Densidad de malla

This connotes a market where little or no information is available or reflected on security prices. In this form, prices cannot be predicted by an analysis of past prices.14

It suggests that the movement in share price on any one particular day is not correlated with the share price the next day hence, making it impossible to predict new share price movements from old share price movements.15

The consequence of this is that investors cannot earn abnormal returns.16

This theory was developed from the ‘random walk’ theory, which suggests that the past movement or trend of a stock price or market cannot be used to predict its future movements (i.e. the prices develop randomly and are not deducible from past prices).17

It indicates impossibility of outperforming the market without assuming additional risks. Critics of the random walk theory argue the possibility of outperforming the market by carefully selecting entry and exit points for equity investments.18

The economies that fall under this tier are characterized by unavailability of up-to-date information and inability to follow rapid and/or consistent change of share prices. The test to determine the weak form of market efficiency is the examination of the interrelationship between current and past stock prices.19

14 _{R. Pike and B. Neale, Corporate finance and investment: Decisions and strategies, (5}th _Edition, Pearson Education 2006) 36

15 _{P. Barnes, Stock market efficiency, insider dealing and market abuse, (Gower & Ashgate 2009) 46} 16 _{Abnormal returns are generated by a given security or portfolio over a period of time that is different} from the expected rate of return. It is a summary of how the actual returns differ from the predicted returns.

17 _{B. Malkiel, A random walk down Wall Street: The time tested strategy for successful investing, (W.} W. Norton & Company Inc. 2007) 24

18 _{S. R. Vishwanath and C. Krishnamarti, Investment management: a modern guide to security analysis} and stock selection, (Springer 2009) 502

19 _{V. K. Gimba, ‘Testing the weak form efficiency market hypothesis; evidence from Nigerian Stock} Market’ (2010) 3 Central Bank of Nigeria Journal of Applied Statistics 122.

Research indicates that the Nigerian capital market is efficient in the weak form.20

Prices in the capital market are fixed daily based on the demand and supply mechanism as well as on performance information documented either in periodic reports or brief by the managing director of a company to the dealing members of the Nigerian Stock Exchange.21

Prices in the secondary market are determined by considering quantitative and qualitative characteristics. The former entails studying the fundamentals of a company by analysing its earnings record, earning projections, asset structure, dividend record, growth records, cash flows etc. The latter involves judgment on the future projection of the company, judgment on equality of management, quality of the products of the company, monetary and fiscal policies of government etc.22

Regardless of the above methods of price determination, the market is considered weak because companies still complain about their shares being undervalued. The principal reason for this is that technical analysis or other forms of security analysis based on historical prices appear to be valueless in the Nigerian capital market. This is further accentuated by the fact that stockbrokers are not sufficiently familiar with companies’ operations to enable them put a fair price on the company’s shares.23

Other factors considered include inadequate information flow in the stock market, inefficient communication system, inadequate understanding of

20 _{G. C. Okpara, ‘Analysis of weak-form efficiency on the Nigerian Stock Market: Further evidence} from the GARCH model’, (2010) 4 The International Journal of Applied Economics and Finance 62 R. Olowe, ‘Weak form efficiency in the Nigerian stock market: Further evidence’ (1999) 11 African Development Review 64

O. F. Ayadi, ‘The Nigerian capital market and the random walk hypothesis’ (1990) Unpublished MSc dissertation, University of Lagos

J. M. Samuels and N. Yacot, ‘Stock exchanges in developing countries’ (1981) 4 Savings and Developments

21 _{R. Olowe (n 20) 54}

M. Ajao, ‘Testing the weak form of efficient market hypothesis in Nigerian capital market’, (2012) 1, Accounting and Finance Research 169

22 _{R. Olowe (n 20) 54} 23 _ibid

financial information by Nigerian investors, low level of automation in the country and interference by the regulatory authorities in the determination of secondary market prices.24

Furthermore, prior to public offers and announcements in the Nigerian capital market, there is usually an erratic price movement that often has minimal effect on pricing but creates the possibility of price volatility.25

This is because prior to the information being made public through an official announcement, it had already arrived in the market, thus creating the possibility for overestimated prices of stock.26

Further reasons for classifying the Nigerian capital as weak includes the fact that the SEC adopts a lacklustre attitude towards abnormal financial activities and does not monitor the market closely to enable it grow and achieve optimal maturity as well as the inadequacy in risk management and market discipline that results in greed and bad choices.27

A consequence of these factors is the inefficiency of the market that paves way for individuals to reap abnormal returns.28

These reasons are partly responsible for lack of depth in the market, because investors will not be encouraged to invest in a market characterised with inadequate and inaccurate information, which essentially are characteristics of a market categorized in the weak form.

24 _ibid

25 _{W. Bewaji, Insider Trading in developing Jurisdictions: Achieving an effective regulatory regime,} (Routledge 2012) 203

26 _ibid

27 _{V. K. Gimba, (n 19) 125}

28 _{J. N. Mojekwu, and S. Ogege, ‘Econometric investigation of the random walk hypothesis in the} Nigerian stock market’ (2013) 1 Journal of Emerging Issues in Economics, Finance and Banking 394