Business finance : theory and practice

Conclusions and implications
would be the outcome of an investment strategy based on selecting securities at random.
For example, Blake and Timmermann (1998) looked at the performance of 2,300 UK
professionally-managed investment funds over a 23-year period. They found that the
average fund performed less well, in terms of investment returns, than would have
been expected for the risk levels involved.
The advice of professional investment advisers has also been assessed and found
not generally to lead to consistently abnormal returns.
Conclusion on strong-form efficiency
The conclusion on strong-form efficiency would seem to be that insiders who have
genuine new information can use it to advantage, revealing an inefficiency of the capital
markets. However, those not having access to such information are not, on a continuing
basis, able to achieve better than average returns irrespective of whether they
are ‘experts’ or not.
We have reviewed by no means all of the research that has been conducted; however,
other studies have reached similar conclusions to those that we have considered.
9.5 The efficient market paradox
A notable paradox of capital market efficiency is that if large numbers of investors
were not trying to earn abnormal returns by technical analysis and by the analysis of
new information (fundamental analysis), efficiency would not exist. It is only because
so many non-believers are actively seeking out inefficiencies to exploit to their own
advantage that none exists that is, in practical terms, exploitable.
9.6 Conclusions on, and implications of, capital
market efficiency
The conclusions of tests on the efficiency of the LSE and of capital markets generally
is that the evidence is consistent with efficiency in all forms, except that only publicly
available information seems to be reflected in security prices. Information not yet
publicly available is not necessarily reflected. Results of research, particularly some
emerging from the USA, may be indicating some minor capital market inefficiencies.
Some observers believe that if evidence of inefficiency is emerging, it may reflect a
change in the nature of LSE investors. Efficiency requires a large number of independent
investors. Increasingly, LSE investment has tended to concentrate in the hands of
a relatively few large institutional investors, most of whom are based in and around
the City of London. This, it is believed by some, leads to prices being determined not
so much by independent market forces as by ‘herd instinct’. Welch (2000) found evidence
that recommendations from analysts about particular securities tend to have an
effect on the subsequent recommendations from other analysts.
Despite some contrary evidence, it remains true that, for most practical purposes,
we can say that the LSE efficiently prices securities that are traded there.
It might be worth remembering that, given the way that stock markets operate,
which we discussed earlier in the chapter, this conclusion on the evidence is not surprising.
Logically, we should expect it to be efficient.
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