Stock-Market Indicators of Efficiency

question 30

Essay

Stock-market Indicators of Efficiency. According to the Efficient Market Hypothesis, current stock prices reflect all relevant risk and return information. This implies that near-term stock price changes are random and independent. In a rational pricing environment, investing in the stock market is a "fair game" where the expected excess return for each security is zero. Taken literally, this means that every stock at every point in time is an equally good buy (or sell). Within this context, the stock market provides a useful context within which to evaluate managerial decisions. "Good" decisions boost share prices, and "bad" decisions cause share prices to fall.
A. Does evidence of inefficiency in the stock market reduce its usefulness as an indicator of managerial efficiency?
B. Suppose that the stock market is very efficient, but not perfectly efficient. Can stock prices still be used to provide information about managerial efficiency?

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Definitions:

Reward Power

The ability of an individual or entity to influence others' behavior by controlling the allocation of rewards such as bonuses, promotions, or praise.

Expert Power

The influence and authority a person has as a result of their expertise, skills, or knowledge.

Avenues Of Appeal

Legal or procedural paths available for challenging decisions or seeking redress within judicial or administrative systems.

Rights Of Clients

The entitlements and protections afforded to clients, especially in legal, therapeutic, and social service contexts, ensuring their treatment is ethical and respectful.