week 12 - Market Efficiency & Payout Policy

Efficiency market hypothesis

The price of a security (such as a share) accurately reflects the information available

The emh implies that investors cannot earn abnormal returns by using information that is already available

Non instantaneous price reaction

An instantaneous price reaction would, in practice mean that after new information becomes available it should be fully reflect the next price established in the market

If market fails to react instantaneously, share traders can develop simple rules to generate excess profits

Strong form efficiency

In a strong form efficient market, all information, whether public or private, is fully reflected in a security's current market price

Semi-strong form efficiency

All publicly available information is fully reflected in a securities current market price, such as financial statements, announcements, analyst reports and general media

• It encompassses a wek form which means if a market is semi strong it is also weak

Weak form efficiency

The information contained in the past sequence of prices of a security is fully reflected in the current market price of that security

Ex dividend

Buyer of stock is no longer entitled for the dividend, seller of the stock retains the dividend

Share repurchases

Instead of declaring cash dividends, a firm buys back shares from their shareholders using the excess cash

Before and after repurchase

Investors wealth are the same, regardless of whether the company payouts as dividend or share reproduce (in perfect capital markets)

Homemade dividends

Firms can create homemade dividends by selling shares.

Market capitalisation after repurchase

1. Find before repurchase

   1. Share amount*sp = a

2. Cost of repurchase 

   1. Share amountof repurchase*sp = b

3. After repurchase = a - b

Share price after repurchase

1. Shares outstanding

   1. Share amount - share amount repurchase

2. Share price after

   1. After repurchase (a-b) divided by shares outstanding