MARKET EFFICIENCY AND THE ROLE OF FINANCIAL ANALYSIS

What Is Market Efficiency?

Market efficiency refers to the degree to which market prices reflect all available, relevant
information. If markets are efficient, then all information is already incorporated into prices, and
so there is no way to "beat" the market because there are no undervalued or overvalued securities
available. Market efficiency was developed in 1970 by economist Eugene Fama, whose efficient
market hypothesis (EMH) states that an investor can't outperform the market, and that market
anomalies should not exist because they will immediately be arbitraged away.

Financial Analysis and their Contribution to the Information Efficiency of Capital Markets

Stock analysts appear on capital markets as central information intermediaries. They gather
public and non-public information, condensing them into buy-sell-hold recommendations, target
price estimates, and forecasts of various company key measures (for example, earnings per share
or net income). Economic theory suggests that stock analysts, drawing on their expert knowledge
and their exclusive access to insider information, help reduce information asymmetries between
management and investor community and adopt the role of leading and supporting the
development of expectations on capital markets.

Evidence suggests that stock prices tend to overweight and financial analysts tend to
underweight these persistence characteristics. Furthermore, we find that analysts' underweighting
attenuates stock price overweighting (Dana Hollie, Philip B. Shane , Qiuhong Zhao 2015).

REFERENCE

Dana Hollie, Philip B. Shane , Qiuhong Zhao (2015) The role of financial analysts in stock
market efficiency with respect to annual earnings and its cash and accrual components.