Question

Financial analysis adds little value given the efficiency of capital markets. Explain why you do not agree with this statement.(short answer )

Answer 1

Answer:

The efficient market hypothesis states that security prices reflect all available information, as if such information could be costlessly digested and translated immediately into demands for buyes or sells. The efficient market hypothessis implies that there is no further need for analysis involving a search for mispriced securities.

How ever if all investors adopted this attitude, no equity analysis would e conducted , mispricing would go uncorrected and markets would no longer be efficient. This is why there must be just enough mispricing to provide incentive for the investment of resouce in security analysis.

Markets may be not efficient under certain circumstances. Mispricing os securities may exist days or even months after the public relevation of a financial statement when the following three conditions are satisfied.

1. Relative to nvestors, managers have superior information on their firms business strategies nd operation.
2. Managers incentive are not perfectly aligned with all shareholder interest and
3. Accounting rules and auditing are imperfect.