Respond to the following: a. What is meant by market efficiency? b. What does the efficient-markets hypothesis imply about the value of accounting information? c. Describe the three forms of the efficient-markets hypothesis.
What will be an ideal response?
ANSWER:
a. Market efficiency means that (1) the market fully reflects available information, and (2) by implication, market prices react instantaneously to new information.
b. If the efficient markets hypothesis is correct, an item of information has value (information content) to investors only if there is evidence of a price response to the new information.
c. The three forms of the efficient markets hypothesis are the weak, the semistrong, and the strong form. The weak form says that security prices reflect information contained in the sequence of historical prices; the semistrong form says that prices reflect all past and current information that is publicly available; and the strong form says that prices reflect all information (both public and private).
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