Efficiency Market Hypothesis Essay Example | Topics and Well Written Essays - 2000 words

Efficiency Market Hypothesis - Essay Example Efficient markets do exist in theory. For example according to financial theory there are efficient stock markets that especially don't permit market manipulation by investors. However the practical scenario negates this proposition very often. For instance the rally of the stock could be attributed partially to the equity issue and not to the efficiency of the markets. The stock market crash of 2008 can be identified as a situation in which a stock market experiences a sudden and major decline in value of its underlying stocks. However crashes can occur mainly due to the rising stock prices and excessive economic optimism (Cuthbertson, 1996). Further it can be caused by the collapse of a speculative bubble, financial crisis or economic crisis. A substantial change in stock markets and price behavior can be caused by psychological influences that often lead to bubbles. Thus EMH is flawed to a certain extent because there is no such grantee that share prices would be solely determined by a pure interplay of market forces, i.e. demand and supply. In fact the crash in 2008 occurred due to structural deficiencies that in turn were characterized by a flurry of activity in which overvalued shares were traded hectically during the immediately preceding period before the crash. Stock market influences on the investors' policy decision making process and corporate strategy have been discussed against backdrop of an evolving environment of change. This is because of the fact that business organizations are becoming more popular because their survival is directly proportional to the size of the market rather than the manageability (Elton, and Martin. 2003). Compact small business organizations have been described as economically unproductive in times of financial recessions because their excessive dependence on internal organizational capabilities leads to poor decisions. Therefore it's essential now to discuss the various theoretical underpinnings of the optimal capital structure in order to determine how efficiently the stock market would be able to function in the absence of the above mentioned shortcomings such as bankruptcy costs and information asymmetry. In addition, there are some highly influential theories. With the help of them it's possible to discuss how best an efficient stock market can be brought into existence (or not) thus rendering both capital structure and dividend policy of the firm irrelevant. However the extent to which those stock market imperfections can be overcome would determine the degree of perfection of the stock market in a given situation.On the other hand the success of big firms has been attributed to their ability to raise both debt and equity capital and the relative size of the market. In the first place financial recessions dependents on the firm's ability to raise capital. Since the market value of the firm is affected by the way in which the capital is structured, managers might prefer to raise debt instead of equity thus bringing down the value of the firm in the eyes of the investor (Copeland, and Fred, 1988). Subsequently shareholders might be compelled to sell their shares at lower prices. In such a scenario big corporate entities are able to survive on pre commitments made by institutional lenders who will not