Academic research has provided mixed and conflicting evidence as to whether an optimal capital structure exists for individual companies and businesses. Demonstrating knowledge and understanding of the differing theoretical viewpoints associated with the concept of capital structure, and drawing upon relevant empirical research within this field, critically analyze and evaluate whether an optimal capital structure does exist.The concept of market efficiency can be defined using three differing strengths; weak form, semi strong form, and strong form. Critically evaluate and analyze the three differing strengths of market efficiency, ensuring the response draws upon relevant empirical research within this field of study.
Banking Academy, Vietnam ASSIGNMENT COVER SHEET UNIVERSITY OF SUNDERLAND BA (HONS) BANKING AND FINANCE Student ID: 149080615/1 Student Name: Tran Quyet Thang Module Code: APC 308 Module Name / Title: Financial Management Centre/ /College: College: Banking Academy of Viet Nam Nam Centre Banking Academy of Viet Due Date: 15 May 2015 Hand in Date: 15 May 2015 Assignment Title: Individual assignment Students Signature: (you must sign this declaring that it is all your own work and all sources of information have been referenced) Financial Management (APC 308) – May 2015 Title page Financial Management APC 308 Banking Academy, Vietnam Submitted on 15 May, 2015 Prepared by: Quyet Thang Tran Student ID: 149080615/1 Financial Management (APC 308) – May 2015 i Table of Contents Title page i Part A: Academic research has provided mixed and conflicting evidence as to whether an optimal capital structure exists for individual companies and businesses Demonstrating knowledge and understanding of the differing theoretical viewpoints associated with the concept of capital structure, and drawing upon relevant empirical research within this field, critically analyze and evaluate whether an optimal capital structure does exist 1 Traditional view Miller and Modigliani’s theory (MM) MM (I): The net income approach Pecking-order theory Part B: The concept of market efficiency can be defined using three differing strengths; weak form, semi strong form, and strong form Critically evaluate and analyze the three differing strengths of market efficiency, ensuring the response draws upon relevant empirical research within this field of study Weak-form Semi-strong form Strong form References 10 Appendixes 14 Financial Management (APC 308) – May 2015 Part A: Academic research has provided mixed and conflicting evidence as to whether an optimal capital structure exists for individual companies and businesses Demonstrating knowledge and understanding of the differing theoretical viewpoints associated with the concept of capital structure, and drawing upon relevant empirical research within this field, critically analyze and evaluate whether an optimal capital structure does exist Capital has an important role for the businesses in investing and operating Capital refers to the firm’s sources of long-term financing (Brealey, et al., 2011) An appropriate capital structure is an important decision for any business by the need to maximize the benefits obtained from individuals and organizations related to the operations of the business Moreover, this decision also impacts to the capability of enterprises in the competitive environment The capital structure refers to the way businesses looking for financing decisions through a combination of debt and equity By deciding the distribution of different sources of funds, the businesses try to minimize their cost of capital and maximize the shares’ price to benefit the shareholders’ wealth as much as possible This is refer to as optimal capital structure There are different theoretical viewpoints about the existence of optimal structure Traditional view The traditional view theory will be shown in the figure below: Figure 1: Traditional view of capital structure (Watson & Head, 2013) KE: cost of equity KD: cost of debt Financial Management (APC 308) – May 2015 It can be seen in Figure that when the level of gearing increases, it also leads the cost of equity KE to increase while the cost of debt is stable and WACC goes down It means that by increasing the ratio of debt, businesses can enjoy cheaper cost of capital In this figure 1, WACC curve has U shape It means that the lowest point (X) indicates the optimal capital structure However, when level of debt increases, the shareholders have to face to higher risk of financial, it causes cost of equity increases At the point that level of gearing become very high, KE curve rises steeply due to threat of bankruptcy This theory is based on some assumptions such as no taxes, no transaction cost, earnings are paid as dividend (Appendix 1) Based on the traditional view, there is an optimal capital structure With high level of debt, companies may fail to complete the obligations to pay back and then go to bankruptcy A research finds that a high-levered firm can engage actions that are harmful to their shareholders and find difficult to get more external finance and may find it more costly to efficiently carry out its dayby-day business (Rocca, et al., 2008) Moreover, a research paper about impact of capital structure on Bangladesh firm’s value shows that maximizing the wealth of shareholders requires a perfect combination of debt and equity, and cost of capital has to be as minimum as possible (Chowdhury & Chowdhury, 2010) However, the contention of the traditional theory, that moderate amount of debt in ‘sound’ firms does not really add very much to the ‘riskiness’ of the shares, is not defensible (Pandey, 2009) Furthermore, Marimuthu (2009) concludes that the traditional view has been greatly devastated by the ‘modern practitioners’ In addition, in the traditional view, risk pricing is inefficient; investors not always have information and/or time needed to closely monitor changes in the level of debt relative to equity (Grant, 2003) Miller and Modigliani’s theory (MM) MM (I): The net income approach By assuming a perfect capital market without taxes, no transaction costs and individual investors can borrow money at the same rate as companies, Miller and Modigliani argued that the market value of a company depends on its expected performance and commercial risk: the market value of a company and its cost of capital are independent of its capital structure (Watson & Head, 2013) To support the argument, Miller and Modigliani used arbitrage theory As investors exploit these arbitrage opportunities, the value of the overpriced shares will fall and that of the underpriced share will rise, thereby tending to eliminate the discrepancy between the market values of the firms Financial Management (APC 308) – May 2015 (Modigliani & Miller, 1958) Moreover, because the market value of companies and its cost of capital are independent of its capital structure, there is an equation: rwacc = We*Ke + Wd*Kd rwacc = D/(D+E) * Kd + E/(D+E) * Ke Ke = rwacc + D/E (rwacc –Kd) Because rwacc and Kd are unchanged, Ke will increase if D/E increase It means that when companies increase their debt, shareholders will face higher of risk Therefore, they will require higher ROE or the cost of equity will go up The figure below will illustrate this issue Figure 2: Miller and Modigliani (I): the net income approach Through the figure 2, it can be seen that WACC curve is a straight line It means that based on the MM (I): the net income approach, there is no optimal capital structure MM (II): Corporate tax Figure 3: Miller and Modigliani (II): corporate tax (Watson & Head, 2013) Financial Management (APC 308) – May 2015 In the second paper, these two researchers mentioned about the advantages of taxes By taking taxes, companies can take debt with cheaper cost because the interest is tax deductible This is called tax shield It means that higher level of debt is, lower WACC is In the figure 3, WACC curve is going down with high level of debt It means that companies should take 100% of debt in order to minimize WACC as much as possible This means that according to this theory, the optimal capital structure does exist There are some evidences from researches supporting for this theory By analyzing the relationship existing between leverage and corporate performance in Nigerian Petroleum Industry, David and Olorunfemi (2010) find that an increase in leverage ratio leads to increase in earnings per share and recommend that managers should much to improve on the leverage ratio This finding follows the conclusion of MM (II) On the other hand, the MM (II): corporate tax suggests that companies should take 100% of debt to benefit from tax shield, it seems to be unrealistic and not logical Miller and Modigliani (1963) also reminded readers that the existence of a tax advantage for debt financing – event the larger advantage of the corrected version – does not necessarily mean that corporations should all the times seeking to use maximum possible amount of debt in their capital structures Furthermore, there are some researches showing the limitations of these propositions These limitations includes: 1) it was based on partial equilibrium rather than general equilibrium analysis, 2) it was not clear whether the theorem held only for competitive markets, 3) except under special circumstances, it was not clear how possibility of firm bankruptcy affected by the validity of the theorem (Stiglitz, 1969) Moreover, by applying Parameter- Preference Theory, Becker shows that the valuation of firm and the cost of capital not require the usual risk-class or arbitrage assumptions (Becker, 1978) In addition, some tests indicate that neither the MM tax nor the no-tax valuation equations are accurate predictors of firm value; specifically, the value of the unlevered firm accounts for much less of firm value than predicted and the sign of the coefficient of the interest tax shield variable is negative, instead of positive as MM predict (Fosberg, 2010) Pecking-order theory In pecking-order theory, management is assumed to know more about the firm's value than potential investors (Myers & Majluf, 1984) Because of the asymmetric information, the investors afraid that the value of shares is higher than their market value Therefore, to solve this problem, Financial Management (APC 308) – May 2015 the firm prefers debt rather than equity In conclusion, based on this theory, there is no ratio target between debt and equity to minimize the cost of capital It means that the pecking order theory go against the optimal capital structure There are some empirical evidences that support the pecking order theory By using a sample of 629 UK SMEs over five-year period, two researchers find evidence consistent with a pecking order (Watson & Wilson, 2002) However, there are a lot of researchers found that firms not follow this theory For example, in Chinese, there is no evidence that capital structure of 407 listed companies follow a pecking order from retained earnings and debt to equity (Jinlan & Miaomiao, 2008) Furthermore, another research also shows that the UK, German and French firms not closely follow the pecking order theory’s prediction (Dang, 2013) The reasons for these differences may be by the changes in capital market or business environment because the pecking-order theory was first suggested by Donaldson in 1961 and modified by by Stewart C Myers and Nicolas Majluf in 1984 In conclusion, there are two theories which support the existence of an optimal capital structure including traditional view and MM (II) corporate tax However these both theories are based on several assumptions such as no taxes, no transaction costs and a perfect market Therefore, in practice, there is no an optimal capital structure for companies to combine debt and equity The financial decisions about capital structure of companies should depend on macroeconomic, microeconomic, industry in order to achieve objective – maximizing shareholders’ wealth Part B: The concept of market efficiency can be defined using three differing strengths; weak form, semi strong form, and strong form Critically evaluate and analyze the three differing strengths of market efficiency, ensuring the response draws upon relevant empirical research within this field of study The efficiency market hypothesis (EMH) state that financial markets make a best use of all available information in determining a share’s price (Howells & Bain, 2007) Therefore, investors cannot beat the markets by using current information or the fluctuation of past share prices According to Fama (1970), EMH is divided into three levels: Weak form: the information set is just historical prices Semi-strong form: the concern is whether prices efficiently adjust to other information that is obviously publicly available (e.g., announcement of annual earnings) Financial Management (APC 308) – May 2015 Strong form: the concern is whether given investors or groups have monopolistic access to any information relevant for price formation Weak-form There are a lot of researches in different stock markets are carried out On the one hand, by applying the two-regime TAR approach on monthly data over the period 1990:1 to 2009:1, a research paper shows that Malaysia and Thailand stock market are characterized by a random walk process, consistent with EMH (MUNIR, et al., 2012) The studies of Milionis and Moschos (2000) point out that the FTSE 30 share index follows the weak form market efficiency The major findings using daily data and a bias-free statistical technique with a sample spanning from September 1995 to March 2010 support the belief that these equity markets of Brazil, Russia, India and China (BRIC) may have been approaching a state of being fairly weak-form efficiency (Mobarek & Fiorante, 2014) For the Israeli, Jordanian and Lebanese markets, composite stock price indices follow a random walk and so these markets are weak-from efficient (Smith, 2007) Furthermore, the study of Yuan and Gupta (2014) documents that timing the Chinese Lunar New Year effect in markets of Hong Kong and Japan does provide incremental wealth for investors, even after considering transaction costs On the other hand, there are some empirical evidences show that the returns on stock market not follow the EMH theory Robinson’s (2005) results suggest that like a number of other emerging markets, the hypothesis of randomness in stock returns on the Jamaica Stock Exchange (JSE) is rejected for at least sixty five (65) percent of the stocks listed on the JSE Mishra (2013) examined the random walk behavior and efficiency of the Indian equity market and found that the Indian equity market does not follow random walk behavior Another study using daily observation over the span from 3rd July 2007 to 31st December 2011 in India Stock Market also rejects weak form efficiency of India stock market (JAYAKUMAR, et al., 2012) Kapusuzoglu’s (2013) findings show that Istanbul Stock Exchange National 100 market is not an efficient market in weak form by testing daily closing values of the related index during the period from 1996 to 2012 In addition, by applying two of the simplest and most popular trading rules—moving averages and trading-range breaks - by utilizing a very long data series, the Dow Jones Industrial Average index from 1897 to 1986, Brock, Lakonishok, and LeBaron (1992) suggest that technical analysis is useful for predictability of equity returns from past returns Metghalchi et al’s (2012) results point Financial Management (APC 308) – May 2015 out that technical trading rules have predictive power by examining the profitability for 16 European stock markets over the 1990 to 2006 period Moreover, technical trading rules are all successful in forecasting stock price movements in Malaysia, Thailand, Indonesia, and the Philippines, with the TRB having additional predictive ability in Singapore (Yu, et al., 2013) In summary, there are many empirical studies that support weak-form market efficiency while others also provide evidences for not supporting stock markets in weak-form efficiency The reasons for these differences may be the methods or models that researches use to test the efficiency of stock markets Semi-strong form To investigate semi-strong form market efficiency, there are a lot of researches using the data from different stock exchanges in the world On the one hand, by using data, for 47 firms over 1993 to 2006 from the Athens stock exchange (ASE), the study shows that the ASE does not fully incorporate publicly available accounting information into stock prices and hence violates the semi-strong EMH (Alexakis, et al., 2010) In India stock exchange, two researchers concludes that it is not efficient in the semi-strong form (Mallikarjunappa & Dsouza, 2013) A similar result is found in Malaysia stock exchange The empirical results indicate that this stock market has not reached its full efficiency level in semi-strong form, as the time required for the market to absorb the information conveyed by the dividend and earnings announcements is extensively long (Hussin, et al., 2010) Torun and Kurt’s (2007) results suggest that there are some countries in European monetary union are not in efficient in semi-strong form In addition, the Nairobi stock exchange is also not semi-strong form efficient as some investors can earn abnormal returns by having unequal access to public information (Olweny, 2012) On the other hand, there are some researches supporting the semi-strong form market efficiency Mandal and Rao’s (2010) results indicate that India stock market is efficient enough in its semistrong form to assimilate the new information revealed by dividend initiation and omission announcements and leave no scope for its investors to earn any abnormal return consistently Furthermore, another empirical study of India stock market with regards to buy-back of share shows very negligible reaction on or before the announcement date and these results are supporting to the implications of efficient stock market in its semi-strong form (Dua & Mittal, 2010) Moreover, Chena and Fraser’s (2010) results suggest that the publicly available expected earnings Financial Management (APC 308) – May 2015 series have significant power in driving stock prices in the markets of the US, the UK, Japan, Korea and Malaysia It means that fundamentals drive stock prices In addition, another empirical results show that the permanent fundamentals are the dominant factors in affecting stock prices (Pan, 2007) Additionally, Velinov and Chen (2015) find a self-correction of stock prices towards their fundamental values by re-examining the dynamic relations between stock prices and macroeconomic fundamentals for six major industrialized countries in the wake of the recent financial crisis These are empirical evidences that support semi-strong form market efficiency Strong form In strong form market efficiency, stock prices reflect all public and private information Despite having private information, investors cannot earn abnormal returns However, if investors have private information that can affect the stock price, this is will be called insider trading This activity is considered as an illegal trading activity in most stock markets in the world For example, insider trading was found to have had a significant impact on the price by analyzing trading in corporation insider and their tippees in Anheuser-Busch’s 1982 tender offer for Campbell Taggart (Cornell & Sirri, 1992) In addition, using a previously unexplored data source, illegal insider trading detected and prosecuted by the Securities and Exchange Commission, Meulbroek’s (1992) analysis suggests that insider trading increases stock price accuracy by moving stock prices significantly and the abnormal price movement on insider trading days is 40 to 50% of the subsequent price reaction to the public announcement of the inside information Furthermore, by examining detailed records of Boesky’s trade, Chakravarty and McConnell (1997) find a positive and significant relation between Boesky’s trades and stock price changes (During the three-month period prior to the acquisition of Carnation by Nestlé in 1984, Ivan Boesky purchased 1.7 million shares of Carnation’s stock on the basis of illegally obtained inside information.) The significant impact of insider trading to stock price is considered as a reason why insider trading is illegal In conclusion, a problem of EMH is asymmetric information The managers will know better about the current activities or business results of firms so it leads to adverse selection for investors when trading shares Therefore, the EMH theory may be not right in this situation Furthermore, the technologies have changed very much It means that adjusting price can take shorter time than in the past due to the development of technologies As the results, chances for investors to earn abnormal return are very low Like in developing and emerging markets, their systems using in Financial Management (APC 308) – May 2015 stock exchanges are still low development compare to developed countries Therefore, investors may find higher chance to gain excess returns when investing in developing and emerging markets That is why most researches above show that stock markets are not in semi-strong form market efficiency For strong-form market efficiency, this involves to inside trading – an illegal trading activities, so it is very hard for researches to have the data for making tests Financial Management (APC 308) – May 2015 References Alexakis, C., Patra, T & Poshakwale, S., 2010 Predictability of stock returns using financial statement information: evidence on semi-strong efficiency of emerging Greek stock market Applied Financial Economics , 20(16), pp 1321-1326 Becker, J., 1978 General Proof of Modigliani-Miller Propositions I and II using ParameterPreference Theory The Journal of Financial and Quantitative Analysis, 13(1), pp 65-69 Brealey, R A., Myers, S C & Allen, F., 2011 Principles of Corporate Finance 10 ed s.l.:McGraw-Hill/Irwin Brock, W., Lakonishok, J & LeBaron, B., 1992 Simple Technical Trading Rules and the Stochastic Properties of Stock Returns Journal Of Finance, 47(5), pp 1731-1764 Chakravarty, S & McConnell, J J., 1997 An Analysis of Prices, Bid/Ask Spreads, and Bid and Ask Depths Surrounding Ivan Boesky’s Illegal Trading in Carnation’s Stock Financial Management, 26(2), pp 18-34 Chena, Y.-H & Fraser, P., 2010 What drives stock prices? Fundamentals, bubbles and investor behaviour Applied Financial Economics, 20(18), pp 1461-1477 Chowdhury, A & Chowdhury, S P., 2010 Impact of capital structure on firm’s value: Evidence from Bangladesh Business and Economic Horizons , 3(1), pp 111-122 Cornell, B & Sirri, E R., 1992 The Reaction of Investors and Stock Prices to Insider Trading Journal of Finance, Volume 47, pp 1031-1059 Dang, V A., 2013 Testing capital structure theories using error correction models: evidence from the UK, France and Germany Applied Economics, 45(2), pp 171-190 David, D F & Olorunfemi, 2., 2010 Capital Structure and Corporate Performance in Nigeria Petroleum Industry: Panel Data Analysis Journal of Mathematics and Statistics, 6(2), pp 168173 Dua, V P H & Mittal, R., 2010 IMPACT OF BUY-BACK OF SHARES ON STOCK PRICES IN INDIA: AN EMPIRICAL TESTING OF STOCK MARKET EFFICIENCY IN ITS SEMISTRONG FORM Pranjana: The Journal Of Management Awareness, 13(1), pp 59-71 Financial Management (APC 308) – May 2015 10 Fama, E F., 1970 Efficient Capital Markets: A Review of Theory and Empirical Work The Journal of Finance, 25(2), pp 383-417 Fosberg, R H., 2010 A Test Of The M&M Capital Structure Theories Journal of Business & Economics Research, 8(4), pp 23-28 Grant, J L., 2003 Foundations of Economic Value Added 2nd ed s.l.:John Wiley & Sons Howells, P & Bain, K., 2007 Financial markets and institutions 5th ed London: Peason Education Limited Hussin, B M., Ahmed, A D & Ying, T C., 2010 Semi-Strong Form Efficiency: Market Reaction to Dividend and Earnings Announcements in Malaysian Stock Exchange IUP Journal Of Applied Finance, 16(5), pp 36-60 JAYAKUMAR, G., THOMAS, B & ALI, S., 2012 Weak Form Efficiency: Indian Stock Market SCMS Journal Of Indian Management, 9(4), pp 80-95 Jinlan, N & Miaomiao, Y., 2008 Testing the Pecking-order Theory: Evidence from Chinese Listed Companies Chinese Economy, 41(1), pp 97-113 Kapusuzoglu, A., 2013 Testing Weak Form Market Efficiency on the Istanbul Stock Exchange (ISE) International Journal of Business Management & Economic Research , 4(2), pp 700-705 Khan, M Y & Jain, P K., 2007 Financial Management: Text, Problems and Cases s.l.:Tata McGraw-Hill Education Mallikarjunappa, T & Dsouza, J J., 2013 A Study of Semi-Strong Form of Market Efficiency of Indian Stock Market Amity Global Business Review , Volume 8, pp 60-68 Mandal, N & Rao, N K., 2010 Semi-Strong Form of Indian Stock Market Efficiency: An Empirical Study Vilakshan: The XIMB Journal Of Management , 7(1), pp 1-16 Marimuthu, M., 2009 Corporate Restructuring, Firm Characteristics International Journal of Business and Management, 4(1), pp 123-131 Metghalchi, M., Marcucci, J & Chang, Y.-H., 2012 Are moving average trading rules profitable? Evidence from the European stock markets Applied Economics , 44(12), pp 1539-1559 Financial Management (APC 308) – May 2015 11 Meulbroek, L K., 1992 An Empirical Analysis of Illegal Insider Trading Journal Of Finance , 47(5), pp 1661-1699 Milionis, A & Moschos, D., 2000 On the validity of the weak-form efficient markets hypothesis applied to the London stock exchange: comment APPLIED ECONOMICS LETTERS, 7(7), pp 419-421 Miller, F M a M H., 1963 Corporate Income Taxes and the Cost of Capital: A Correction The American Economic Review, 53(3), pp 433-443 Mishra, P K., 2013 Random Walk Behaviour : Indian Equity Market SCMS Journal Of Indian Management, 10(3), pp 55-66 Mobarek, A & Fiorante, A., 2014 The prospects of BRIC countries: Testing weak-form market efficiency Research in International Business and Finance, Volume 30, pp 217-232 Modigliani, F & Miller, M H., 1958 THE COST OF CAPITAL, CORPORATION FINANCE AND THE THEORY OF INVESTMIENT The American Economic Review, 48(3), pp 261-297 Moosa, I & Li, L., 2011 Technical and Fundamental Trading in the Chinese Stock Market: Evidence Based on Time-Series and Panel Data Emerging Markets Finance & Trade, Volume 47, pp 23-31 MUNIR, Q., CHING, K S., FUROUKA, F & MANSUR, K., 2012 THE EFFICIENT MARKET HYPOTHESIS REVISITED: EVIDENCE FROM THE FIVE SMALL OPEN ASEAN STOCK MARKETS Singapore Economic Review, 57(3), pp 1-12 Myers, S C & Majluf, N S., 1984 Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have Journal of Financial Economics, 13(2), pp 187221 Olweny, T., 2012 Dividend Announcement and Firm Value: A Test of Semi Strong Form of Efficiency at the Nairobi Stock Exchange Asian Social Science, 8(1), pp 161-175 Pandey, I., 2009 Financial Management 9th ed s.l.:Vikas Publishing House Pvt Ltd Pan, M.-S., 2007 Permanent and transitory components of earnings, dividends, and stock prices The Quarterly Review of Economics and Finance, Volume 47, pp 535-549 Financial Management (APC 308) – May 2015 12 Robinson, J., 2005 STOCK PRICE BEHAVIOUR IN EMERGING MARKETS: TESTS FOR WEAK FORM MARKET EFFICIENCY ON THE JAMAICA STOCK EXCHANGE Social & Economic Studies, 54(2), pp 51-69 Rocca, M L., Rocca, T L & Gerace, D., 2008 A survey of the relation between capital structure and corporate strategy Australasian Accounting, Business and Finance Journal, 2(2), pp 1-18 Sheeba, K., 2011 Financial Management s.l.:Pearson Education in South Asia Smith, G., 2007 Random walks in Middle Eastern stock markets Applied Financial Economics, 17(7), pp 587-596 Stiglitz, J E., 1969 Re-Examination of the Modigliani- Miller Theorem The American Economic Review, 59(5), pp 784-793 The University of Sunderland, 2012 Financial Management 2nd ed s.l.:The University of Sunderland Torun, M & Kurt, S., 2007 TESTING WEAK AND SEMI-STRONG FORM EFFICIENCY OF STOCK EXCHANGES IN EUROPEAN MONETARY UNION COUNTRIES: PANEL DATA CAUSALITY AND CO-INTEGRATION ANALYSIS s.l., s.n Velinova, A & Chen, W., 2015 Do stock prices reflect their fundamentals? New evidence in the aftermath of the financial crisis Journal of Economics and Business, Volume 80, pp 1-20 Watson, D & Head, A., 2013 Corporate Finance: Principles and Practice 6th ed s.l.:Person Education Watson, R & Wilson, N., 2002 Small and Medium Size Enterprise Financing: A Note on Some of the Empirical Implications of a Pecking Order Journal of Business Finance & Accounting, 29(1), pp 557-578 Yuan, T & Gupta, R., 2014 Chinese Lunar New Year effect in Asian stock markets, 1999–2012 The Quarterly Review of Economics and Finance, 54(4), p 529–537 Yu, H., Nartea, G V., Gan, C & Yao, L J., 2013 Predictive ability and profitability of simple technical trading rules: Recent evidence from Southeast Asian stock markets International Review Of Economics And Finance, Volume 25, pp 356-371 Financial Management (APC 308) – May 2015 13 Appendixes Appendix – Assumptions of traditional view There are some assumptions that traditional view theory follow: No taxes exist, either at personal or corporate level Companies have two choices of finance: perpetual debt finance and ordinary equity share Companies can change their capital structure without incurring either issue or redemption costs Any increase (decrease) in debt finance is accompanied by simultaneous decrease (increase) in equity finance of the same amount Companies pay out all distributable earnings as dividends The business risk associated with a company is constant over time Companies’ earnings and hence dividends not grow over time (Watson & Head, 2013) Appendix 2: Miller and Modigliani (I): the net income approach This argument in Miller and Modigliani (I): the net income approach can be explained with an example as follows: Option Option 500 shares, each $1 800 shares, each $1 $500 debt, r=8% $200 debt, r=8% ROA =12% ROA = 12% ROE = 16% ROE = 13% WACC = 0.5*16%+0.5*8% = 12% WACC = 0.8*13%+0.2% = 12% Financial Management (APC 308) – May 2015 14 ...Title page Financial Management APC 308 Banking Academy, Vietnam Submitted on 15 May, 2015 Prepared by: Quyet Thang Tran Student ID: 149080615/1 Financial Management (APC 308) – May 2015 i Table... Weak-form Semi-strong form Strong form References 10 Appendixes 14 Financial Management (APC 308) – May 2015 Part... tests Financial Management (APC 308) – May 2015 References Alexakis, C., Patra, T & Poshakwale, S., 2010 Predictability of stock returns using financial statement information: evidence on semi-strong