Week 2: Stock Market Efficiency

Stock market efficiency is a market in which stock prices reflect fully and immediately all the information currently available on the market. The price increases or decreases due to market response to new information. And in random walks theory of Kendal (1953), he also suggested that the share prices trend cannot be predicted by looking at the previous day’s price change. So, share prices just are affected and changed by new information in the market. Any prediction or analyst based on the trend of the past did not effect to this theory. According to Fama (1070), the efficient market is divided into 3 types: weak-form, semi-strong form and strong-form efficiency.

On 15^th January 2013, shares of Burberry have risen 5% after the company reported a strong increase in total sales for the final three months of 2012 (increased by 9% to £613m, up from £574m compared with previous year). The first reason for a significant increase of total sales is due to sales of coats, scarves, men's tailoring and accessories. Besides, another reason was the impact of new shop openings. However, wholesale sales of this company drop 5%, which it blamed on weak trading conditions in Europe. According to information from Burberry, retail sales saw the biggest rises across Asia Pacific, led by Hong Kong and China. While in European area, retail sales were almost unchanged. In my opinion, although wholesale sales decrease in Europe, but revenues of Burberry still gain over expectation of analyst, so the performance of this company is considered as successfully.

In case of Burberry, I think stock market efficiency belongs to semi-strong form. According to Arnold (2008), in semi-strong form, most information in annual reports, profit or dividend announcements are reflected in share prices before the announcement is made. Revenues of Burberry are published by the board of the company to all people who care Burberry’s financial situation such as investors, shareholders or speculators. Through various media channels like newspaper, internet, TV, radio, investors can access all information quickly and accurately. And then, they will immediately evaluate the performance of Burberry and make decision whether invest or not.  As can be seen, this information of Burberry will affect directly to the price of shares in market.

However, I still consider about the accurately of information in these situation. If the company, for example Burberry, intentionally provide fake information or mixed information to attract investors and increase value for shares of them. So, how the investors can detect and collect information exactly?