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the emh presents an interesting research challenge for accountants.the financial crisis of
2007-2009 suggest that the market failed to incorporate some pieces of information such as
the housing bubble or the unsustainable levels of risk offered by mortgage backed securities
and has led to additional criticism.one market strategist even maintained that the EMH is
responsible for the financial crisis,asserting that belief in the hypothesis caused the
investment community to underestimate the dangers of asset bubbles breaking.additionally
noted financial journalist roger lowenstein attacked the theory,stating "the upside of the
current great recession is that it could drive a stake through the heart of the academic nostrum
known as the efficient market hypothesis .finally ,former federal reserve chairman paul
volcker said "its clear that among the causes of the recent financial crisis was an unjustified
faith in rational expectations and market efficiencies.
others disagree with these assessments .eugene fama,who first developed the theory, said that
the emh held up well during the crisis and maintained that the markets were a casualty of the
recession ,not the cause of it.despite this,he had conceced earlier that "poorly informed
investors could theoretically lead the market astray" and that stock prices could
become"somewhat irrational"as a result .critics have also suggested that financial institutions
and corporations have been able to reduce the accuracy of conventional disclosures ,as well
as by developing new and complex products that are challenging for most market participants
to evaluate and correctly price.
on balance,it has become conventional wisdom the 2007-2009 financial crisis discredited the
emh ,but to assess the validity of EMH it is important tio remember that it has three
forms,and as a result,itis virtually impossible to discredit or uphold EMH in gbeneral
terms.each form of the EMH must be addresses specifically.however,in all of its forms,EMH
simply states that investors cannot consistently produce excess returns given that stock prices
reflect all publicly available information .EMH does not talk about the ability of stock prices
to accurately
predict future events.
research strategies must continue to be designed to test each of the EMH forms so that more
solid conclusions can be drawn.this research is important because it provides evidence on the
way information about business enterprices is incorporated into the price of corporate
securities ,and it might allow investor oriented accounting principles to be developed.