evolution of market prices cannot be forecasted based on the analysis of past equity trends.
Prices follow a random-walk, and the efficiency condition is respected.
1.2.2 Implications
(a) Intuitive implications
Under market efficiency, the ability of markets participants to identify the most productive
investment opportunities based on actual price signals ensures that resources are efficiently
utilized (Bekaert, Harvey & Lundblad, 2001). By contrast, informational inefficiencies disturb
the market-based system of incentives, and ultimately the investment allocation process. First,
a firm may not be able to raise the outside funds necessary to undertake a worthy investment
project if manager cannot fully and credibly reveal information to outside investors and
lenders (Myers and Majluf 1984). Second, assymetries of information between managers and
outsiders may lead to diverging perceptions of asset pricing. Given the alternative of financial
leverage, managers may issue new equity only if they assume that prices are overvalued. As a
consequence, risk-averse investors may be reluctant to invest in new equity issues (Stiglitz,
1989; Mayer 1990; Hubbard 2000). Entrepreneurs may also hesitate to implement public
offerings as a result of high transaction costs or the uncertainty of getting a fair price, which
reduces the incentive to enter new ventures (Bekaert and Harvey, 1997). Third, inefficient
markets are often characterized by the absence of widely accepted accounting standards and
the lack of a regular, adequate and reliable disclosure of information. This magnifies the
informational advantage of insiders who are able to manipulate stock prices in order to make
extra profits. For instance, better informed investors may gain inside information about firm
productivity. This advantage may be used to retain the high-productivity firms and selling the
low-productivity ones to partially-informed savers, resulting in a misallocation of domestic
savings (Razin, Sadka and Yuen (1999)). Fourth, market efficiency constrains the impact of