Efficient Market Theory A Cont Essay

This essay has a total of 561 words and 3 pages.

Efficient Market Theory A Cont


Abstract
According to the Efficient Market Theory, it should be extremely difficult for an investor
to develop a "system" that consistently selects stocks that exhibit higher than normal
returns over a period of time. It should also not be possible for a company to "cook the
books" to misrepresent the value of stocks and bonds. An analysis of current literature,
however, indicates that companies can and do "beat the system" and manipulate information
to make stocks appear to perform above average. An understanding of the underlying
inefficient "human" factors in the market equation is necessary in order to account for
the flaw in Efficient Market Theory.


Efficient Market Theory: A Contradiction of Terms
Efficient Market Theory (EMT) is based on the premise that, given the efficiency of
information technology and market dynamics, the value of the normal investment stock at
any given time accurately reflects the real value of that stock. The price for a stock
reflects its actual underlying value, financial managers cannot time stock and bond sales
to take advantage of "insider" information, sales of stocks and bonds will not depress
prices, and companies cannot "cook the books" to artificially manipulate stock and bond
prices. However, information technology and market dynamics are based upon the workings of
ordinary people and diverse organizations, neither of which are arguably efficient nor
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