efficient capital markets

• efficient capital markets: security prices accurately reflect available information and responds to new information instantly
• market efficiency:

  • weak - share price reflects information about past prices
  • semi-strong - share price reflects publicly available information
  • strong - share price reflects public and private information
• inefficient capital markets:

  • investors are irrational
  • prices slowly adjust to earnings announcements → investors exhibit conservatism as they slowly adjust to announcements
• behavioural finance argues that investors are irrational, which explains why share prices increase and drop abruptly - capital markets are inefficient