Market Efficiency or Lack Thereof: A Critique and Rethinking on Corporate Governance
40 Pages Posted: 12 Apr 2015 Last revised: 13 Feb 2020
Date Written: November 10, 2019
The untenable volatility of financial markets and fleeting nature of stock ownership on one side and corporate scandals, high-risk managerial whims and empire building attitudes of corporate managers on the other have rekindled a three-decade old debate on whether financial markets, especially stock markets hold efficient mechanisms for investment and resource allocation (Khachaturyan, 2003; Vitols, 2008; Coffee, 2005). And the recent Nobel prize (for the year 2013) awarded to Robert Shiller, Eugene Fama, and Lars Hansen for their research contributions with regard to functioning of financial markets and price evaluation of stocks has reinforced the importance of efficient resource allocations and the need to regulate stock-market to safeguard the interests of investors and corporations. For instance, the Aspen Institute’s Corporate Values Strategy Group (Aspen Institute, 2009) which has been working on promoting long-term orientation in business decision making and investing has issued a call to end the value-destroying short-termism in financial markets and create public policies that reward long-term value creation, which is endorsed by twenty-eight leaders representing business, investment, government and academia (including Warren Buffett - CEO of Berkshire Hathaway, Lou Gerstner - former CEO of IBM, Roger Ferguson - President of TIAA-CREF, and James Wolfensohn - former President of the World Bank).
In this light, this article critically reviews the stock-market behavior, its influence on firm management, and the corporate factors that induce market anomalies, and to recommend measures that would curtail stock-market-volatility and corporate practices neglecting long-term investor-interests. The major assumptions of market-efficiency are critically reviewed in light of new evidences pointing to the failures of market mechanisms and corporate governance practices. This article further articulates the need for creating effective regulations and long-term incentives that are of interest to both investors and corporate managers.
Keywords: stock market, corporate governance, trust, efficiency, regional stock exchanges
JEL Classification: G00, G10, G11, G12, G31, M41, M21
Suggested Citation: Suggested Citation