MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING
PROGRAMME: BACHELOR OF COMMERCE ACCOUNTING HONOURS DEGREE

MODULE CODE: ACC216

MODULE TITLE: FINANCIAL MANAGEMENT FOR ACCOUNTANTS
LEVEL: 2:2

NAME OF STUDENT: TENDAI BILLET MAKAVA

REG NUMBER: R1916959M

QUESTION

Discuss the efficient market hypothesis and the three main levels, assessing whether our
local financial market are efficient. [25]
Introduction
A financial market is a market in which financial assets (securities) such as stocks and
bonds can be purchased or sold.
- Funds are transferred in financial markets when one party purchases financial
assets previously held by another party.
- Financial markets facilitate the flow of funds thus allowing financing and
investing by households, firms, and government agencies.
 This definition is according to Madura (2013).

An efficient market hypothesis is defined as a market in which security prices adjust

rapidly to the arrival of new information thus the current prices of securities reflect all
information about the security enabling the investors to make wise decisions
 This is according to a publication by Prateek available on
http://web2.uwindsor.ca/courses/business/assaf/Pmlect2a.pdf
 According to Melicher and Norton (2017), any announcement of an unexpected event
that affects sales, earnings, or new products will result in a quick change on the prices
of the securities.
 Only unexpected news or events cause price changes or shifts in securities whilst
expected news should have no effect on the prices of securities. This is according to
Melicher and Norton (2017),
 The efficient market hypothesis asserts that available information makes assets prices
efficient.
- This hypothesis suggests that an investment strategy cannot produce large profits
using current or historical information.
- Adjustment of prices to new information is now happening within an imperceptibly
brief period of time as a result of factors such as; rising numbers of investment
advisory services, vast amounts of information as well increased numbers of
investors.
 This is according to information available on
http://web2.uwindsor.ca/courses/business/assaf/Pmlect2a.pdf
 According to Melicher and Norton (2017), investors who receive information fast and
who can process is as soon as they receive it will have the opportunity to earn large
profits as they are able to buy or sell their securities as soon as they receive good or
bad information respectively before others are aware of the developments.

 According to the research of Prateek available on

https://www.slideshare.net/kush2589/emh-6628392 in support with a research available
on http://web2.uwindsor.ca/courses/business/assaf/Pmlect2a.pdf, the following are the
assumptions made for the requirements of an efficient market:
 Information must be free and quick to flow
- A large number of profit-maximising participants analyse and value securities,
each independently from the others
 Bottlenecks and costs are not there
  Taxes have no noticeable impact
 Investors are rational
 Market prices are efficient and not sticky
- The competing investors attempt to adjust security prices rapidly to reflect the
new information.
The early work related to efficient capital markets was based on what is known as the
‘Random Walk Hypothesis’.
- This hypothesis is a financial theory which stipulated that changes in stock
prices occurred randomly thus the prices of the stock market cannot be
predicted
 This is according to information available on
https://www.slideshare.net/kush2589/emh-6628392
 There also were assumptions in this hypothesis which are as follows;
 There exists a perfectly competitive market
 No individual investor or group is able to influence stock pries
 The price moves in an independent fashion without undue presence
 Future changes in prices will only be as a result of some other new piece of
information
 These assumptions have been gathered from the presentation of Prateek available
on https://www.slideshare.net/kush2589/emh-6628392

 There are three versions of efficient market hypothesis which shall be discussed
below.
 Weak Form Efficiency
 This form of EHM suggests that the prices of securities include or contain all past
information only.
 The name, Weak form, was given because, security prices are the most public and
the most easily available pieces of information hence no one should be able to
profit from using something everyone else is familiar with.
 This information is supported by Clarke’s research available on
https://www.turtletrader.com/pdfs/efficient-market.pdf as well as Melicher and
Norton (2017),
 Since this hypothesis assumes that current market prices already reflect all past
returns and any other security-market information, technical analysis to study past
share price movements is fruitless because past prices are not useful in predicting
future prices (making money).
- Non-existence of price patterns also make technical analysis useless
 Past rates of return and other market data should have no relationship with future
rates of return.
 This is according to an article available on
http://web2.uwindsor.ca/courses/business/assaf/Pmlect2a.pdf
 Semi-Strong Form Efficiency
 This form of market efficiency hypothesis suggests that the current price fully
incorporates all information known to all market participants i.e. publicly available
information as well as All relevant information about past price movements and their
implications
 This is according to Acca (2009)
 Fundamental analysis test of market hypothesis is of no use since past and future
expected performance, results, dividends,
 Individuals cannot 'beat the market' and make profits by reading the newspapers or
annual reports, since the information contained in these documents is available to
everyone.
 This is supported by an article available on
https://www.turtletrader.com/pdfs/efficient-market.pdf as well as the ACCA (2009) book
 According to the information available on https://www.turtletrader.com/pdfs/efficient-
market.pdf, public information includes not only past prices, but also data reported in
a company’s financial statements (annual reports, income statements, filings for the
Security and Exchange Commission, etc.), earnings and dividend announcements,
announced merger plans, the financial situation of company’s competitors,
expectations regarding macroeconomic factors (such as inflation, unemployment), etc.
- This simply means that the public information is not strictly financial in nature
but can involve the business activities among other aspects.
 Gathering and processing of public information may be difficult and costly since one
might need to follow wire reports, research journals among others in order to get
information missing from major newspapers.
 This information is in accordance with material found on
https://www.turtletrader.com/pdfs/efficient-market.pdf

 Strong Form Efficiency

 According to Melicher and Norton (2017), in conjunction with Acca (2009), this
is a market in which prices reflect all knowledge, including past and current
publicly known and private information as well as information from specialists’
insider knowledge.
 Corporate officers and other insiders still find it difficult to earn risk-adjusted
profits above average from their selling or buying of stocks because their detailed,
exclusive information is reflected in current stock prices according to the strong-
form hypothesis
- The company’s managers cannot benefit from the exclusive information they
will be possessing shortly after a meeting because they cannot gain from
inside information which has not yet been publicised.
 This is according to Melicher and Norton (2017).

 Efficiency of our local financial markets

  According to a Mazviona and Nyangara (2013), studies on African market efficiency
which were from the mid-1990s till 2013 had revealed that efficiency of a market
depends on the stage of development of the market
 However, Zimbabwean markets proved to actually be doing quite the opposite
because despite having existed for over a century the markets was inefficient in
the majority of studies.
 According to Karekwaivenani (2003) sited in Mazviona and Nyangara (2013), the
ZSE was established in June 1894 even though back then it was called the
Salisbury Stock Exchange, thus proving the market has been in existence for a
very long time.
 In African markets, it is not only information that determines efficiency of markets
but it has been discovered that changing economic and political realities affect stock
markets to the extent of making mature markets become fresh markets.
 For Zimbabwe inefficiency is said to have existed up to the February 2009 when
the country adopted the multi-currency system where we were now using the
regional and international currencies mainly the US dollar alongside with South
African rands etc as legal tenders.
 From the research and study of Mazviona and Nyangara (2013), empirical test of the
weak form efficiency of the ZSE was conducted using data from 2009 currency
reforms.
 These tests also proved right the argument that it takes time for the positive effects
of currency reforms, if any, to translate into efficiency on stock markets,
 The tests being mentioned typically involved testing for linear serial dependence
between successive prices to establish if the price process followed a random walk
 According to Afego (2011) cited in Mazviona and Nyangara (2013), Zimbabwe was
ranked the 3rd oldest stock market in Africa.
 Studies up to 2013 showed convincing evidence that the ZSE is weak form
inefficient
 The studies were carried out by the following authors Magnusson and Wydick
(2002); Simons and Laryea (2005); Jefferis and Smith (2005); Smith (2008);
Sunde and Zivanomoyo (2008) and these authors are all sited in Mazviona and
Nyangara (2013),
 It is said that in testing for weak form efficiency after the currency reform, daily
closing prices data for the period 19 February 2009 to 28 June 2012 was used

Reference list
Acca (2009), Financial Management, 3rd edition, BPP Learning Media Ltd: UK
https://www.slideshare.net/kush2589/emh-6628392 accessed on 18 August 2021

http://web2.uwindsor.ca/courses/business/assaf/Pmlect2a.pdf accessed on 12 August 2021

Madura, J. (2013) Financial Markets and Institutions, 11th Ed. Cengage Learning, Florida
Atlantic University, USA