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Abstract 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 do beat the system and manipulate information to make stocks appear to perform above average An understanding of the underlying inefficient human factors in the market equation is necessary in order to account for the flaw in Efficient Market Theory Efficient Market Theory A Contradiction of Terms Efficient Market Theory EMT is based on the premise that given the efficiency of information technology and market dynamics the value of the normal investment stock at any given time accurately reflects the real value of that stock The price for a stock reflects its actual underlying value financial managers cannot time stock and bond sales to take advantage of insider information sales of stocks and bonds will not depress prices and companies cannot cook the books to artificially manipulate stock and bond prices However information technology and market dynamics are based upon the workings of ordinary people and diverse organizations neither of which are arguably efficient nor consistent Therefore we have the basic contradiction of EMT How can a theory based on objective mechanical efficiency hold up when applied to subjective human inefficiency As a case in point America Online AOL offers a classic example of how investors can be misled by a company that uses the market system against itself AOL up until early November of this year used an accounting system that effectively cooked their books and provided misleading figures on the companys performance Instead of accounting for its promotion expenses and costs as a regular expense as normal companies do AOL spread them over two years
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