Stock-market Indicators of Efficiency. According to the Efficient Market Hypothesis, current stock prices reflect all relevant risk and return information. This implies that near-term stock price changes are random and independent. In a rational pricing environment, investing in the stock market is a "fair game" where the expected excess return for each security is zero. Taken literally, this means that every stock at every point in time is an equally good buy (or sell). Within this context, the stock market provides a useful context within which to evaluate managerial decisions. "Good" decisions boost share prices, and "bad" decisions cause share prices to fall.
A. Does evidence of inefficiency in the stock market reduce its usefulness as an indicator of managerial efficiency?
B. Suppose that the stock market is very efficient, but not perfectly efficient. Can stock prices still be used to provide information about managerial efficiency?

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The Answer of Stock-market Indicators of Efficiency. According to the Efficient Market Hypothesis, current stock prices reflect all relevant risk and return information. This implies that near-term stock price changes are random and independent. In a rational pricing environment, investing in the stock market is a "fair game" where the expected excess return for each security is zero. Taken literally, this means that every stock at every point in time is an equally good buy (or sell). Within this context, the stock market provides a useful context within which to evaluate managerial decisions. "Good" decisions boost share prices, and "bad" decisions cause share prices to fall.
A. Does evidence of inefficiency in the stock market reduce its usefulness as an indicator of managerial efficiency?
B. Suppose that the stock market is very efficient, but not perfectly efficient. Can stock prices still be used to provide information about managerial efficiency?

Stock-Market Indicators of Efficiency