Chapter 9 • The secondary capital market and its efficiency
More recently, Busse and Green (2002) found that good news is typically im-
pounded in the relevant share price within one minute. Bad news can take up to
fifteen minutes before it is fully reflected. The ‘news’ in these cases was the opinions
of analysts broadcast on television during Wall Street’s normal trading hours.Conclusion on semi-strong-form efficiency
From the studies that we have reviewed here, the results of which are typical of the
conclusions drawn from the research conducted on the world’s secondary capital mar-
kets, the evidence seems consistent with the view that security prices adjust rationally
and speedily to new information. Just as importantly, they seem to ignore bogus new
information, that is, data that appear to be relevant but which in fact are not. Thus the
general conclusion is that the capital markets, including the LSE, are efficient in the
semi-strong form.Tests of strong-form efficiency
Strong-form efficiency would imply that there is no such thing as private information
in the context of information relevant to the setting of security prices. As soon as infor-
mation is available to any one person or group it is reflected in the price of the particu-
lar security or securities to which it relates.
Those who might have access to information that is not generally available include:l insiderswho have privileged positions with regard to such information (this might
include managers, staff, auditors and other professional advisers); and
l expert and professional investors.Intuition suggests that managers who have information not yet publicly available
could turn this knowledge into investment returns that are abnormally high compared
with those of investors not possessing the information. Similarly, we might expect that
investment fund managers would be more successful, given their experience and
research resources, than if they were to select investments at random.Insiders
In the UK, insider dealing is much frowned upon by public opinion, by law, and by
ethical standards of professional bodies. Thus, if insider dealing goes on, it is done
furtively and is, therefore, not readily observable by researchers. In the USA a differ-
ent attitude used to be taken (until the 1960s) to insider dealing, although insiders
were required to register their status when dealing. Tests on the success of insiders
dealing on Wall Street have been conducted. Both Jaffe (1974) and Finnerty (1976)
found that insiders could consistently earn abnormal returns as a result of their greater
access to information.Professionals
As regards professional investors, much research has been conducted into the perform-
ance of unit and investment trusts. These are organisations that attract funds from
the investing public, which are then invested predominantly in marketable securities.
These studies, including one conducted by Firth (1977b) on UK unit trust performance
during the period 1965 to 1975, have found no superior performance. Some researchers
have found that the results of investment by these experts are in fact less good than