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Market efficiency and the global debt crisis: is debt relief really necessary?

If we look at the global debt crisis the main problem is the lack of transparency among banks and reporting standard making it difficult to make a good comparison. The Efficient Market Hypothesis (EMH) was developed to explain different types of market efficiency. In the economic theory the Efficient Market Hypothesis says that in a financial market, where we know everything the market is perfect and complete. In such a perfect and homogenous world, as Modigliani and Miller (1961) like to describe it, the only factors that can impact the future value of a company are the investments and its return on its assets.In the recent paper “The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?” by Ray Ball of the University of Chicago the current crisis in relation to the EMH is further discussed.

But the question still remains if we can defuse the global debt crisis with debt relief? In the financial markets there are different forces at play and different theories available explaining part of the working of financial markets. Modigliani and Miller (1958, 1961) have already described the situation of perfect capital markets where there are no market imperfections. In the real world there are many market imperfections that influence the efficiency of financial markets. Therefore there are no arbitrage opportunities and there is no information asymmetry between different investors. The past decades due to rapid technological development such as the wide use of internet, information has become more widely and faster available.

Technological developments such internet have made our lives easier as, for example we no longer need social circles to meet people; we can just create a new social circle online with either Facebook, Myspace or in the case we look for a new love using online dating sites we have found on the internet. An example where we can both combine market efficiency and online dating site example is the share price of Meetic, the largest online dating portal in Europe that is listed on the Paris Euronext stock exchange, that gets both a lot of traffic via Google Search and via direct traffic.

We can see the Google.fr ranking the site has, so it is publically available information as well as the potential client base they have as the amount of people logging into the Meetic sites across Europe. Additionally we can look into the retention rate (how long members stay as members) and activity rate of users (how many messages an average member sends), which we can find in the annual reports. Thus with the publically available information we can calculate the actual market value of the dating site Meetic. This has made many investors more knowledgeable and better informed about financial news hitting the markets.

As explained with the above example the key to understanding the true value of the market valuation of a company and its debt (with its bankruptcy/default risk) included is transparency. I personally strongly encourage companies to become more transparent so we can actually avoid the discussion of mutual debt relief which can only temporarily solve the problem. The best solution to defusing the global debt crisis is to promote more transparency in financial reporting so we can better assess the risks a company or country has. And in case we have tracked down holes in a company’s pockets, we can easily mend these pockets so financial distress can be avoided. So, I urge all companies around the world as well as countries to become more transparent! – http://siterencontregratuit.be/