Preview – An Efficient Market
Because information is reflected in prices immediately, investors should only expect to obtain an equilibrium rate of expected return (as predicted by the SML). Awareness of information when it is released does the investor no good. The price adjusts before the investor can trade on it.
Firms should expect to receive a fair value for securities they issue.
Financial managers cannot time issues of securities.
A firm can sell as many shares of stock or as many bonds as it wants without fear of depressing the price.
Stock and bond markets cannot (barring fraud) be affected by firms artificially increasing earnings (cooking the books).