The Importance of Market Efficiency
Understanding the If and How the EMH Principal can Affect Shareholder Wealth
• Understanding how securities are valued is important because these valuation principles provide guidelines to managers how they should manage businesses on behalf of the shareholders. • It is the legal requirement and managerial responsibility for managers to act in the owners’ best interest.
On the other hand, scholars have argued that adopting environmental and social policies can
destroy shareholder wealth (e.g., Friedman 1970; Clotfelter 1985; Navarro 1988; Galaskiewicz 1997). In
its simplest form the argument goes that sustainability may be just another type of agency cost where
managers receive private benefits from embedding environmental and social policies in the company, but
doing so has negative financial implications (Baloti and Hanks 1999; Brown, Helland, and Smith 2006).
The broader objective of the FSA’s regulatory approach is to balance the
competing interests of shareholder wealth maximization and the interests of other
The FSA’s balancing exercise relies less on the strict application of
statutory codes and regulatory standards, and more on the design of flexible, internal
compliance programmes that fit the particular risk-level and nature of the bank’s
The 2007 global financial crisis ignited by reckless bankers and their flawed reward structures will be felt for years to come.
Emerging from the wreckage, however, is renewed support for the over-arching objective of traditional finance theory,
namely the long-run maximisation of shareholder wealth using the current market value of ordinary shares (common
stock) as a benchmark.
After studying chapter 1, you should be able to: Explain why the role of the financial manager today is so important, describe “financial management” in terms of the three major decision areas that confront the financial manager, identify the goal of the firm and understand why shareholders’ wealth maximization is preferred over other goals;...
Chapter 12 - Dividend and share repurchase decisions. This chapter include objectives: Define ‘dividend policy’ and understand some institutional features of dividends and share repurchases, explain why dividend policy is irrelevant to shareholders’ wealth in a perfect capital market with no taxes, outline the imputation and capital gains tax systems and explain their effects on returns to investors,...
Chapter 1 - The role of financial management. After studying chapter 1, you should be able to: Explain why the role of the financial manager today is so important, describe “financial management” in terms of the three major decision areas that confront the financial manager, identify the goal of the firm and understand why shareholders’ wealth maximization is preferred over other goals;...
Chapter 6 - Dividends and share repurchases: Basics. This chapter describe regular cash dividends, extra dividends, stock dividends, stock splits, and reverse stock splits, including their expected effect on a shareholder’s wealth and a company’s financial ratios.