Question

Explain what an efficient capital market is and why market efficiency is important to financial managers.

Answer 1

Efficient capital market means the following
1. All information is available to all the investors and they receive the information in a same manner.
2. It assumes that if all information is available to investors then return of one investor cannot be higher than the other and their returns will be same as market returns.
3. It assumes that stocks or securities are fairly priced if all information is available with investors

It is important for financial managers because if there is information asymmetry (if one investor has more information than other) then the informed investors will always beat the market. With the advent of algorithmic trading, electronic transaction and information being available to all the market is moving towards an efficient market. So managers can take decisions assuming efficient market.