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ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares

If the stock market of a country is semi-strong form efficient, which of the following is the most appropriate implication for the financial manager of a listed company?

The share price can be treated as a fair reflection of all publicly available information, so share issues need not be timed and the market price is a fair value. Cosmetic accounting changes will not raise the price because the market sees through them.

  1. AChanging accounting policies to raise reported profit will raise the share price, as long as the cash flows are unchanged
  2. BTiming a share issue to wait for a share price rise is likely to give a better issue price
  3. CThe share price will fairly reflect the company's public information, so the market price can be treated as a fair value for issues of sharesCorrect
  4. DDirectors can profit by using inside information to trade in the company's shares

Explanation

In a semi-strong efficient market, prices reflect all public information, so the market price is a fair value and issues need not be timed. Cosmetic accounting changes with no cash flow effect will not fool the market. Insider information could be used to earn abnormal returns only because it is not yet public, but this is illegal and is a strong-form matter, not a sensible implication for managers.

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