正确答案：(b) The term ‘Efficient Market Hypothesis’ (EMH) refers to the view that share prices fully and fairly reflect all relevant availableinformation1. There are other kinds of capital market efficiency, such as operational efficiency (meaning that transaction costsare low enough not to discourage investors from buying and selling shares), but it is pricing efficiency that is especiallyimportant in financial management.Research has been carried out to discover whether capital markets are weak form. efficient (share prices reflect all past orhistoric information), semi-strong form. efficient (share prices reflect all publicly available information, including pastinformation), or strong form. efficient (share prices reflect all information, whether publicly available or not). This research hasshown that well-developed capital markets are weak form. efficient, so that it is not possible to generate abnormal profits bystudying and analysing past information, such as historic share price movements. This research has also shown thatwell-developed capital markets are semi-strong form. efficient, so that it is not possible to generate abnormal profits by studyingpublicly available information such as company financial statements or press releases. Capital markets are not strong formefficient, since it is possible to use insider information to buy and sell shares for profit.If a stock market has been found to be semi-strong form. efficient, it means that research has shown that share prices on themarket respond quickly and accurately to new information as it arrives on the market. The share price of a company quicklyresponds if new information relating to that company is released. The share prices quoted on a stock exchange are thereforealways fair prices, reflecting all information about a company that is relevant to buying and selling. The share price will factorin past company performance, expected company performance, the quality of the management team, the way the companymight respond to changes in the economic environment such as a rise in interest rate, and so on.There are a number of implications for a company of its stock market being semi-strong form. efficient. If it is thinking aboutacquiring another company, the market value of the potential target company will be a fair one, since there are no bargainsto be found in an efficient market as a result of shares being undervalued. The managers of the company should focus onmaking decisions that increase shareholder wealth, since the market will recognise the good decisions they are making andthe share price will increase accordingly. Manipulating accounting information, such as ‘window dressing’ annual financialstatements, will not be effective, as the share price will reflect the underlying ‘fundamentals’ of the company’s businessoperations and will be unresponsive to cosmetic changes. It has also been argued that, if a stock market is efficient, the timingof new issues of equity will be immaterial, as the price paid for the new equity will always be a fair one.