New Tests of Market Efficiency Using Fully Identifiable Equity Cash Flows

Abstract

Despite the fact that stock market efficiency has been tested in numerous studies and through several approaches, it is still not clear to what extent stock prices correctly reflect information. The inability to test whether stock prices correctly incorporate information stems from the infinite life of a corporation, which inhibits complete measurement of realized corporate cash flows. Using a unique dataset of publicly traded venture capital funds, we examine the relation between investor reaction to announcements of identifiable investments by funds and realized results of these investments. The advantage of our dataset is that these investments retain their original structure until fully realized. Our results indicate that, upon the announcement of investments, investors are able to properly forecast the eventual realizations of these investments and share prices reflect these forecasts.