chapter 13 principles principlesofcorporatefinance tenth edition efficient markets and behavioral...

16
Chapter 13 Principles Principles of of Corporate Corporate Finance Finance 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

Upload: bertram-barber

Post on 26-Dec-2015

245 views

Category:

Documents


6 download

TRANSCRIPT

Page 1: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

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

Page 2: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 2

McGraw Hill/Irwin

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

Page 3: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 3

McGraw Hill/Irwin

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

Page 4: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 4

McGraw Hill/Irwin

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

Page 5: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 5

McGraw Hill/Irwin

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

Page 6: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 6

McGraw Hill/Irwin

Efficient Market Theory

Fundamental Analysts– Research the value of stocks using NPV and other

measurements of cash flow

Page 7: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 7

McGraw Hill/Irwin

Efficient Market Theory

Technical Analysts– Forecast stock prices based on the watching the

fluctuations in historical prices (thus “wiggle wiggle watcherswatchers”)

Page 8: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 8

McGraw Hill/Irwin

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

Page 9: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 9

McGraw Hill/Irwin

Efficient Market Theory

Average Annual Return on Mutual Funds and the Market Index

Page 10: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 10

McGraw Hill/Irwin

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

Page 11: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 11

McGraw Hill/Irwin

Price AnomaliesD

evia

tion,

%Log Deviations From Royal Dutch Shell / Shell T&T Parity

1973 - 2006

Page 12: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 12

McGraw Hill/Irwin

Efficient Market Theory

2000 Dot.Com Boom

883,1208.092.

6.154)( 2000 March

gr

DivindexPV

589,8074.092.

6.154)( 2002October

gr

DivindexPV

Page 13: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 13

McGraw Hill/Irwin

Efficient Market Theory

1987 Stock Market Crash

119310.114.

7.16)( crash pre

gr

DivindexPV

928096.114.

7.16)( crashpost

gr

DivindexPV

Page 14: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 14

McGraw Hill/Irwin

Behavioral Finance

Arbitrage limitationsLTCM example

Factors related efficiency and psychology

1. Attitudes towards risk

2. Beliefs about probabilities

Page 15: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 15

McGraw Hill/Irwin

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

Page 16: Chapter 13 Principles PrinciplesofCorporateFinance Tenth Edition Efficient Markets and Behavioral Finance Slides by Matthew Will Copyright © 2010 by The

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved

14- 16

McGraw Hill/Irwin

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