第十三章公司融資決策和有效資本市場13.1CanFinancingDecisionsCreateValue?EarlierpartsofthebookshowhowtoevaluateinvestmentprojectsaccordingtheNPVcriterion.Thenextfivechaptersconcernfinancingdecisions.WhatSortofFinancingDecisions?Typicalfinancingdecisionsinclude:HowmuchdebtandequitytosellWhen(orif)topaydividendsWhentoselldebtandequityJustaswecanuseNPVcriteriatoevaluateinvestmentdecisions,wecanuseNPVtoevaluatefinancingdecisions.HowtoCreateValuethroughFinancingFoolInvestorsEmpiricalevidencesuggeststhatitishardtofoolinvestorsconsistently.ReduceCostsorIncreaseSubsidiesCertainformsoffinancinghavetaxadvantagesorcarryothersubsidies.CreateaNewSecuritySometimesafirmcanfindapreviously-unsatisfiedclienteleandissuenewsecuritiesatfavorableprices.Inthelong-run,thisvaluecreationisrelativelysmall,however.13.2ADescriptionofEfficientCapitalMarketsAnefficientcapitalmarketisoneinwhichstockpricesfullyreflectavailableinformation.TheEMHhasimplicationsforinvestorsandfirms.Sinceinformationisreflectedinsecuritypricesquickly,knowinginformationwhenitisreleaseddoesaninvestornogood.Firmsshouldexpecttoreceivethefairvalueforsecuritiesthattheysell.Firmscannotprofitfromfoolinginvestorsinanefficientmarket.ReactionofStockPricetoNewInformationinEfficientandInefficientMarketsStockPrice-30 -20 -10 0 +10 +20 +30Daysbefore(-)andafter(+)announcementEfficientmarketresponseto“goodnews”O(jiān)verreactionto“goodnews”withreversionDelayedresponseto“goodnews”ReactionofStockPricetoNewInformationinEfficientandInefficientMarketsStockPrice-30 -20 -10 0 +10 +20 +30Daysbefore(-)andafter(+)announcementEfficientmarketresponseto“badnews”O(jiān)verreactionto“badnews”withreversionDelayedresponseto“badnews”13.3TheDifferentTypesofEfficiencyWeakFormSecuritypricesreflectallinformationfoundinpastpricesandvolume.Semi-StrongFormSecuritypricesreflectallpubliclyavailableinformation.StrongFormSecuritypricesreflectallinformation—publicandprivate.WeakFormMarketEfficiencySecuritypricesreflectallinformationfoundinpastpricesandvolume.Iftheweakformofmarketefficiencyholds,thentechnicalanalysisisofnovalue.Oftenweak-formefficiencyisrepresentedasPt=Pt-1+Expectedreturn+randomerrortSincestockpricesonlyrespondtonewinformation,whichbydefinitionarrivesrandomly,stockpricesaresaidtofollowarandomwalk.WhyTechnicalAnalysisFailsStockPriceTimeInvestorbehaviortendstoeliminateanyprofitopportunityassociatedwithstockpricepatterns.Ifitwerepossibletomakebigmoneysimplybyfinding“thepattern”inthestockpricemovements,everyonewoulddoitandtheprofitswouldbecompetedaway.SellSellBuyBuySemi-StrongFormMarketEfficiencySecurityPricesreflectallpubliclyavailableinformation.Publiclyavailableinformationincludes:HistoricalpriceandvolumeinformationPublishedaccountingstatements.Informationfoundinannualreports.StrongFormMarketEfficiencySecurityPricesreflectallinformation—publicandprivate.Strongformefficiencyincorporatesweakandsemi-strongformefficiency.Strongformefficiencysaysthatanythingpertinenttothestockandknowntoatleastoneinvestorisalreadyincorporatedintothesecurity’sprice.RelationshipamongThreeDifferentInformationSetsAllinformation

relevanttoastockInformationset

ofpubliclyavailable

informationInformation

setof

pastpricesSomeCommonMisconceptionsMuchofthecriticismoftheEMHhasbeenbasedonamisunderstandingofthehypothesissaysanddoesnotsay.WhattheEMHDoesand

DoesNOTSayInvestorscanthrowdartstoselectstocks.Thisisalmost,butnotquite,true.Aninvestormuststilldecidehowriskyaportfoliohewantsbasedonriskaversionandthelevelofexpectedreturn.Pricesarerandomoruncaused.Pricesreflectinformation.ThepriceCHANGEisdrivenbynewinformation,whichbydefinitionarrivesrandomly.Therefore,financialmanagerscannot“time”stockandbondsales.13.4TheEvidenceTherecordontheEMHisextensive,andinlargemeasureitisreassuringtoadvocatesoftheefficiencyofmarkets.Studiesfallintothreebroadcategories:Arechangesinstockpricesrandom?Arethereprofitable“tradingrules”?Eventstudies:doesthemarketquicklyandaccuratelyrespondtonewinformation?Therecordofprofessionallymanagedinvestmentfirms.AreChangesinStockPricesRandom?Canwereallytell?Manypsychologistsandstatisticiansbelievethatmostpeoplewanttoseepatternsevenwhenfacedwithpurerandomness.Peopleclaimingtoseepatternsinstockpricemovementsareprobablyseeingopticalillusions.AmatterofdegreeEvenifwecanspotpatterns,weneedtohavereturnsthatbeatourtransactionscosts.Randomstockpricechangessupportweak-formefficiency.WhatPatternDoYouSee?Double-clickonthisExcelcharttoseeadifferentrandomseries.Withdifferentpatterns,youmaybelievethatyoucanpredictthenextvalueintheseries—eventhoughyouknowitisrandom.EventStudies:HowTestsAreStructuredEventStudiesareonetypeoftestofthesemi-strongformofmarketefficiency.ThisformoftheEMHimpliesthatpricesshouldreflectallpubliclyavailableinformation.Totestthis,eventstudiesexaminepricesandreturnsovertime—particularlyaroundthearrivalofnewinformation.Testforevidenceofunderreaction,overreaction,earlyreaction,delayedreactionaroundtheevent.HowTestsAreStructured(cont.)Returnsareadjustedtodetermineiftheyareabnormalbytakingintoaccountwhattherestofthemarketdidthatday.TheAbnormalReturnonagivenstockforaparticulardaycanbecalculatedbysubtractingthemarket’sreturnonthesameday(RM)fromtheactualreturn(R)onthestockforthatday:AR=R–RMTheabnormalreturncanbecalculatedusingtheMarketModelapproach:AR=R–(a+bRM)EventStudies:DividendOmissionsEfficientmarketresponseto“badnews”S.H.Szewczyk,G.P.Tsetsekos,andZ.Santout“DoDividendOmissionsSignalFutureEarningsorPastEarnings?”JournalofInvesting(Spring1997)EventStudyResultsOvertheyears,eventstudymethodologyhasbeenappliedtoalargenumberofeventsincluding:DividendincreasesanddecreasesEarningsannouncementsMergersCapitalSpendingNewIssuesofStockThestudiesgenerallysupporttheviewthatthemarketissemistrong-fromefficient.Infact,thestudiessuggestthatmarketsmayevenhavesomeforesightintothefuture—inotherwords,newstendstoleakoutinadvanceofpublicannouncements.IssuesinExaminingtheResultsMagnitudeIssueSelectionBiasIssueLuckyEventIssuePossibleModelMisspecificationTheRecordofMutualFundsIfthemarketissemistrong-formefficient,thennomatterwhatpubliclyavailableinformationmutual-fundmanagersrelyontopickstocks,theiraveragereturnsshouldbethesameasthoseoftheaverageinvestorinthemarketasawhole.Wecantestefficiencybycomparingtheperformanceofprofessionallymanagedmutualfundswiththeperformanceofamarketindex.TheRecordofMutualFundsTakenfromLubosPastorandRobertF.Stambaugh,“EvaluatingandInvestinginEquityMutualFunds,”unpublishedpaper,GraduateSchoolofBusiness,UniversityofChicago(March2000).TheStrongFormoftheEMHOnegroupofstudiesofstrong-formmarketefficiencyinvestigatesinsidertrading.Anumberofstudiessupporttheviewthatinsidertradingisabnormallyprofitable.Thus,strong-formefficiencydoesnotseemtobesubstantiatedbytheevidence.ViewsContrarytoMarketEfficiencyStockMarketCrashof1987Themarketdroppedbetween20percentand25percentonaMondayfollowingaweekendduringwhichlittlesurprisinginformationwasreleased.TemporalAnomaliesTurnoftheyear,—month,—week.SpeculativeBubbles

Sometimesacrowdofinvestorscanbehaveasasinglesquirrel.13.5ImplicationsforCorporateFinanceBecauseinformationisreflectedinsecuritypricesquickly,investorsshouldonlyexpecttoobtainanormalrateofreturn.Awarenessofinformationwhenitisreleaseddoesaninvestorlittlegood.Thepriceadjustsbeforetheinvestorhastimetoactonit.Firmsshouldexpecttoreceivethefairvalueforsecuritiestha