Revisiting The Efficient Market Hypothesis

The efficient market hypothesis is an investment theory that states it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. This theory is flawed because it assumes that everyone will reach the same decision as to the appropriate price of a market or security when given the same information. There is no reason to assume that everybody will interpret and act upon the same information as anybody else. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. Due to the recent financial crisis in 2008, investors should not assume the efficient market hypothesis to be true. Investors should focus on ways of distinguishing overpriced and underpriced securities by investigating companies’ balance sheet and other financial statements in relationship to the companies’ security prices. The research that will be performed will include a literature review on the efficient market hypothesis as well as gathering historical financial statements and stock prices of various companies. STATA analysis software will be used to run correlations between various components of the financial statements and security price in order to see if there is a way for the efficient market hypothesis to be modified to be more accurate