3. RESULTADOS Y DISCUSIÓN
3.3.1. RESULTADOS DE LAS MEDIDAS DE
Price accuracy is dependent on the information available to the market regarding a certain security and its incorporation into the security’s price. The premise of an
167 Robert G. King and Ross Levine, ‘Finance and Growth: Schumpeter Might be Right’ (1993) 108 The
Quarterly Journal of Economics 717; Ross Levine and Sara Zervos, ‘Stock Markets, Banks and Economic Growth’ (1998) 88 The American Economic Review 537.
168 There is theoretical distinction between fundamental efficiency and informational efficiency.
Fundamental efficiency is the ability of a market to reflect the best estimate of the future incomes of an asset, while informational efficiency is the inability to profit from available information because they are already reflected in the securities price. This distinction is only relevant to the extent that there are mechanisms to predict securities price more accurately than the market, given the same set of available information. Since this is an unlikely proposition, the distinction is not relevant for the purposes of this work, and the underlying concept used here for market efficiency will be informational efficiency. See Ronald J. Gilson and Reinier Kraakman, ‘The Mechanisms of Market Efficiency Twenty Years Later: The Hindsight Bias’ 446 Harvard Law School John M Olin Center for Law, Economics and Business Discussion Paper Series 1, 2.
169 Gordon and Kornhauser 768 (n 165). If the price is not accurate the decisions made by investors and
savers will not be optimal.
efficient market is that it ‘fully reflects’ all available information.171 The ‘reflection of available information’ is dependent on two factors: a) how information is incorporated into prices and b) how information is made available.
The incorporation of information into prices can be framed as a two-step process. Firstly, it depends on the number of potential investors that have access to a piece of information. Secondly, it depends on how these persons transmit this information to the market price of a security. The price adjustment is a function of the initial number of persons possessing the information and the amount of transactions that are made based on such information; the bigger the number of initial persons possessing the information and the bigger the transactions made based on it, the faster the information is incorporated into prices.172
The availability of information can be thought of as a continuum that goes from publicly available information to restricted information. Information requires effort to be gathered; this is reflected in the use of personal time or by hiring researchers. Even if it is publicly available, its pieces can be raw data that must be organized to be understood. The costs of organizing information coherently in such a manner that some use might be made of it might be high. Moreover, it may be necessary to check whether the information provided is true, an activity that has also has a cost.173 Therefore, the level of availability of a piece of information can be translated in terms of the cost to acquire, organize and reasonably rely upon it.
Due to the costs of obtaining, processing and verifying information, many different mechanisms have emerged to diminish these costs through economies of scale and scope. The press, financial intermediaries and individual networks are some of the avenues that are used for this purpose. Such mechanisms increase the initial availability of information to market participants. By diminishing information costs, they enhance price accuracy in
171 Eugene F. Fama, ‘Efficient Capital Markets: a Review of Theory and Empirical Work’ (1970) 25 The
Journal of Finance 383, 383.
172 Liquidity therefore is an important aspect for market price efficiency, the more liquid the market, the
faster is the price adjustment.
173 In sum, information costs can be divided into three categories: acquisition costs; processing costs and
verification costs. For a more in depth overview, see Ronald J. Gilson and Reinier H. Kraakman, ‘The Mechanisms of Market Efficiency’ (1984) 70 Virginia Law Review 549, 597-609.
capital markets by increasing the distribution of reliable information while also contributing to economic efficiency, both directly, through the reduction of informational costs, and indirectly, through a more efficient capital market.174
The second moment of price formation is the incorporation of available information into the prices of a product. In any given market, this ‘reflection’ occurs through different mechanisms.175 In the long-run, prices tend to adjust to equilibrium by incorporating new available information; the important question regarding price accuracy is how fast the information is incorporated into prices.176 The incorporation of information is basically done through transactions that are based on the new information. Actors using the information will evaluate and act on it, pushing securities prices up or down.
There are four mechanisms of information incorporation into prices: ‘universally informed trading’, ‘professionally informed trading’, ‘derivatively informed trading’ and ‘uninformed trading’,177 which have a parallel in the cost structure mentioned above.
‘Universally informed trading’ is the situation where information is either already incorporated into prices, such as old information, or where the costs of obtaining it are so low that the market players will receive, process, adjust their expectations and act on it promptly, reaching near perfect efficiency.178
In cases where information is widespread but further analysis is necessary for it to be understood, professional traders play a bigger role, entering into the universe of the ‘professionally informed trading’. Professional traders have better tools to analyze
174 There is an apparent paradox in the relationship between the cost of obtaining information and market
efficiency. The premise of an efficient market is that any available information is ‘fully reflected’ in stock prices at any time. Therefore, if the market is efficient, any information that becomes available is fully reflected in the stock prices, and the costs of acquiring new information will not be worthwhile, pushing the market to inefficiency again. The paradox is just apparent. Since price systems are not perfectly efficient there is always an opportunity to make a profit from arbitraging, justifying the existence of information providers and arbitrageurs. See Sanford Grossman and Joseph Stiglitz, ‘On the Impossibility of Informationally Efficient Markets’ (1980) 70 The American Economic Review 393.
175See Gilson and Kraakman 554-65 (n 173). 176 Ibid 559-60.
177 Gilson & Kraakman, based on previous financial literature, elaborated these terms. See ibid 566. 178 Ibid 568-69. One example would be an oil spill that is widely televised across the globe.
complex information that would not be meaningful to the unsophisticated investor. Professional trading is responsible for incorporating complex information into securities prices and it is an efficient mechanism so long as the trading volume, based on the new expectations that were formed from the analysis of such information, is sufficient to move the market price.179 As such, a certain consensus among professionals is needed for price movement.
The third mechanism, ‘derivatively informed trading’, functions when information is not widespread and the costs of acquiring it are higher. The few players that are in control of the information will be able to trade on it and profit from their behavior until the information is leaked or other market players are able to ‘decode’ it. In this case, the price will only adjust to the extent that other players are able to obtain the information on which the insiders are trading the security. This happens through two processes: 1) if the trades made by insiders are sufficient to move the demand or supply of the security or 2) if outsiders realize that insiders are executing the trade and decide to engage in the same trades under the belief that those insiders have more information than they do.180 There is a considerable gap in time from the moment when the new information is available to the insider to its incorporation into the security price; if insider trading volume is low and there are no other manners of outside traders to discover that insiders are trading their securities, the new information might never be incorporated into the price. This gap creates an informational asymmetry problem that may lead to an increase in transaction costs and an overall deterioration of the market.181
The last mechanism is ‘uninformed trading’, a mechanism based on soft information, belonging to the realm of predictions and forecasts. Each individual trader has opinions and beliefs that are used as a basis for engaging in certain trades. By trading
179 Ibid 569-72.
180 Gilson & Kraakman term these two mechanisms as ‘trade decoding’ and ‘price decoding’. Ibid 573. 181 This is the well-known ‘lemons’ problem. When there is informational asymmetry regarding products in
the same class and the purchasers are not able to differentiate between a good product and a medium one, the tendency is for the purchasers to discount prices to compensate for the risk of buying a product of medium quality. Since the price will not reflect the real quality of the good product, their owners might no longer be willing to sell them. The same process then happens with the medium and the bad product, pushing it into a downward spiral that may lead to the extinction of the market. See George A. Akerlof, ‘The Market for "Lemons": Quality Uncertainty and the Market Mechanism’ (1970) 84 The Quarterly Journal of Economics 488.
based on these beliefs, each and every single trader’s expectation is transferred to the market price of the security.182 The adjustment of securities prices will be a mean average of each individual investor’s expectations of what the price should be, and even though the market would behave as if its actors were informed, in fact they would not be.183
These four mechanisms are not exclusive; they complement each other and they may even operate concomitantly regarding the same piece of information. It is through these mechanisms that information incorporates into securities prices, adjusting its accuracy.
These mechanisms are shaped and limited by the institutional complexities surrounding the activities related to gathering, processing and verifying market information, as well as by the legal framework surrounding these processes.184