Grossman and Stiglitz (1980) argued that it is impossible for markets to be informationally efficient in the real world where information is costly: if prices fully reflected all available information, informed traders who expended resources to obtain that information would not earn a return and be compensated for their efforts. This implies that price changes occur due to unexplained reasons other than subsequent new information, which calls into question the entire underpinnings of the EMH. In addition, top business schools place more than 40% of their MBA graduates in the finance industry – former Merrill Lynch CEO’s John Thain and Stanley O’Neal, Lehman Brothers CEO Richard Fuld, and ex Citigroup CEO Vikram Pandit are all card-carrying MBA graduates (Holland, 2009).Ī disturbing excess volatility anomaly in stock market prices was uncovered by Shiller (1981) who found that stock market price changes over the past century were statistically five to thirteen times too high to be attributed to subsequent new dividend information. The EMH as the cornerstone of Modern Finance Theory and technical analysis as an intensively and widely used investment analysis technique, together constitute vital elements of Financial Management which remains a core foundation course of all Master of Business Administration (MBA) programs 2.
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Long-Term Investment Strategyįrom a long term investment strategy perspective, global capital market inefficiency dictates that it would be a wise choice to select a professional investment manager who is able to capitalize on global market inefficiencies by diversifying and trading internationally, thereby generating returns in excess of the market and a much needed larger nest egg upon retirement. This will result in the sub-optimal allocation of the nation’s resources in unproductive companies, which will have a significant detrimental long term effect on economic growth and prosperity.
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Inefficient capital markets will send inaccurate signals to private and institutional investors regarding their capital investment decisions amongst the nation’s private and public companies, and firms will receive inaccurate price signals to guide their strategic production and investment decisions. Modern Finance Theory paradigm created over 50 years ago, of which the EMH is the cornerstone, would be challenged and this would encourage future research in Behavioral Finance and strengthen the case for a paradigm shift in price formation theory.Įmpirical evidence of market inefficiency and consequent inability of the market to manage prices and risk, will strengthen the case of government bureaucrats pushing for more stringent global regulatory standards on the necessary level of bank capital, liquidity and leverage requirements and overall banking industry regulation in the aftermath of the 2008 global financial crisis.
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