Capital Market Efficiency: Definitions, Testing Issues And Anomalies

Research on capital market efficiency continues to have an important impact on the accounting and finance literatures. This paper covers five topics related to market efficiency: I. Alternative viewpoints on what is meant by market efficiency, II. Issues that arise in testing market efficiency with respect to specific information releases, Mechanisms by which market efficiency may be attained, IV. An overview of evidence that has been interpreted as anomalous with respect to market efficiency, and V. Non-capital market inefficiency explanations for the evidence viewed as anomalous. In 1970, Fama concluded that “the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse.” (p.416) This conclusion no longer holds. One characterization of the market efficiency literature since 1970 is that it has evidenced a greater ability to pinpoint theoretical or empirical gaps in our knowledge than it has been able to provide models or results to close these gaps.