The efficient market hypothesis and corporate event waves: part 1

Efficient markets are commonly defined as ones that do not allow investors to earn above-average returns without accepting above-average risk. In a traditional framework, where investors are rational and there are no frictions, the efficient market hypothesis (EMH) states that a security's price reflects its fundamental value, which is the sum of its discounted expected future cash flows. Put simply, under the EMH, securities are "rightly priced." Through this study, the author finds that while the EMH has been widely accepted for decades among academics, practitioners and regulators still appear to be unconvinced. From a behavioral perspective, the author shows that human psychology and sentiment factors can account for some discrepancies in financial markets. He also finds evidence of limited arbitrage being risky and costly and, hence, impeding the ability of investors to take advantage of profitable opportunities. This study provides an extensive analysis of the critical discussions surrounding the EMH and deepens and strengthens the understanding of the EMH, as well as the arguments for and against.