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CS Executive · Corporate Accounting and Financial Management · Security Analysis

Which statement best describes the implication of the Efficient Market Hypothesis for a company's financial manager?

Because an efficient market reflects available information in share prices, managers cannot profit from timing equity issues to exploit mispricing. Prices approximate intrinsic value, and cosmetic accounting changes without cash flow effects will not raise value, so decisions should focus on real value-creating projects.

  1. AShare prices fairly reflect available information, so issuing shares at a time chosen to exploit market mispricing is unlikely to helpCorrect
  2. BThe company should time share issues only when prices are at a past peak shown on charts
  3. CAccounting changes that do not affect cash flows will raise the share price
  4. DShare price depends on past prices, so trends should guide investment decisions

Explanation

If the market is efficient, prices reflect available information and the intrinsic value, so managers cannot gain by timing issues to exploit mispricing. Cosmetic accounting changes are seen through by an efficient market, and past-price trends have no predictive value.

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