Analysis of Tesla's Shares Plunge by Efficient Market Hypothesis

This report provides an analysis of Tesla's share price decline, focusing on the application of the Efficient Market Hypothesis. The study examines the impact of the resignation of a key executive and the behavior of the company's founder on the stock's performance. It applies the Efficient Market Hypothesis to assess how market information, including both publicly available and insider information, influenced the share price. The report concludes that the market for Tesla's shares aligns with the 'strong' form of the hypothesis, suggesting that the price reflects all available information, including insights not accessible to the general public. The analysis highlights the role of internal organizational structure and the significance of information dissemination in shaping stock market outcomes, underscoring the interconnectedness of company behavior and market dynamics.

Running head: ANALYSIS OF TESLA‘S SHARES PLUNGE BY THE EFFICIENT MARKET
HYPOTHESIS
ANALYSIS OF TESLA'S SHARES PLUNGE BY THE EFFICIENT MARKET HYPOTHESIS:
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ANALYSIS OF TESLA‘S SHARES PLUNGE BY THE EFFICIENT MARKET
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Executive Summary
The study titled “Analysis of Tesla's Shares Plunges by the Efficient Market Hypothesis”, is a study
on one of the U.S. top company Tesla, whose share plunges due to the resignation of the new
appointed Chief Executive. The study applies the Efficient Market Hypothesis Model and
concludes that the company has a ‘strong’ hypothesis result, which says that the company’s price
affects the available information as well as the insider’s information.

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ANALYSIS OF TESLA‘S SHARES PLUNGE BY THE EFFICIENT MARKET
HYPOTHESIS
Table of Contents
Article 4- “Tesla shares plunge after Elon Musk smokes marijuana during interview”:....................3
Efficient Market Hypothesis:...............................................................................................................3
Analysis using the Efficient Market Hypothesis:................................................................................4
Conclusion...........................................................................................................................................4
References............................................................................................................................................5

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ANALYSIS OF TESLA‘S SHARES PLUNGE BY THE EFFICIENT MARKET
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Article 4- “Tesla shares plunge after Elon Musk smokes marijuana during interview”:
The study focuses on the article “Tesla shares plunges after Elon Musk smokes marijuana
during interview”. The article states the incident where in a live Youtube interview on September 8,
2018, the Tesla founder Elon Musk have smoked a pot of marijuana during an interview, which
have an impact on the Tesla’s inner organisation, share market as the share price of the company
dropped suddenly on the share market (Tesla shares plunge after Elon Musk smokes pot in
interview, 2019). The actual reason behind the Tesla share price drop, is due to the resignation of
the Chief Executive of the company, Dave Morton, who was just appointed a month ago, but was
disappointed over Musk’s behaviour (Tesla erupts in chaos after senior execs leave, Musk tokes up,
2019).
Efficient Market Hypothesis:
Efficient Market Hypothesis is a type of financial economic theory, which states that the
price of an asset of an organisation is reflected by the available information. This theory was
developed by Eugene Fama, who has developed this theory by arguing a theory and states that the
stocks are always traded at their fair value (Lo, 2017, P.12). As it is already been known that
hypothesis have three variants, and in this particular hypothesis theory the weak form means that
the priceson the traded assets, are already been reflected the past publicly available information.
The semi-strong form of this hypothesis theory states that the price not only reflects all publicly
available information, but also prices changes instantly to get new publically available information
get reflected,. The other variant or the strong form in the theory states that the prices even reflects
instantly, to the insider information also. The market efficiency is very useful and benefitted for the
investment purpose for most of the individuals in the market, because it simplifies the future
condition of the market, which does not mean that it specify that the market will have no
uncertainty (Malkiel, 2003, P.63).

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ANALYSIS OF TESLA‘S SHARES PLUNGE BY THE EFFICIENT MARKET
HYPOTHESIS
Analysis using the Efficient Market Hypothesis:
The efficient market hypothesis, states that stocks always traded at its fair value in the
market, and hence it is useful to the scenario discussed above. The Efficient Market Hypothesis can
be applied to the Tesla’s situation, where the stocks of the company dropped suddenly because of
the resignation of the Chief Executive of the company, which is done due to the Company’s
founder’s behaviour in the interview. Through the Efficient Market Hypothesis, in the market,
trends can be predict through fundamental analysis and technical analysis (Patel et al., 2015,
P.270). Thus, it could be used to reflect the price of the Tesla’s stock at a instant. The stocks of
Tesla drops at an instant after the news of the resignation is shared by the US securities and stock
exchange board, and the price have dropped to more than 12% on that very day. Applying the
theory to this scenario, it can be said that the hypothesis results to the ‘strong’ form of the
hypothesis, i.e. the price of the Tesla is not only reflected the information, but also effected the
insider’s information that is hidden to the public (Malkiel, 2003, P.61).
Conclusion
From the above study it can be concluded that Tesla’s share drop is due to the overall inside
structure of the company. The behaviour of the founder is indirectly responsible for the plunge in
the share price of the company, but the main reason identified is the lack of understanding within
the organisation’s structure, because one incident cannot make the Chief Executive of the company
resign, who have appointed just a month ago. The other main reason behind the plunges that is
identified by applying the Efficient Market Model, is that the market of the Tesla’s stock is strongly
efficient, which means that the available information affects the organisation’s internal structure
too.

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ANALYSIS OF TESLA‘S SHARES PLUNGE BY THE EFFICIENT MARKET
HYPOTHESIS
References
Lo, A. W. (2017). Efficient markets hypothesis. The New Palgrave Dictionary of Economics, 1-17.
Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of economic
perspectives, 17(1), 59-82.
Patel, J., Shah, S., Thakkar, P., & Kotecha, K. (2015). Predicting stock and stock price index
movement using trend deterministic data preparation and machine learning techniques. Expert
Systems with Applications, 42(1), 259-268.
Tesla erupts in chaos after senior execs leave, Musk tokes up. (2019). Retrieved from
https://www.autonews.com/article/20180907/OEM02/180909839/tesla-erupts-in-chaos-after-
senior-execs-leave-musk-tokes-up
Tesla shares plunge after Elon Musk smokes pot in interview. (2019). Retrieved from
https://thenewdaily.com.au/life/tech/2018/09/08/tesla-shares-plunge-elon-musk-smokes-marijuana-
interview/?utm_source=Adestra&utm_medium=email&utm_campaign=Sunday%20Best
%2020180909