Finance assignment on adding value when capital markets are seen efficient
Task: Can you write a finance assignment explaining when financial analysis can add value and implications of efficient market hypothesis?
Finance assignment explaining how financial analysis adds value
According to the findings of the finance assignment, the efficient market hypothesis states that security prices are having all the relevant information and they do not need any further analysis. However, if all the investors adopt this attitude, then there will be no equity analysis, mispricing will go uncorrected and markets will no longer be effective enough. In case John opts for financial analysis then he can analyze newly announced data faster, also financial analysis will help him in understanding any company better. Also mispricing can be there and that cannot be ignored owing to many factors like imperfect auditing, or accounting rules are not followed, managers are not aligned with the interest of the investors and managers have more information about the firm than the investors. Hence it is found in this finance assignment that financial analysis is important and effective(Malkiel, 2005).
Implication of efficient market hypothesis
The main implication of efficient market hypothesis as per the finance assignmentis that stocks trade on the exchange at their fair value. It implies that investors should not be able to beat the market because all the information that can predict the movement of the prices is already built into the stock prices. It states that share prices follow a random way which states that prices are more determined by today’s news rather than the past stock prices movement(Yen & Lee, 2008). Thus as per this finance assignmentthis will lead to no equity analysis, no correction in the pricing would be there and investors will suffer losses if they do not interpret the prices after doing proper analysis.
Finance assignmentexplaining the problem due to issuance of executive stock options
Agency problem is a conflict of interest that occurs when one party is expected to act in the best interest of another party in any relationship and same in case of the employer and the employee relationship. It refers to the conflict of interest between the company’s management and the interest of the stakeholders. Now as per the finance assignment, executive stock option was launched to overcome this issue, ESOP encourages employees to acquire stock and ownership in the company. It is an employee benefit plan where employees are paid in stock rather than in monetary term(Dalton, et al., 2007). However there are a lot of issues with ESOP like ESOP have shares that do not have equal voting right and hence they are less valuable in the market. Also the employees who are holding these shares have little or no say in the decisions of the company and shareholders are considered to be that people who can have influence on the decision of the management. Hence as per the findings of finance assignment, ESOP has not been able to overcome the issues associated with agency problems.
Dalton, D., Hitt, M., Certo, S. & Dalton, C., 2007. The fundamental agency problem and its mitigation in the finance assignment. Academy of Management annals, 1(1), pp. 1-64.
Malkiel, B. G., 2005. Reflections on the efficient market hypothesis: 30 years later. Financial review, 40(1), pp. 1-9. Yen, G. & Lee, C., 2008. Efficient market hypothesis (EMH): past, present and future of finance assignment. Review of Pacific Basin Financial Markets and Policies, 11(2), pp. 305-329.