Investments, tenth edition

 Example  11.4 

Using Abnormal Returns to Infer Damages 

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7/17/13   3:41 PM

7/17/13   3:41 PM

Final PDF to printer

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362 

P A R T   I I I

  Equilibrium in Capital Markets

 Suppose that we see negative abnormal returns (declining CARs) after an announce-

ment date. Is this a violation of efficient markets? 

 CONCEPT CHECK 

11.4 

   The Issues 

 Not surprisingly, the efficient market hypothesis does not exactly arouse enthusiasm in the 

community of professional portfolio managers. It implies that a great deal of the activity 

of portfolio managers—the search for undervalued securities—is at best wasted effort, 

and quite probably harmful to clients because it costs money and leads to imperfectly 

diversified portfolios. Consequently, the EMH has never been widely accepted on Wall 

Street, and debate continues today on the degree to which security analysis can improve 

investment performance. Before discussing empirical tests of the hypothesis, we want to 

note three factors that together imply that the debate probably never will be settled: the 

 magnitude issue,  the  selection bias issue,  and the  lucky event issue.