Efficient market hypothesis (EMH)

Eugene Fama and Efficient Market Theory

Eugene Fama created the efficient business theory in the 1960s. According to this theory, it is impossible to outperform the competition because rates embody and integrate all available information. According to this theory, buying or selling securities is mostly determined by chance rather than experience. When markets are present and effective, it means that their values can largely represent all available knowledge. This theory also implies that the majority of people who buy or sell securities do so under the assumption that the securities they buy are worth somewhat more than the purchasing prices, while the ones they sell are worth less than the sale prices. Financial statement analysis assists in determining the company’s financial stability (Vaibhav, 2012).

Importance of Honest Financial Statement Analysis

The analysis of these statements cannot be performed in a manner which provides a significant advantage to the investor because that they must be done in an honest manner. If the analysis is done in a manner which gives an advantage to the investor, it means some things may be done wrongly to please the investor and therefore end up risking the company to bad performance or even collapsing (Vaibhav, 2012). The financial statement analysis should portray real and true information because it acts as a decision-making tool. If improper analysis is undertaken to give a significant advantage to the investor, wrong decisions may be taken hence harming the overall performance of the company. Implementing financial statement analysis with the aim of giving the investor a significant advantage makes the analyst concentrate only on factors which please investors and omit the ones which show negative implications concerning the company, hence making him make wrong investment decisions, extension of credits, among others.

Alliances and Strategy

According to Pavan (2012), alliances are agreements which allow organizations to enter into cooperation with either current or future competitors. This can be established through joint ventures or short-term agreements. In order to make an alliance work, organizations must have good strategy. Strategy in this case refers to clearly identifying how the alliance will assist the company to attain its goals, and the short and long-term wins for the organizations involved. A proper strategy should include choosing the right partners for the intended goals, sharing the right information, engaging in a deal which involves risks and benefit analysis, must establish realistic agreement on the time to market and cooperation expectations, and should also include mutual and flexible commitment concerning what may be appropriate to change, measure, and share with each one’s culture.

Selecting the Right Partner

According to Pavan (2012), selecting the right partner is among the ways to make alliances work. When selecting the partner company, it is advisable to consider choosing a company that operates in a different market. For example, an organization that is not in the foreign market should make an alliance with one that operates in such a market because the organization can benefit from the knowledge and skills which the partner company has already acquired in that market. Another way to make alliances work is trying to look at the big picture instead of short-term payoffs. Organizations that aim at establishing alliances must bring the right framework, the right company, and the right relationship together.

References

Vaibhav. J. (2012). An Insight into Behavioral Finance Models, Efficient Market Hypothesis and Its Anomalies. Researchers World, 3(3), 123-145.

Pavan, K. T. 2012. Collaborative Strategy - the Way Forward in Alliances and Joint Ventures: A Concept Note. IUP Journal of Business Strategy, 9(2), 34-67.