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In this short essay, the author presents an analysis of the stock market efficiency hypotheses and applied the same as per experiences in Croatia. The author first presents a general understanding about Capital Market Efficiency Hypotheses and then applies the understanding from Croatian perspective that corporations cannot fool the markets using creative accounting.
The internal information being revealed to the stock markets is termed as "dimensions of signal space" whereby empirical researches suggest that a smaller relative signal space for large number of assets result in fully revealing equilibrium prices.
However, Jordon (1983. pp1325-1327) proved that efficient market hypotheses cannot be viewed from the ideal perspective whereby the signals (of internal information) and the corresponding return on assets need not be normal if the dimension of signal space is larger for smaller number of assets. In such cases, the researcher argued that the market equilibrium is generally inconsistent with the efficient market hypotheses. If investors are risk neutral, the equilibrium price of each asset can be equal to its expected returns. However, investors do have risk aversion - in the form of relative risk aversion and constant risk aversion. Each signal, when known to the investors adds to the risk perception thus affecting the return from the asset - positively or negatively - depending upon how the signal has been perceived. Beaver (1981. ...