DFTSE/history?
period1=1424131200&period2=1581897600&interval=1mo&filter=history&frequency=1mo
(Accessed: 17 February 2020).
Yahoo Finance 2020. Available at: https://in.finance.yahoo.com/quote/SBRY.L/history?
period1=1424131200&period2=1581897600&interval=1mo&filter=history&frequency=1mo
(Accessed: 17 February 2020).
Yahoo Finance 2020. Available at: https://in.finance.yahoo.com/quote/TSCO.L/history?
period1=1424131200&period2=1581897600&interval=1mo&filter=history&frequency=1mo
(Accessed: 17 February 2020).