chapter 13 principles principlesofcorporatefinance tenth edition efficient markets and behavioral...
TRANSCRIPT
Chapter 13 PrinciplesPrinciples
ofof
CorporateCorporate
FinanceFinance
Tenth Edition
Efficient Markets and Behavioral Finance
Slides by
Matthew Will
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
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Topics Covered
We Always Come Back to NPVWhat is an Efficient Market?
– Random Walk– Efficient Market Theory
The Evidence Against Market EfficiencyBehavioral FinanceSix Lessons of Market Efficiency
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Return to NPV
NPV employs discount ratesThese discount rates are risk adjustedThe risk adjustment is a byproduct of
market established pricesAdjustable discount rates change asset
values
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Return to NPV
Example
The government is lending you $100,000 for 10 years at 3% and only requiring interest payments prior to maturity. Since 3% is obviously below market, what is the value of the below market rate loan?
Assume the market return on equivalent risk projects is 10%.
012,43$
988,56000,100
)10.1(
000,100
)10.1(
000,3000,001NPV
10
10
1
tt
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Efficient Market Theory
Weak Form Efficiency– Market prices reflect all historical information
Semi-Strong Form Efficiency– Market prices reflect all publicly available
information
Strong Form Efficiency– Market prices reflect all information, both
public and private
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Efficient Market Theory
Fundamental Analysts– Research the value of stocks using NPV and other
measurements of cash flow
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Efficient Market Theory
Technical Analysts– Forecast stock prices based on the watching the
fluctuations in historical prices (thus “wiggle wiggle watcherswatchers”)
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Efficient Market Theory
-16
-11
-6
-1
4
9
14
19
24
29
34
39
Days Relative to annoncement date
Cu
mu
lati
ve
Ab
no
rma
l Re
turn
(%
)
Announcement Date
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Efficient Market Theory
Average Annual Return on Mutual Funds and the Market Index
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Efficient Market Theory
0
5
10
15
20
First Second Third Fourth Fifth
Av
era
ge
Re
turn
(%
)
IPO
Matched Stocks
IPO Non-Excess Returns
Year After Offering
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Price AnomaliesD
evia
tion,
%Log Deviations From Royal Dutch Shell / Shell T&T Parity
1973 - 2006
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Efficient Market Theory
2000 Dot.Com Boom
883,1208.092.
6.154)( 2000 March
gr
DivindexPV
589,8074.092.
6.154)( 2002October
gr
DivindexPV
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Efficient Market Theory
1987 Stock Market Crash
119310.114.
7.16)( crash pre
gr
DivindexPV
928096.114.
7.16)( crashpost
gr
DivindexPV
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Behavioral Finance
Arbitrage limitationsLTCM example
Factors related efficiency and psychology
1. Attitudes towards risk
2. Beliefs about probabilities
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Lessons of Market Efficiency
Markets have no memoryTrust market pricesRead the entrailsThere are no financial illusionsThe do it yourself alternativeSeen one stock, seen them all
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Example: How stock splits affect value
0
5
10
15
20
25
30
35
40
Month relative to split
Cumulative abnormal return %
-29 0 30
Source: Fama, Fisher, Jensen & Roll