To Have an Understanding of the Impact of Market Efficiencies on Financial Statements

(A)

(i) “In a stock exchange which is semi-strong efficient, it would be impossible, except by bad luck, to select investments which would continually lose more than the average investor in the same market in the same period. Even the most inept investor couldn’t consistently do worse than average.”

Semi-strong efficiency is a form of efficient marketing hypothesis (EMH) that states that “all public information is calculated into a stock’s current share price. Neither fundamental nor technical analysis can be used to achieve superior gains.” In this case traders who have non-public information access can earn excess profits as they obviously know more about what is going on in any given company and so would be able to make choices on this rather than just on the public information. The semi-strong form of the efficient market hypothesis assumes that security prices adjust rapidly to all publicly available information. This information includes market based information and so the semi-strong EMH is known as the weak form. In addition to market information, other public information including earnings and dividend announcements, financial ratios, accounting practises, stock splits, and economic and political news. If markets are semi-strong efficient, investors should not be able to earn excess risk-adjusted returns if their decisions are based on information that has already been made public. So in stating all of this it would indeed be impossible except by bad luck, to select investments which would continuously lose more than the average investor in the same period in a semi-strong efficient market as they have all public information the same as all other investors and so no investor has any competitive advantage, they are all in the same boat. But also in stating that one investor could keep making risks and not acknowledging the public information and in return consistently do worse than the average but that would be only if they weren’t in a semi-strong market.

(ii) “When an Irish Stock Exchange listed business publishes accounts which show a loss, one would normally expect its share price to fall.”

A loss in a business is a decrease in net assets for which no revenue is obtained and which arises from incidental transactions. Examples are the loss on the sale of a fixed asset, a catastrophe loss and a loss on the early extinguishment of debt. It shows that the business is not doing well.

The stock price of a company is calculated when a company goes public at an event called the initial public offering. This is when a company will pay an investment bank to use very complex valuation techniques and formulas to derive a company's value by determining how many shares will be offered to the public and at what price. The company sells these shares on the stock market/exchange.