Beruflich Dokumente
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Chapter Thirteen
Corporate Financing Decisions Corporate Finance Ross Westerfield Jaffe and Efficient Capital Markets
Sixth Edition
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Prepared by Gady Jacoby University of Manitoba and Sebouh Aintablian American University of Beirut
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Chapter Outline
13.1 Can Financing Decisions Create Value?
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Just as we can use NPV criteria to evaluate investment decisions, we can use NPV to evaluate financing decisions.
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Sometimes a firm can find a previously-unsatisfied clientele and issue new securities at favourable prices. In the long-run, this value creation is relatively small, however.
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Semi-Strong Form
Security prices reflect all publicly available information.
Strong Form
Security prices reflect all informationpublic and private.
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If the weak form of market efficiency holds, then technical analysis is of no value.
Often weak-form efficiency is represented as Pt = Pt-1 + Expected return + random error t Since stock prices only respond to new information, which by definition arrives randomly, stock prices are said to follow a random walk.
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Investor behaviour tends to eliminate any profit opportunity associated with stock price patterns.
Sell Sell Buy Buy If it were possible to make big money simply by finding the pattern in the stock price movements, everyone would do it and the profits would be competed away.
Time
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A matter of degree
Even if we can spot patterns, we need to have returns that beat our transactions costs.
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Double-click on this Excel chart to see a different random series. With different patterns, you may believe that you can predict the next value in the serieseven though you know it is random.
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To test this, event studies examine prices and returns over timeparticularly around the arrival of new information. Test for evidence of underreaction, overreaction, early reaction, delayed reaction around the event.
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The studies generally support the view that the market is semistrong-form efficient. In fact, the studies suggest that markets may even have some foresight into the futurein other words, news tends to leak out in advance of public announcements.
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All funds
Growth funds
Income funds
Sector funds
Taken from Lubos Pastor and Robert F. Stambaugh, Evaluating and Investing in Equity Mutual Funds, unpublished paper, Graduate School of Business, University of Chicago (March 2000).
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Temporal Anomalies
Turn of the year, month, week. For large-capitalization Canadian stocks there is no longer a day-of-the week effect.
Speculative Bubbles
Sometimes a crowd of investors can behave as a single squirrel.
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Firms should expect to receive the fair value for securities that they sell.
Fair means that the price they receive for the securities they issue is the present value. Thus, valuable financing opportunities that arise from fooling investors are unavailable in efficient markets.
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2. Financial managers cannot time issues of stocks and bonds using publicly available information.
3. A firm can sell as many shares of stocks or bonds as it desires without depressing prices.
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There is abundant evidence for the first two forms of the EMH.
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