chapter 12 principles principlesofcorporatefinance concise edition efficient markets and behavioral...
TRANSCRIPT
Chapter 12 PrinciplesPrinciples
ofof
CorporateCorporate
FinanceFinance
Concise Edition
Efficient Markets and Behavioral Finance
Slides by
Matthew Will
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw Hill/Irwin
12- 2
Topics Covered
We Always Come Back to NPVWhat is an Efficient Market?
– Random Walk– Efficient Market Theory
The Evidence Against Market EfficiencyBehavioral FinanceSix Lessons of Market Efficiency
12- 3
Return to NPV
NPV employs discount ratesThese discount rates are risk adjustedThe risk adjustment is a byproduct of
market established pricesAdjustable discount rates change asset
values
12- 4
Return to NPV
Example
The government is lending you $100,000 for 10 years at 3% and only requiring interest payments prior to maturity. Since 3% is obviously below market, what is the value of the below market rate loan?
repayment loan of PV-
pmtsinterest of PV- borrowedamount NPV
12- 5
Return to NPV
Example
The government is lending you $100,000 for 10 years at 3% and only requiring interest payments prior to maturity. Since 3% is obviously below market, what is the value of the below market rate loan?
Assume the market return on equivalent risk projects is 10%.
012,43$
988,56000,100
)10.1(
000,100
)10.1(
000,3000,001NPV
10
10
1
tt
12- 6
Random Walk Theory
The movement of stock prices from day to day DO NOT reflect any pattern.
Statistically speaking, the movement of stock prices is random (skewed positive over the long term).
12- 7
Random Walk Theory
$103.00
$100.00
$106.09
$100.43
$97.50
$100.43
$95.06
Coin Toss Game
Heads
Heads
Heads
Tails
Tails
Tails
12- 8
Random Walk Theory
S&P 500 Five Year Trend?or
5 yrs of the Coin Toss Game?
70
120
Month
Lev
el
12- 9
Random Walk Theory
S&P 500 Five Year Trend?or
5 yrs of the Coin Toss Game?
80
130
180
230
Month
Le
ve
l
12- 10
Random Walk Theory
12- 11
Random Walk Theory
12- 12
Random Walk Theory
12- 13
Random Walk Theory
12- 14
Random Walk Theory
12- 15
Efficient Market Theory
Last Month
This Month
Next Month
$40
30
20
Microsoft Stock Price
Cycles disappear
once identified
Actual price as soon as upswing is recognized
12- 16
Efficient Market Theory
Weak Form Efficiency– Market prices reflect all historical information
Semi-Strong Form Efficiency– Market prices reflect all publicly available
information
Strong Form Efficiency– Market prices reflect all information, both
public and private
12- 17
Efficient Market Theory
Fundamental Analysts– Research the value of stocks using NPV and other
measurements of cash flow
12- 18
Efficient Market Theory
Technical Analysts– Forecast stock prices based on the watching the
fluctuations in historical prices (thus “wiggle wiggle watcherswatchers”)
12- 19
Efficient Market Theory
-16
-11
-6
-1
4
9
14
19
24
29
34
39
Days Relative to annoncement date
Cu
mu
lati
ve
Ab
no
rma
l Re
turn
(%
)
Announcement Date
12- 20
Efficient Market Theory
Average Annual Return on Mutual Funds and the Market Index
12- 21
Efficient Market Theory
0
5
10
15
20
First Second Third Fourth Fifth
Av
era
ge
Re
turn
(%
)
IPO
Matched Stocks
IPO Non-Excess Returns
Year After Offering
12- 22
Price AnomaliesD
evia
tion,
%Log Deviations From Royal Dutch Shell / Shell T&T Parity
1973 - 2006
12- 23
Efficient Market Theory
2000 Dot.Com Boom
883,1208.092.
6.154)( 2000 March
gr
DivindexPV
589,8074.092.
6.154)( 2002October
gr
DivindexPV
12- 24
Efficient Market Theory
1987 Stock Market Crash
119310.114.
7.16)( crash pre
gr
DivindexPV
928096.114.
7.16)( crashpost
gr
DivindexPV
12- 25
Behavioral Finance
Arbitrage limitationsLTCM example
Factors related efficiency and psychology
1. Attitudes towards risk
2. Beliefs about probabilities
12- 26
Lessons of Market Efficiency
Markets have no memoryTrust market pricesRead the entrailsThere are no financial illusionsThe do it yourself alternativeSeen one stock, seen them all
12- 27
Example: How stock splits affect value
0
5
10
15
20
25
30
35
40
Month relative to split
Cumulative abnormal return %
-29 0 30
Source: Fama, Fisher, Jensen & Roll
12- 28
Web Resources
www.thecorporatelibrary.com
www.towers.com
www.businessweek.com
www.forbes.com
Click to access web sitesClick to access web sites
Internet connection requiredInternet connection required