Question 2.ST.2: What is the relevance of the efficient market hypothesis for...
What is the relevance of the efficient market hypothesis for the financial manager?
The relevance of the efficient market hypothesis for financial management is that, if the hypothesis holds true, the company’s ‘real’ financial position will be reflected in the share price. If the company makes a ‘good’ financial decision, this will be reflected in an increase in the share price. Similarly, a ‘bad’ financial decision will cause the share price to fall. In order to maximise shareholder wealth, the financial manager need only concentrate on maximising the NPV of investment projects, and need not consider matters such as the way in which the future position of the company will be reflected in the company’s financial statements. The financial manager, then, may use rational decision rules and have confidence that the market will rapidly reflect the effects of those decisions in the company’s share price.