Behavioural finance specialist may concede that there are no easy profits but argue that arbitrage is costly and sometimes slow-working, so that the deviations from fair value may persist. The "no free lunch" principle gives financial managers lessons of market efficiency. Discuss any four (4) lessons of market efficiency and give an example showing the lesson's relevance to financial managers.

Behavioural finance specialist may concede that there are no easy profits but argue that arbitrage is costly and sometimes slow-working, so that the deviations from fair value may persist. The "no free lunch" principle gives financial managers lessons of market efficiency. Discuss any four (4) lessons of market efficiency and give an example showing the lesson's relevance to financial managers.

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 2QE

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Which of the following is incorrect about the Pecking Order Theory? A.Firms with high ratios of fixed assets to total assets tend to have higher debt ratios.This evidence exclusively supports the pecking order theory B.When external finance is required,firms issue debt first and equity as a last resort C.Most profitable firms borrow less not because they have lower target debt ratios but beause they don't need external finance D.Firms prefer internal finance since funds can be raised without sending adverse signals
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