Financial Theories Overview
Running head: FINANCIAL THEORIES OVERVIEW
Financial Theories Overview
Velda Eaton
University of Phoenix – School of Advanced Studies
Financial Theories Overview Theory | General Description | Current Examples | Significant Attributes | Efficiency Theory | The germinal theory proposed by Fama (1965) states An efficient market is where there are large numbers of rational profit-maximizers actively competing trying to predict future market values from new information on inherent values to be reflected immediately in actual prices. Market efficiency is the ability to allocate capital effectively, by pricing securities solely by economic considerations based on available information (Weaver-Weston, 2002). | The Information Highway: the World Wide Web and the Securities & Exchange Commission (SEC) provide information on large trading firms accessing and acting on stock transaction data before the merged trade data is published (Ross−Westerfield−Jaffe, 2008). | Information is feelessly incorporated into prices, it is impossible to profit from news as already priced into the stock (Ball, 2001), and high-speed traders have the advantage, which is estimated to account for two-thirds of all stock market volume (Ross−Westerfield−Jaffe, 2008). | Theory of Investment | This germinal theory depicts that dividends and capital structures are irrelevant in the determination of stock prices in the market. (Miller-Modigliani, 1958; Chew, 2001). Instead the market value of a firm is based on the earning power of the assets currently held and on the size and relative profitability of the investment opportunities, which is independent of its capital structure. (Miller-Modigliani, 1958 | Junk bonds have provide vitality in the market and have aided in the development of the preference forLeveraged Buyouts (LBOs) (Chew, 2001). The new characteristics in corporate governance followed the LBOs of large firms. Chew (2001) states strip financing as one. | Miller-Modigliani
Financial Theories Overview
Velda Eaton
University of Phoenix – School of Advanced Studies
Financial Theories Overview Theory | General Description | Current Examples | Significant Attributes | Efficiency Theory | The germinal theory proposed by Fama (1965) states An efficient market is where there are large numbers of rational profit-maximizers actively competing trying to predict future market values from new information on inherent values to be reflected immediately in actual prices. Market efficiency is the ability to allocate capital effectively, by pricing securities solely by economic considerations based on available information (Weaver-Weston, 2002). | The Information Highway: the World Wide Web and the Securities & Exchange Commission (SEC) provide information on large trading firms accessing and acting on stock transaction data before the merged trade data is published (Ross−Westerfield−Jaffe, 2008). | Information is feelessly incorporated into prices, it is impossible to profit from news as already priced into the stock (Ball, 2001), and high-speed traders have the advantage, which is estimated to account for two-thirds of all stock market volume (Ross−Westerfield−Jaffe, 2008). | Theory of Investment | This germinal theory depicts that dividends and capital structures are irrelevant in the determination of stock prices in the market. (Miller-Modigliani, 1958; Chew, 2001). Instead the market value of a firm is based on the earning power of the assets currently held and on the size and relative profitability of the investment opportunities, which is independent of its capital structure. (Miller-Modigliani, 1958 | Junk bonds have provide vitality in the market and have aided in the development of the preference forLeveraged Buyouts (LBOs) (Chew, 2001). The new characteristics in corporate governance followed the LBOs of large firms. Chew (2001) states strip financing as one. | Miller-Modigliani
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