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The effectiveness of the stock markets involves the investigation of how much, how fast, and how accurately the available data is incorporated into security prices. Financial economists classify the efficiency of capital markets into different categories based on the meaning of available information on security prices. Empirical evidence from the study of the 1912 sinking Titanic ship and its effects to the International Mercantile Marine Company, its parent firm, is constructive in the perception of the efficiency of capital markets. The effectiveness of the U.S. stock markets is, therefore, analyzed through the study of the theories in the economics literature about the Titanic.
The sinking of the Titanic ship in 1912 had a great impact on the company that constructed the ship, a representation of the whole economy. The tumbling of the liner may be regarded as a crashing of the stock of the company and its recovery has not been less dramatic than that of the rest of the market. The formal efforts of the IMM Company after the sinking of the Titanic brings an idea of a strong capital market of the United States as a legitimately debatable issue. In many ways, the existing culture of the U.S. acts as if financial analysts proved the state of the market several decades ago. Sensibly, a gulf has developed between the current economics literature and the persistent conception regarding market efficiency in the legal culture (Khanna, 1998).
Many eminent theorists perceive pricing influences not to be associated with rational expectations about asset values. Alternative models developed by scholars suggest that prices make significant departures from the asset values, which can be related to the Titanic. The IMM, having been incorporated under the laws of New Jersey in 1893, had the prices of its asset highly volatile. The management of the publicly traded company was changed in 1902 by the certificate of amended incorporation; a sign of an efficient capital market. The highly volatile company invested in three huge ships because of the encouraging efficient capital markets. The Titanic vessel was among the three modern ships (Khanna, 1998).
The volatility of the IMM Company is indicated when the Titanic ship almost rammed the American Liner, New York, and when it finally strikes a gigantic iceberg that leads to the sinking. Despite the fact that the company that managed the Titanic changed its name from International Navigation Company to International Mercantile Marine, the company still perceived all the available information in precisely the same manner. The capital market is regarded efficient as indicated when the IMM Company was not able to determine the precise value of the vessel after the calamity. Financial analysts approximated the net worth of the tumbling ship as per the returns on the corporation and the preferred stock at the time the calamity occurred (Khanna, 1998).
After the unfortunate incidence that made news headlines, information on the cost of the Titanic, insurance cost, and the net loss was readily available to assist in the market value calculations. For instance, the procedure used by a financial analyst in the estimation entirely relied on information from the U.S. market stock. The capital market of the U.S. was, consequently, correctly tested by the sinking of the Titanic Ship in 1912. The availability of information after the calamity clearly tested the U.S. capital markets as efficient. A test for market efficiency is also based on price changes close to an event. Apparently, the merger of two companies involves the release of public information to be used by lawyers and investors as illustrated.
Before the acquisition, stock prices goes up, indicating an act of dishonesty. The early move however, is an indication of strong market efficiency (Goetzmann, 2016).
An efficient capital market is tested when a research on the investment in a market is carried out, and the results reveal that no single investor attains greater profitability or loss than other investors with the same amount of invested funds. An efficient market hypothesis requires equality in the sharing of profits due to the aspect of equal sharing of information. The incidence of the sinking of the Titanic reveals the efficiency of the state of the capital markets in America. Information from a journal on the untold story of the Titanic illustrates that the loss in the stock value was steady with the average loss to the company in charge of the Titanic vessel, the parent company of the Titanic (Goetzmann, 2016).
As illustrated, market participants are obliged to equal possession of information; thus, they can only achieve identical returns. According to the journal, the procedure in the calculation of the impact of the Titanic sinking on the market value is a test that apparently qualifies to ascertain the competence of capital markets of the United States of America.
An efficient capital market is composed of investors who are of equal mutual relation. No investor is entitled to beat the market. An efficient capital market is also defined by the availability and accuracy of information about the securities and their prices. The calamity that hit the Titanic ship in 1912 was a chance to determine the efficiency of the Capital markets of America during the century. Information obtained from the study is significant enough to be used in the current investment community.
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