Discussion Response

The CFO of a certain company always wears his green suit on a day that the firm is about to release positive information about his company. You believe that you can profit from this information by buying the firms shares at the beginning of every day that the CFO shows up wearing this green suit. Describe which form of market efficiency is consistent with your belief.

Please respond to the following 2 posts.

POST 1:

The market efficiency that is consistent with the belief in this scenario is the semistrong-form of the efficient market hypothesis. This efficient market hypothesis is a weaker form of the efficient market hypothesis, and is defined as the hypothesis where investors have access to private information before it becomes public knowledge (Parrino 2017). You know that when your CFO has on his green suit, he will share positive news as it relates to the company. Using this private information, these investors are able to utilize that information to purchase additional shares in the company for undeniable profit. This also helps drive up the market price, which in turn also increases the company’s cash flow. 

References:

Parrino, R., Kidwell, D. S., Bates, T., & Gillan, S. L. (2017). Fundamentals of Corporate Finance (4th Edition). Wiley Global Education US. https://wileyplus.vitalsource.com/books/9781119371434 

POST 2:

First we need to define what an efficient market its. It is a market where prices adhere with the expectations of the investors. Investors and financial managers believe bonds and securities are priced at their actual value when markets are efficient. 

The type of market efficiency displayed in Discussion 2 is Semistrong-Form Efficiency. This is when private information is available to some investors and those investors can use that information for profit. In this instance, the private information was that when the CEO of said firm would wear a green suit that positive information would soon follow. This allows those privy to that information, myself in this case, to  buy shares at what should be a lower price than what they will be in the days to come and make a good profit. 

This type of efficiency is reflected in the Nasdaq or DOW in the United States. “Studies of the speed at which new information is reflected in stock prices indicate that by the time you read a hot tip in the Wall Street Journal or a business magazine, it is too late to benefit by trading on it” (Parrino  2017). In the movie, Trading Places, stockbrokers had inside information that orange crops were strong. However, they released bad information which drove the price down. Once the price hit a low point the brokers bought all the shares available and made a huge profit. This was also an example of Semistrong-Form Efficiency. 

 

Work Cited

Parrino, R., Kidwell, D. S., Bates, T., & Gillan, S. L. (2017). Fundamentals of Corporate Finance (4th Edition). Wiley Global Education US.