Efficient Market and Asset Valuation

Many studies indicate that the capital markets are efficient as related to numerous sets of information. At the same time, research has uncovered a substantial instances where the market fails to adjust prices rapidly to public information. What does this mean to individual investors, financial analysts, portfolio managers, and institutions?

Capital Market Efficiency

Market efficiency is important for everyone because markets set prices. In particular, stock markets set prices for shares of stock. Currency markets set exchange rates. Commodity markets set prices of commodities such as wheat and corn. Setting correct prices is important because prices determine how available resources are allocated among different uses.

Agency Relationships in Financial Management

An agency relationship arises when the principal hires an agent to perform some services or the decision-making authority is delegated to the agent. However, the agent is not fully responsible for the decision that is made. Since the agent and the principal may have different goals, the agency relationship creates a potential conflict of interest.