案例講稿學(xué)校homework7.1equity capital and the emh

1、Strategic Corporate FinanceWeek 7 Equity CapitalContrast equity finance and debt financeKnow the stock markets available in UKExplain requirements of LSE and AIMDescribe rights issues, placings and open offersUnderstand Efficient Market HypothesisLearning esOrdinary shares/shareholdersOwners of the

2、companyExercise controlVote at shareholder meetingsAppoint directorsReceive dividendsApprove takeoversIndividual shareholders may feel powerlessLast to be repaid in event of liquidationWhat is equity capitalControl Lenders have no official controlHowever there may be conditions associated with the l

3、oan regarding liquidity or solvencyThe issue of control can influence a company whether to raise finance through debt or equityDebt vs. equity capitalCostDebt finance is less expensive than equityCost of issuing debt is much lessReturn of debt is less because there is less riskInterest on debt is ta

4、x deductibleDebt vs. equity capitalExtraordinary profitLenders only get their contracted amountsThey get no more even if profits are very highShareholders will get the greater part of any extraordinary profitsDebt vs. equity capitalDividends cannot be used to reduce taxable profitsDividends are paid

5、 out of after tax profitsInterest payments are tax deductibleTaxable profit is after interest has been deductedDebt vs. equity capitalSeparate legal identityLimited liability Restrictions on sale of sharesPublic Limited Company (plc)Offer shares to wide range of potential investorsMost plcs are not

6、quoted on a stock marketListed company Listed on a recognised stock exchangeLimited companiesFixed rate of dividendNo guarantee if there are insufficient profitsDividend paid before ordinary shareholdersHigher return than other fixed interest securitiesNo voting rightsPart of shareholders funds but

7、are not equity share capitalPreference sharesAn efficient market is where shares are not undervalued or overvaluedAn inefficient market regularly mis-prices sharesThis would allow people to develop ways to beat the marketEfficient Market hypothesisDefinition of Efficient Markets Professor Eugene Fam

8、a, defined market efficiency as follows:In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and

9、on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value. Fama, Eugene F. (1995) Random walks in stock market prices. Financial analysts journa

10、l 51.1: 75-80.HistoryPrior to the 1950s it was generally believed the use of fundamental or technical approaches could “beat the market” In the 1950s and 1960s studies began to provide evidence against this view.Researchers found that stock price changes (not prices themselves) followed a “random wa

11、lk.”They also found that stock prices reacted to new information almost instantly, not gradually as had been believed.What is meant by efficiency?If new information is received about a share, it will be incorporated into the share price rapidly and rationally with respect to the size and direction o

12、f the movementNo trader can make a return greater than a that justified by risk, except by chanceIt does not mean that shares are priced at their true value at all timesIt does mean errors are unbiased and price deviations from true value are randomEfficient Market hypothesisMost (individual) invest

13、ors are too late to take advantage of new informationNew information should be rapidly assimilatedAssumes a large number of informed investorsAssumes quick analysis and actionTherefore markets may be efficient at pricingBut many analysts claim they are quicker than the rest and can make abnormal ret

14、urnsAnecdotal evidence suggest some people exploit inefficiencies Efficient Market hypothesisEMH does not say: Prices do not depart from true economic valueThis is false. Value depends on the future which is uncertainWhat efficiency does not meanYou will not come across an investor beating the marke

15、t in a single time periodIf shares are selected randomly, you would expect about half to outperform the marketWhat efficiency does not meanNo investor following will beat the market in the long termThere are millions of investors and half will outperform the market very yearThis is because the marke

16、t return is the average return of all investorsTherefore about half of all investors will be above itWhat efficiency does not meanEncourages share buying. If shares are systematically incorrectly priced then savers will be worried about losing moneyGive correct signals to company managersThe objecti

17、ve of the firm is to maximise shareholders wealthIf pricing is inaccurate, managers may pursue incorrect strategiesThe value of an efficient marketTo help allocate resourcesOverall, society needs to allocate resources by investing in profitable enterprises and withdrawing funding from non profitable

18、 onesMispricing shares may lead to misallocation of resources The value of an efficient marketWeak form efficiency Share prices reflect all information contained in past price movementsPast share price history cannot be used to predict the future Evidence- mostly in support but some exceptionsThe th

19、ree levels of efficiencySemi strong form efficiencyPrices reflect all publicly available informationThis includes all announcements about earnings and dividends as they are madeThe market absorbs new information quickly and accuratelyNo point in analysing publicly available information as it has alr

20、eady been taken into accountEvidence mostly in support but some exceptionsThe three levels of efficiencyStrong form of efficiencyAll relevant information is reflected in the share priceThis includes private informationTherefore even insiders cant make abnormal profitsEvidence suggests the market is

21、inefficient at this levelThe three levels of efficiencyFor the vast majority of people public information cannot be used to earn abnormal returns (above the normal level for that risk class)Fundamental analysis, looking at information about the profits of a company for example, is a waste of timeBes

22、t investing strategy is to simply select a suitable diversified portfolioYou should invest in index tracker funds, unit trusts etc.Implications of EMH for investorsInvestors need to press for better, more timely informationSemi strong efficiency depends on the quantity and quality of publicly availa

23、ble informationCompanies should be encouraged to provide better informationImplications of EMH for investorsThe perception of a fair market could be improved by more constraints and deterrents to insider dealingStrong form efficiency does not exist so insiders can gain an unfair advantageShould be p

24、unished by the law for doing soImplications of EMH for investorsThe timing of share issues does not have to be fine tunedManagers should not delay the issue of share just because the market is low and they think their shares are underpricedIf the market is efficient the shares are already correctly

25、pricedImplications of EMH for companiesIf investors are satisfied the new shares will generate a return at least as high as the existing funds the price will not fallLarge quantities of new shares can be sold without moving the price if the new shares can produce the same return as the old shares di

26、dFirms may be worried that if they issue too many new shares the price may fall, but.The market is generally large enough to absorb the issue of shares.Implications of EMH for companiesSignals from price movements should be taken seriouslyDirectors should take note of share price movements as being

27、a commentary on their performanceImplications of EMH for companiesThere are inefficiencies at the strong form levelIt is rare for a non insider to outperform the marketHowever there is some evidence that someone with superior analytical ability, knowledge, creativity can earn abnormal returnsThe inf

28、luence of psychology is being researched and may be significant So, are stock markets efficient?Ashfield plc has 3m shares and Lycett plc 8m Day 1:Market value/share- Ashfield 3, Lycett 6 Day 2:Management of Lycett decide, at a private meeting, to make a take-over bid for Ashfield at 5 per share. Th

29、is will produce operating savings with a present value of 8m. Day 5: Lycett publicly announces unconditional offer to purchase all Ashfield shares at 5/share with settlement on day 20. Savings not announced or made publicDay 10: Lycett announces 8m savings EMH: ExerciseRequired:Calculate the share p

30、rice of Ashfield and Lycett at days 2, 5 and 10 if the market is:Semi strong form efficientStrong form efficientIn each of the following separate circumstances.The purchase consideration is for cash onlyThe purchase consideration, decided on day 2 and publicly announced on day 5, is five new issued shares of Lycett for every six shares of Ashfield.Efficient market hypothesis exerciseEfficient market hypothesis exercise: cash