Efficient market hypothesis relies and reacts upon the announcements made by participating companies. In an ideal world this sounds, not only reasonable, but also the most simplist way to judge a companies present share value. More over reactive pricing is the only method the stock market can adopt as it is impossible to predict the future.
Often however companies can find themselves unfairly positioned within the marketplace. This is often as a result of being too transparent or hiding the whole truth from investors. Striking the right balance can prove to be difficult. This can be the known affects of behaviourial finance. More specifically when investors make systematical errors or mis judgements.
A good example of how markets can be manipulated from lack of disclosure in the case of sports direct. Mike Ashley is a known ruthless business man, more so since his controversial presence within Newcastle football club. He has been known to manipulate his companies performance and operations through lack of disclosure. This is likely to be to protect share value. Long term this can be much more detrimental to share value then disclosing a true and fair analysis.
Following the the poor sales performance of Sport Direct in 2007 Mr Ashley did not communicate issues effectively with the shareholders. Prior to profit warnings being released from Sports Direct the company had released information of a 20% sales boost which is inconsistent to the performance later confirmed. When companies fall victim to this kind of dysfunctional behaviour then markets will come down on them harder then ever. In this case share prices plummet further then they would have had the true and fair information been given and later react slower to positive press releases.
This is why in the market place honesty is always the best policy even in instances whereby the share price will temporarily fall. The majority of companies do follow a more honest approach however. By punishing companies in this way the city could be seen to be responding both efficiently and inefficiently at once.
Coming down on companies for not disclosing information fairly means that other listed companies are not likely to do the same promoting better overall efficiency. However being to harsh on companies can mean that the share value will never regain its full potential value. Mike Ashley is known for not holding the best relationship with investors. Following the plummet of Sports Direct share price he crudely labelled city workers as being a bunch of cry babies.
But in despite of the controversy Mike Ashley has managed to regain strength in the once struggling brand and the increasing share price reflects this, along with his bank balance. Mr Ashley is set to take a 16m bonus in shares for the recent positive results. This supports the notion that despite foul play the share price has recovered suggesting current market efficiency.
http://www.guardian.co.uk/business/2009/jul/06/jjb-david-jones-mike-ashley-loan?INTCMP=ILCNETTXT3487
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