Markets Take Time to be Efficient

In the main we accept that markets price in known information relatively efficiently. But... information in the public domain is not always widely digested or assimilated and understood. There is evidence showing stock prices react gradually rather than instantly to new information.

This is the third excerpt from a brief paper Equitable Investors put together, "Seeking Advantage - Focusing on the Underlying Drivers of Excess Returns Most Evident in Smaller Companies to Optimise Investment Portfolios for Return and Risk". You can read the previous excerpts at blog.equitableinvestors.com.au and you can find the paper itself at www.equitableinvestors.com.au.

While information may exist in the public domain, it may not have been widely disseminated; or it may be widely disseminated but a broad base of investors may not have the additional knowledge to understand the materiality of one piece of information among many.

The smaller a company is, the less likely it is able to broadly disseminate new information; and the less likely that a broad base of investors understand the context of that information.

A European study measuring excess returns following earnings surprises compared the outcome before and after the adoption of wire services (or news agencies) to disseminate news. As illustrated in the chart below, the study found that even though new information was more rapidly priced in after the adoption of wire services, with stronger initial reactions and lower post-earnings price “drift”, .it still takes time for markets to fully react to material new information.

Excess returns from top & bottom surprises before & after adoption of wire service


Source: News Dissemination and Investor Attention (Boulland, Degeorge & Ginglinger, May 2016)

So for the investor who happens to have done the right homework and instantly understands the implications of new information, time is on their side.

Even at the macro level, there is evidence prices do not rapidly adjust to new information.

A 2017 study by Columbia University academics Calomiris & Mamaysky examined news flow and pricing in 51 stock markets and concluded that “Economic and statistical significance are high and larger for year-ahead than monthly predictions” - ie rather than immediately re-pricing, markets take time to adjust to new information.

Equitable Investors Pty Ltd is a Corporate Authorised Representative (No. 001256627) and Martin Pretty is an Authorised Representative (No. 001256674) of Glennon Capital Pty Ltd (AFSL No. 338567)


Popular posts from this blog

10k Words | August 2022

Image
Apparently , Confucius did not say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy. It is almost compulsory to discuss interest rates and inflation so the first charts this time around give us inflation for advanced economies and Australia, via the RBA,  then US yield curve inversion and inflation-adjusted interest rates, courtesy of Bloomberg and Axios. The same sources have served up some charts on the strength of the US job market. Then we get into the tech sector with CB Insights mapping out billion-dollar acquisitions while Equitable Investors compares the dollar amount of stock compensation against operating cash flow for Amazon and Atlassian. The global IPO market is down 74% year-to-date in CY2022 and the Aust
Read more

Feel the Cash Burn as Profit Season Closes (or "In memory of Pocketmail")

Another crazy month of reporting financials has come to an end on the ASX, with the typical last minute dump of reports on the evening of August 31 (or the following morning) reflecting unfavourably on business models or financial robustness. "Have you heard if Company X has approached anyone about a convertible note or something like that", an investor peer asked me in passing on Friday. No, I hadn't. But I had looked at the financials Company X had just released and I know why he was asking. Cash on hand was equivalent to about 45% of its annual cash burn. Without fresh funding, Company X's brief life could soon come to an end. Too often founders or cornerstone investors choose to raise just enough funds to get to the next milestone, at which point they are sure investors will significantly revalue the business, allowing a less dilutive round of funding to get to the next milestone. Company X probably thought the same thing - the only problem is that its sha
Read more

Where was the EPS uplift?

Most of the top-down analysis of the ASX's August reporting season has focused on the surprises and changes in expectations for the S&P/ASX 200. But most of the real action, of course, could be found among stocks that don't have large enough free float market caps to make it in to this key index. Trying to make sense of the numbers and possibly identify an opportunity or two, we've run the numbers on changes in the consensus expectations among analysts for Earnings Per Share (EPS), using Thomson Reuters data. Starting where everyone else starts, we count 134 stocks that over the last month experienced upward revisions in EPS expectations for fiscal 2018, compared to 232 downward revisions. The weighted average revision over the last month for the largest 200 stocks (weighted by market capitalisation) was -0.2%. BUT much of the bad news was pre-warned - the weighted average decline over the past TWO months was -2.4%! Smaller stocks suffered larger negative revisi
Read more

Disclaimer

Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

The content of this blog should not be relied upon in making investment decisions.Any decisions based on information contained on this blog are the sole responsibility of the visitor. In exchange for using this blog, the visitor agree to indemnify Equitable Investors and hold Equitable Investors, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to legal fees) arising from your use of this blog, from your violation of these Terms or from any decisions that the visitor makes based on such information.

This blog is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The information on this blog does not constitute a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Although this material is based upon information that Equitable Investors considers reliable and endeavours to keep current, Equitable Investors does not assure that this material is accurate, current or complete, and it should not be relied upon as such. Any opinions expressed on this blog may change as subsequent conditions vary.

Equitable Investors does not warrant, either expressly or implied, the accuracy or completeness of the information, text, graphics, links or other items contained on this blog and does not warrant that the functions contained in this blog will be uninterrupted or error-free, that defects will be corrected, or that the blog will be free of viruses or other harmful components.Equitable Investors expressly disclaims all liability for errors and omissions in the materials on this blog and for the use or interpretation by others of information contained on the blog.