Implications
of Market Efficiency for Corporate Managers
Corporate
managers make several implications concerning market efficiency. For instance,
corporate managers may decide that shareholders should not know the company
budgeting process and decisions of the company. Disclosing financial
information to shareholders will be having a negative impact on the company in
the stock market. A shareholder has no place in the company, and usually a shareholders
playing field is in the stock exchange market. When a shareholder has access to
companies budgeting process, the company may be in the loose end. For example,
a company may be experiencing financial problems, but it is still doing well in
the stock exchange market. This will see the continuity of the company by
attracting many investors to buy companies shares. They would, in turn, use the
money made from the selling of shares to try reviving the company deteriorating
the financial situation. Unknowingly, the company is performing badly, but its
relevance in the stock markets enables it to sell shares. By this, the company
demand price will be performing well at the expense of the shareholders.
Although this does not promote equilibrium between supplier price and demand price,
the company can make a profit by not disclosing the financial problem.
Shareholders should not know the company budget decision of a company. Making them know will give them a platform to
know the weaknesses of the company and exploiting it will be possible. As
mention earlier in the introduction part, the stock market pricing provides all
the necessary information an investor would like to know. Therefore, disclosing
the budget will be seen as unfair competition by other companies. As long as
the company is still running, it’s not its duty to inform the shareholders.
However, if such company does not regain its normality, high chances of its
shares dropping in the stock market will be evident. This will happen when
investors realise that the company returns are not meeting their needs. They
might opt to sell the shares at a low price and this may lead to the collapse
of the company.
Also,
when the company is performing well, and it is not experiencing any financial
problems, shareholders will start receiving returns that meet their demands. In
such situation the company will attract many investors wanting to buy its
shares. However, this will be determined by the stock exchange market in an
attempt to maintain market efficiency and fair competition to other companies.
Another
implication by corporate managers is that they cannot fool the market and the
shareholders as this will result to being punished by the market. A company may
decide to promote its share market by advertising the wrong information. For
instance, in the past, a company was performing well in the stock exchange
market. However, with time the company starts making losses and as a result
they opt to sell many shares as possible when the company is still relevant in
the market. The company can do this by convincing stakeholders to buy their
shares using the records of how the company performed well in the stock
exchange market.
Investors
like investing on promising projects that guarantee returns. They will,
therefore, buy such shares. The company doing this has first engaged itself in
uncompetitive competition by revealing its past profit records, and according
to theories of market efficiency, the stock market, the pricing of company
shares are enough information to attract or not attract investors. In this
case, this company shares should be sold at a price that maintains the
equilibrium between the demand and supply price. If they stick to this
portfolio, their shares will be sold at a low price. After this, it is now left
for investors to decide for themselves whether they will buy the shares or not.
Some
investors may decide to take a risk and buy such shares. They are taking a risk
because they are not sure if the company will be able to regain its momentum.
However, if the company continue fooling its shareholders by selling them
shares that do not bring substantial results, the stock market will realize,
and as a result, the company will make even more losses since no one will be
willing to buy their shares since all along the company was engaging itself in
unfair competition.
Investors, who
decide to take the risk of buying the shares, might end up making big returns
from selling the shares after the company starts to make profits once again.
Another implication a corporate can make is
deciding not to participate actively in the stock market. The company can then
decide to use funds it would use to pile stocks for another investment plan
that would enable them to make good returns. By this managers argue that they
will be able to offer worthy competition to big companies who have the largest
share of the stock market. Being in the stock exchange market also mean the
company will employ a specialist to represent the company in the stock market.
To hire such employees is expensive and the money used to pay them could be
channeled to other investment of the company. Although a good businessman is
one who takes risks, some manager may feel the risk with the stock exchange
market is not worth taking. Buying of stock or maintaining stock securities is
not easy since the security to stocks can fall anytime depending on the stock
exchange market analysis.
Corporate managers may also decide to keep off
the stock market exchange in fear of intermediaries in the sector. Such people
make the shares to be expensive more than it’s supposed to be so that they can
end up benefiting from the market as well. Intermediaries have the expertise
needed in the stock market, and they know how to manipulate the market in an
effort of making a profit (Choi 30th September 2015).
Finally,
corporate managers might decide to remain in the stock exchange market since
being in the marketplaces the company in the limelight of not only investors
who buy their shares but also customers of the services they offer. Companies
in the stock market usually draw a lot of attention to customers who want to
know how the company is performing in the stock exchange market. Also, a company
can gain experience on how the market operates and things to implement to match
the quality of other companies.
