Does relative efficiency matter? An analysis of market uncertainty

Lim, Hyoung-joo; Mali, Dafydd

Abstract

In this paper, we examine whether relative efficiency provides useful information for investment decisions. We find that efficient firms have lower levels of stock price volatility compared to inefficient firms. The results suggest that market participants consider relative efficiency when making investment decisions. This finding is consistent with investors speculating in inefficient firms due to potential stock return opportunities that increase the uncertainty levels of inefficient firms. Next, we test whether higher levels of investment and disinvestment in inefficient firms are due to potential investment opportunities. We find a positive relation between stock price volatility and market returns. Moreover, we find a negative relation between stock returns and relative efficiency. These findings show that inefficient firms provide high-risk, high-return potential investment opportunities; and efficient firms can be considered low-risk, low-return investment opportunities.

Citation

Lim, H.-J., & Mali, D. (2018). Does relative efficiency matter? An analysis of market uncertainty. Investment Analysts Journal, 47(2), 127-148. https://doi.org/10.1080/10293523.2018.1466491

• Journal Article Type: Article
• Acceptance Date: Apr 11, 2018
• Online Publication Date: May 27, 2018
• Publication Date: Jan 1, 2018
• Deposit Date: Nov 4, 2021
• Publicly Available Date: Nov 10, 2021
• Journal: Investment Analysts Journal
• Print ISSN: 1029-3523
• Electronic ISSN: 2077-0227
• Publisher: Taylor & Francis
• Peer Reviewed: Peer Reviewed
• Volume: 47
• Issue: 2
• Pages: 127-148
• DOI: https://doi.org/10.1080/10293523.2018.1466491
• Keywords: relative efficiency; stock price volatility; market risk; news sensitivity
• Public URL: https://nottingham-repository.worktribe.com/output/6610842
• Publisher URL: https://www.tandfonline.com/doi/full/10.1080/10293523.2018.1466491
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in Investment Analysts Journal on 27/05/2018, available online: http://www.tandfonline.com/10.1080/10293523.2018.1466491