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Market Efficiency and Value Creation

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This concept that market prices measure the value of assets is formalized in the Efficient Market Hypothesis (EMH), which holds that self-interested buyers and sellers seek out all available information on the security and use this information to guide their actions in buying and selling:  information drives supply and demand.  Security prices thus reflect all of this available information and are a fair representation of the true value of the securities. 

We will examine the EMH in Unit 14; however, as it underlies our view of how the corporation is valued I want to give you a brief introduction to it now.

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Please write an essay of no more than 400 words addressing the following questions: What is market efficiency?  Are the U.S. capital markets efficient?

Your essay should be based on one of these articles.  These articles differ in their focus and the level of sophistication, so choose your article carefully. 

Option 1= Value Creation:  The ultimate measure by which a company is judged

Option 2= The value of value:  Fashions are changing in the stock market Jan 31, 2013 Economist

Option 3= Taking the long view:  The pursuit of shareholder value is attracting criticism—not all of it is foolish.  Economist Nov 22, 2012

Option 4= Efficiency and beyond:  The Efficient Market Hypothesis has underpinned many of the financial industry’s models for years.  After the crash, what remains of it?  Jul 16, 2009 Economist

In the essay:

1. Identify the article you selected

2. Summarize the key points and conclusion of the article.

3. Describe, given the chosen article, what is meant by market efficiency and how it affects market prices.

4. Given the article’s information and your own views, evaluate maximizing the company’s stock price as the appropriate goa of a corporation.