The Role of Ghana Stock Market in the Economic Development
In accordance to the economic development of Ghana and their financial market, Mishkin (2001) argued that usually financial assets are going to the process of trading. Companies enable exchange of previously issued financial assets. Moreover, the facilitation of lending and borrowing of newly issued financial assets sale. Basically, there are numerous samples of financial market around the globe and one of this is the Ghana stock market. Actually, like in other researches and studies, the debate involving stock market is primarily concentrated on its efficiency. The efficiency of stock markets is important, particularly for financial participants, as this influences the prices received and paid for securities purchased and sold. For instance, the cost involved in changing securities and loans into cash for liquidity needs is influence by efficiency conditions. Efficiency also influences the time required to complete a certain transaction (Digital University, 2011).
Moreover, the government of Ghana as well as its financial institutions that are into security trading are also aware of the significance of market efficiency. In order to facilitate effective economic development plan, government organisation as well as its financial institutions knew that large transaction can be supervised by other dealers, who in turn will take advantage of the information they acquire about large known buyers or sellers and utilize it to bid up the price of the sell short securities a dealer is attempting to unload or the securities in demand. Short-selling refers to the act of putting assets borrowed from an owner on sale and later on, purchasing it back to return the borrowed security (Digital University, 2011). The efficiency of stock market also enables the market of Ghana to take in a transaction devoid of a large price change. Furthermore, market efficiency is involved with the amount of transaction costs characterized by the difference between the financial asset’s ask price and bid. With this, the spread of the bid-ask becomes narrower, if the efficiency of the financial market is great. Market efficiency also determines whether capital has been allocated to these funds that have the utmost profit at any specified risk level. Without the efficient determination of prices, capital will not flow to the investment with the highest risk adjusted return. This case can negatively affect a country’s economic growth and productivity (Digital University, 2011).
Due to the importance of financial market efficiency, several arguments have been raised in relation this issue. In response to this, theories have been introduced, of which the most controversial was the Efficient Market Hypothesis (EMH).
For more than thirty years, the introduction of Eugene Fama concerning the Efficient Market Hypothesis is actually the main context of financial economics. The principle behind the EMH argued that security prices at any time completely replicate all the existing information. Meaning, the stock market prices securities at their fair values (Tam, 2002). Under this concept, Fama (1970) defined three distinctive market efficiency forms: weak, semi-strong and strong. Among these forms, the semi-string has been the focus of the majority if empirical researches.
The concept described by the strong form of EMH states that securities prices reflect all existing information, even private ones. Sufficient evidence has been provided, showing that stakeholders gain earnings from information trading that is not yet included into prices (Seyhun 1998). Thus, the strong form does not grasp in a business market with an irregular playing field. Alternatively, an EMH with the semi-strong type implies that security prices reflect all public information available. As there are overvalued or undervalued securities, trading costs are then not capable to create superior earnings. Upon the discharge of the latest information, the information is fully incorporated to the price rather hastily. Intraday data’s availability enabled tests that provide evidence of public information affecting stock prices within a short span of time (Gosnell, Keown & Pinkerton, 1996). On the other hand, the weak form of EMH implies that pat returns or prices reflect prices or returns in the future. From the incoherent feat of technical analysts, it was suggested that this form holds. Fama (1991), however, expound on the concept behind the EMH weak form, and included the use of macroeconomic variable or accounting in the prediction of future returns.
With respect to the previous discussion, it was stated that the semi-strong form of efficient market theory (EMT) argued that looking at past prices or information is no longer needed and no other benefits we can get by looking at this. The market already knows the information and it is built into the price.
The value of any financial information is solely due to the expected reward it will yield. If the market already knows all past accounting records then what value is an accounting report? On a personal level, we may feel that it is interesting and may therefore pay to view it. But to the market, there is no value. It has already seen the information. Looking at the report will not in any way provide an edge for future profits. If we do buy the stock and make money, it is not from reading the report; instead, it is from new information that arrived after reading it that happened to move the stock in our favour.
An easier illustration is this: How much would we pay someone to know yesterday’s closing price on IBM? What about for the day before? If we answered nothing (as we should) then what value is a chart showing all of the closing prices (and all intra-day prices)? What value is an accounting report with old information? As seen in that example, we can be able to see the validity of semi-strong EMH.
Based from the concept depicted by the semi-strong form of market efficiency, the stock price reflects all publicly available information. In line with this, many studies have attempted to examine the efficiency of public information on predicting price movements. In general, studies had indicated that market quickly responds to these diverse corporate announcements within a short span of time. Applying this general conclusion, investors then cannot expect to earn higher returns by trading on the date of the announcement. In one popular study (Fama, Fisher, Jensen & Roll, 1969) the feedback of stock price was studied in relation to stock splits. Traditionally, stock splits have been good news in general for investors as they are naturally preceded by dividend increases. The study found that on the average, stock splits were pave the way by phases of tough performance presumably due to the tendency of firms splitting in good times. Nonetheless, no evidence of abnormal performance of stock prices was observed by the researchers after the split. This means that no profit will be gained by investors when stocks are purchased on the split date. This evidence complies with the EMH.
The presentation actually shows the cause and effect situation of the progress of Ghana Stock Market. Actually, if the stock market of Ghana is excellent, more projects and financial returns will enter ion Ghana and this also means economic progress and development.
References:
Digital University (2011). The Efficiency of the Financial Markets. Available at: http://www.digitu.com Accessed: January 28, 2011.
Fama, E. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25, 383-417.
Fama, E. (1991). Efficient capital markets: II. Journal of Finance, 46, 1575-1617.
Fama, E. F., Fisher, L., Jensen, M. & Roll, R. (February 1969). The Adjustment of Stock Prices to New Information. International Economics Review.
Gosnell, T.F., Keown, A.J. & Pinkerton, J.M. (1996). The intraday speed of stock price adjustment to major dividend changes: Bid-ask bounce and order flow imbalances. Journal of Banking and Finance, 20, 247-266.
Mishkin, F. S. (2001). The Economics of Money, Banking, and Financial Markets. Boston, MA: Addison-Wesley.
Seyhun, N. (1998). Investment intelligence from insider trading. MIT Press.
Tam, F. (November 2002). Markets not entirely efficient. Business Times (Malaysia).
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