Essay Prompt

Consider the following. The theory of market efficiency is based on the premise that a market is considered efficient when stock prices are an actual reflection of information known about a company. U.S. markets are generally viewed as semi-strong form market efficient.
What would happen if U.S. markets became less efficient?
What might lead to markets becoming less efficient?
How do markets in other countries compare to the U.S. in terms of efficiency?

 

The efficient market hypothesis is based on the idea that a market is regarded efficient when stock prices are the true reflection of a company's financial information and status. While this concept/theory has been under academic and professional consideration for several years, it's an underlying assumption across several financial models. The theory of market efficiency is used to determine or understand the strength and status of a nation's economy. Through this theory, an economy can examine how its market compares with other countries with regards to efficiency. Based on information shown in market prices or stock prices, market efficiency is classified into three i.e. weak, semi-strong, and strong.

In light of the theory of market efficiency, United States markets are generally considered as semi-strong form market efficient. Generally, semi-strong market efficiency is where the present stock prices are reflections... This information includes changes in accounting policy, announcements of acquisitions, and dividend payouts (Degutis & Novickyte, 2014, p.8). In this regard, U.S. stock prices are actual reflection of historical prices and all current publicly available information.


If the U.S. markets became less efficient, the nation's economy would experience significant challenges that hinder economic growth. First, if the U.S. markets became less efficient, it would fundamentally change the perception that the country is a financially safe haven. The United States has been renowned as a financially safe haven, which has made it benefit tremendously by generating economic exceptionalism. A change in perception would damage the country's economic growth and development by making her become less attractive. Secondly, if U.S. markets became less efficient, it would be difficult to attract investors because of increase in interest rates and costs of borrowing as well as slow investment and consumption that will damage the economy (Schuman, 2011). Third, the nation's currency would weaken, which would in turn undermine the value of currency reserves across the globe. This implies that the…