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Chapter 20

Market efficiency and the efficient

market hypothesis

7.1 The concept of market efficiency

An efficient market is one in which security prices fully reflect all
available information (i.e. they are fairly priced).

In an efficient market new information is rapidly and rationally
incorporated into share prices in an unbiased way.

Fairly priced shares ensure investor confidence and reflect director
performance.

7.2 The efficient market hypothesis

There are three forms of efficiency based on different theories about
where this new information comes from:

Weak Semi strong Strong
Past share price All public information All information
movements (all public and private)
(including – past share
price movements)

Current share price

406