The stock market is an area that is highly unpredictable; the
market can be affected by news and like all news the outcome is unknown until
it arrives and lands on the stock market. Each share price fluctuation is independent
from the one before. News can have a positive effect on share price but
sometimes this can be an overreaction, and then followed by a deflation as the
hype begins to diminish. There are three types of efficient market hypothesise
(EMH), they are operational, allocational and pricing. I am going to look at
the case of Trinity Mirror and how their share prices jumped when News of the
World (NoW) closed at the beginning of July 2011.
Trinity Mirror who own national newspapers Daily Mirror,
Sunday Mirror, The People magazine and the Sunday Mail had already experienced share
prices plummet as reports of a ‘slow and volatile’ recovery as inflation costs,
investments and surging newsprint prices would outweigh their savings planned
for the year. (The Guardian) Share prices dropped by 20% to 66p a share and in
the following months dropped a further 37% to 41p a share. The publically listed company found
advertising losses were a huge part to play in cost cutting as 19 categories of
advertiser spending less years on year and government advertising budget over
£1m had been chopped to £100k, since the economic decline in 2008.
But as the news came on the 8 July 2011 that the NoW had
closed, share prices in Trinity Mirror increased rapidly to 56.75p a share, in
early morning deals. As the excitement
of the advertising potential and NoW customers that would now buy their
Newspapers. This put them in a much stronger position to increase share holder
wealth maximization. But are the markets always priced rationally? As emotions
are running high with the very public case of NoW, can the price of stock be
inefficient.
In this case it was an overreaction as share prices fell to
37.5p in August 2011. Even though the closure of NoW did help boost sales in
July, the trading environment and decline in the amount of customer who now buy
Newspapers, in favour of online publications has led to a decline in profits. The
EMH asserts that the financial markets are ‘informationally efficient’ and achieving
above average returns on risk adjusted investments in not very likely. Trinity
Mirror is an example of single market inefficiency and how quickly and
rationally a share price can change.
The Hypothesise falls into ‘weak, semi strong and strong’
versions and Trinity Mirror falls into ‘Semi Strong’. All public information is
made available; the share price instantly reflects the new changes in public
information as it reacts quickly and rationally to change. But is investing
just chance, how can you really know what is the best company to buy shares in
or is it just pot luck.
(Sources: The Guardian, The Telegraph, London Stock
Exchange)
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