What is the importance of market efficiency??

Question

Can anyone please help me with this question?

Answer 1

If you are talking about the stock market...

Market efficiency theory talks about the speed and dispersion of market information.

Perfect market efficiency is that every body has every bit public information instantaneously and uniformly. The idea is that it is impossible to take advantage of new information that is already public because somebody else has already taken advantage of the information and therefore price into the market.


This compares to the "inefficient market" whereby information does not spread quickly or uniformly and therefore profit via information ownership is easy. This has been proven false in the context of a modern stock market.

The efficient market theory has been tested by Fama & French, Miller & Modigliani and the other guys who grace the spines of my finance books that I've been forced to read for about a decade. Their tests showed that the market was, surprise-surprise, somewhere in between - the "semi-efficient market".


If you are not talking about the stock market and you are just talking about general market efficiency, then...

Market efficiency is important in that it creates more productivity and less cost to the system. Markets exist to try and exchange goods and service of the highest utility at the lowest cost.

Efficiency improve production by allowing suppliers the ability to deliver more goods and services to the market. Efficiency helps reduce trading frictions and increases competition to create lower prices, better quality and higher availability to consumers. Efficiency also helps reduces risk - which affects productivity and costs over time.

Risk is the inherent enemy of markets. Risk can come in many forms - from physical risks (e.g. war, ability to deliver, availability and quality of infrastructure), financial risks (e.g. stability of the underlying financial infrastructures, volatility of currency, inflation) and political risks (e.g. that the laws are upheld, that politicians do not co-opt the markets on a whim).

Answer 2

It is a source of debt finance.This is achieved by the issue of debentures to help a company that is facing liquidity problems.Debentures thus are important in raising long term debt capital.Debentures carry a fixed rate of interest.