Efficient Market Theory: A Contradiction of Terms

Efficient Market Theory: A Contradiction of Terms <b>Abstract</b> According to the Efficient Market Theory, it should be extremely difficult for an investor to develop a "system" that consistently selects stocks that exhibit higher than normal returns over a period of time. It should also not be possible for a company to "cook the books" to misrepresent the value of stocks and bonds. An analysis of current literature, however, indicates that companies can and …

…because the system adjusted the stock price to reflect the actual value of AOL stock. The previously high price did indicate the value of the stock based on the accounting practices then in effect, however misleading they may have been. At the moment that the company decided to change the accounting practices, the value of the stock then was corrected to the actual lower value. This could, reasonably, be viewed as a repudiation of EMT.