Introduction

Efficient market hypothesis is widely accepted by academic community as a cornerstone of modern financial theory. Fama (1970) gives detailed definition of this theory and states that efficient market is a market that stock prices quickly and fully reflect all available and newly released information, where majority of participants are rational in their decision making process and where an investor is not able to outperform the market through any analyses, because of actual price of stock shows its intrinsic value. Naturally such revolutionary hypothesis did not occur suddenly. In 1990 Louis Bachelier in his "Theory of Speculation" paragraph gave definition of informational efficiency of the market. This study was not being developed until 1953 when Maurice Kendall who postulated that stock prices movement follow the random walk theory. Further enhancement of these studies associated with the name of Eugene Fama who gave comprehensive resume of efficient market hypothesis, as well as empirical evidences to support it and defined three form of efficient market: weak, semi-strong and strong in 1970 (Dimson and Mussavian, 1998). Later several different researches have been carried out by financial academics which continuously underpinned efficient market hypothesis. Consequently this theory began widely use by investors for investment decision making process. However only after two decades this hypothesis began less dominance in the market. Several crashes, changing economical situations revealed salient controversial criticisms of this hypothesis. Instead of testing limitations of three form of efficient market, the paper critically reviews major assumptions of this hypothesis. Because of instable nature of market, constantly changing conjuncture does not allow to accurately identify weather market experiences weak, semi-strong or strong form of efficiency. This paper has been divided into four sections. The first section of the paper will examine informational efficiency of market with the help of post-announcement drift study and newly released information publication research. The second section will describe if it is possible to predict stock prices movement and get excessive return through technical and fundamental analyses. The third section will discuss dominance of behavioural finance theory over efficient market hypothesis. The last section will investigate small firm effect over the market as one of the obvious argument against efficient market theory.

Informational Inefficiency. Although efficient market hypothesis is considered being is the very important theory for making corporate investment decisions it has major limitations that needs to be accounted for. Myriad researchers have been conducted by experts to reveal anomalies which associate with this hypothesis. Yet, there are a lot of proponents which insistently deny any drawback of this concept.

One of the striking implication concerning to efficient market hypothesis is about informational efficiency. Fama (1970) states that all known public information quickly and incessantly expressed in the stock prices. Lots of analyses have been carried out by researchers about how quickly stock prices reflect to public announcements of stock splits, dividend changes, corporate mergers, and such kind of different strongly influential information. In most cases were found that stock prices instantly responded to new information (Lynn A. Stout, 2003).

However, there are limits to how far the informational efficiency can be taken. Gilson and Kraakman (1984) exploration on this issue revealed that information is a costly resource. Another case is that obtaining certain kind of information, analyzing and understanding it is not as simple as it seen. Because it is known that market consists of different kinds of investors with different background knowledge on this inarticulate field. Exploration concludes that only small part of professional investors can acquire and correctly analyze existing information. In this case stock prices way of reflection of new information became different. Gilson and Kraakman (1984) conducted some research according to this issue and arrived at a result that very small well-informed part of professional market participants swift purchase of large quantity of stocks creates pressure on prices which make it increase. Consequently, this pressure drives less-informed part of investors act in the same way which in the result causes immediate movement of the stock prices.

On the other hand the case described above doesn't work without flawless. Because stock markets have a wide range of participants: from novice one to professional. Which means that not all of them competent or having enough knowledge to easily act in the agitated stock market. So what does it mean? Lynn A. Stout (2003) explains that it is very simple to interpret some kinds of information like dividend announcement, mergers, stock splits etc. But how about information that is very technical and complicated to interpret. In this case investigations revealed that stock prices gradually and imperfectly reflect this type of information, which in its turn gives opportunity to view market inefficiency. One comprehensive investigation according to delayed market responses to new information had been carried out by Bernard and Thomas (1989) and was about post-earnings-announcement-drift. It states that corporations positive or negative earning information is not correctly assess by investors. Therefore corporations experience abnormal positive or negative return over the subsequent months after announcement. Bernard and Thomas (1989) research encompasses period between1974-86 years and reveals noticeably abnormal positive/negative return appears in the first 60 days following to the earnings announcement. One issue also became clear from this research that post-announcement-drift changes depending upon firm size.

Another associated and noteworthy research related to the stock prices gradually and incomplete response to new information had been conducted by Chang and Suk (1998). Research shows that Securities Exchange Commission made section 16 filings accessible to all investors as soon as they got information from the insiders. The same information about after ten days was published in the Wall Street Journal's Insider Trading Spotlight column. Survey by Chang and Suk (1998) uncovered considerable price changes after publication of the same information in the Wall Street Journal. Which mean that only after ten days stock prices completely reflected new available information and displayed informational inefficiency of the securities market.

Returns unpredictability Inefficiency

Proponents of efficient market hypothesis enunciate that future movements of stock prices are unpredictable. Which display another one salient implication of hypothesis of efficient market. With the help of the random walk theory supporters of this concept try to explain that because of stock prices movement follow random path independently from its past price it is impossible to predict stock price's future direction. Additionally it is fruitless to use technical or fundamental analyses in order to predict future stock prices. However different kinds of studies which had been carried out on this issue revealed obvious results against market efficiency. Major accepted view by opponents of this hypothesis is that current price doesn't express true value of a stock. Some analyses need to carry out in order to find out its true value and profit from it. Bako and Sechel (2013) state that with the help of two analytical method - technical and fundamental - investors can predict future price movements of stocks and increase their earning yield. Also one issue need to be taken into account that speculative nature of the stock market makes investor's stock picking process complicated. That's why any investor has to make detailed technical and fundamental analyses before buying or selling stocks. Whereas Clarke and Gershon (2001) points out that conducting different analyses is a very costly process. So even though an investor who makes profit in this way has to reduce it’s profit by the amount of associated costs. As a result s/he will get trifling return. And of course if we consider the time consumed during this process, stress and nervousness related to analyzing data as a cost it becomes apparent that the whole process is worthless. But after getting depth into the process it displays different pattern and prove that it is inevitable and actual to conduct analyses. In this case technical and fundamental analyses will be analyzed separately. Generally technical analysis uses data which derives from the past performance of stock price in order to predict its future return. One of the detailed study according to technical analyses predictability of stock returns had been carried out in 1992 by Brock, Lakonishok and LeBaron. In the study it had been used only ordinary methods of technical analyses and considered transaction costs that are very small. One of the particular point of this study is that it analyzed 90 years daily data of Dow Jones Industrial Average from 1897 to 1986. Which in its turn shows that, how exploration widely conducted. Research shows that return signals getting from the Dow Jones data strongly support technical analyzes predictability of stock returns. In the same time with technical analyses fundamental analyses also have predictability power of stock returns which again opposed by efficient market hypothesis. Unlike technical analysis fundamental analysis uses not only past performance of the stock price but other several economic indicators of stocks and companies by analyzing it's financial statement, annual report and etc. in order to predict future stock price. One of the noteworthy investigation related to fundamental analyses predictability power associated with the name of Jeffrey and Brian (1998). Covering the results that encompass the period during 1974-1988 the study apparently shows that portfolio which was established based upon the fundamental signals yielded 13,2 percent abnormal return during 1974-1985 and displaying very slight negative return during 1986-88. Another proven research of predictability of fundamental analysis had been provided by Jane and Stephen (1989). Investigation captures sample of financial statement information of the firms during 1965-1984. It had been divided into two stages. In the first stage data estimation for 1973 to 1977 (the years of employing investment strategy)are used from 1965-1972. But in the second stage data estimation for 1978-1983 (the years of employing investment strategy) are used 1973-1977. The study demonstrates that thoroughly utilizing value-measures of financial statement with the help of the fundamental analysis enables easily discern some fundamentals which are not expressed in the stock price. Which in its turn means that the stock price undervalued. Hence, gaining abnormal returns in the future from these stocks are realizable.

Behavioural Finance versus Efficient Market Hypothesis

Escalating contradictions between these two theories have become much more intensive in recent years. Several strong investigations resulted in favour of the behavioural finance theory of explaining stock price movements. Therefore began to widely use by investors to accomplish investment strategies instead of efficient market hypothesis. What made behavioural finance theory draw such an excessive attention from investors? What are the advantages of behavioural finance/in other word what limitations of efficient market hypothesis made investors turn against it ? Being a fundamental theory of classical finance efficient market hypothesis states that all market participants are rational in their decision making process and assumes that existence of irrational participants does not impact effectiveness of market. Because quick movements of rational traders expel irrational investors from the market thus brings market to equilibrium (Stout, 2003). However, there is an inconsistency with this argument. Because during the several crashes this assumption failed to elucidate sharp up and downward trends in stocks prices. For instance, Malcolm and Jeffrey (2007) affirm that classical finance theory faced with considerable difficulty while trying to explain dramatic level of stock prices during the crashes which occurred in 1960, 1970, 1987 and 1990. The result is that not all investors in the market act logically and rationally. The reason is that especially psychological factors inherent to human nature impel investors to be irrational. Anastasios, et al. (2012) states that being a dominated theory for investing behavioural finance appeared to be not only a new model but also the one which disproved the financial theories that have prevailed in the market for a long time. Behavioural finance theory distinguishes two types of market participant: rational investors and noise traders. Rational investors always make logical investment decisions according to relevant information, while noise traders subject to investor sentiment and make irrational decisions in the market. Daniel, Hirshleifer, and Subrahmanyam (1998) enunciate that because of investor sentiment market participants tend to over react to unexpected and dramatic information and under react to announcement, so affecting stock prices. Several empirical evidences related to these issues strongly comply with it. De Bondt and Thaler (1985) painstakingly scrutinized overreaction phenomenon over stock prices and got significant results. The study included monthly return data from 1926 to 1982. According to some calculations of stocks it was formed winner and looser portfolio. After conducting some more assessments the study revealed stunning results. Loser portfolios got 19.6% abnormal positive return 36 months after the formation. However, winner portfolios got 5.0% abnormal negative return. Nicholas, Andrei and Robert (1998) explain that the reason of such anomaly is that stocks which experience poor performance in the past period tend to outperform the market in the long term while stocks which display superior performance in the past period tend to underperform the market in the following period. The outcomes of this investigation are widely comply with the overreaction phenomenon. Thus display sharp violation efficient market hypothesis. How about under reaction phenomenon? Do the findings validate it and display market inefficiency? A sufficient number of investigations carried out to answer this kind of questions. One of the praiseworthy research associates with the names of Louis, Narasimhan and Josef (1997). The study encompasses sample data from January 1977 to January 1993. Taken stocks then assigned to established portfolios which ranked from one to ten deciles. The established portfolios have been subjected to earning announcement of the firms. Result shows that high past return stocks and stocks which experienced positive earnings announcement tend to outperform the worst past performance stocks and stocks which experienced negative earnings announcement. The findings unearthed noticeable evidences consistent with under reaction of stock prices.

Small firm effect: next anomaly of efficient market hypothesis

As a so-called size effect in the market small firm effect is one of the particular irregularity of efficient market hypothesis. Lots of findings revealed that on a risk adjusted basis small firms tend to outperform large firms and yield excessive return. However, proponents of efficient market hypothesis want to explain that such occurrence associated with using inappropriate model of risk measurement. For instance, according to Malkiel (1987) it is very hard to assume that such abnormal behaviour is a sign of market inefficiency. It may be occurred due to inadequacies of capital asset pricing model used to measure risk. Keim (1983) support this point by emphasizing that efficient markets that use capital asset pricing model are unable to explain small firms abnormal returns. However, there is an inconsistency with such approach. Because blaming only pricing model for dismissing some risk factors is inappropriate. Keim (1983) explains that small firms get excessive abnormal return in January in each year and average or small positive return in remaining months, therefore risk is unable to explain such tendency alone. Myriad investigated studies constantly validated small firm effect in the market, as well as market inefficiency. One of the remarkable research related to small firm effect conducted by Banz (1981). The sample stocks cover the period between 1926 and 1975 that listed in New York Stock Exchange. Monthly return files used in order to get monthly information of sample stocks. The study revealed that on a risk adjusted basis the fifty small firms outperformed the fifty large firms on average 1% each observed month. Klein and Bawa (1977) explain such abnormal return by stating that available information about small firms are less than large firms, that make them more risky and neglected by investors. Therefore small stocks undergo excessive high return. However Banz (1981) states that such explanation is just conjecture and is not enough to explain such phenomenon. No any precise explanation of small firm effect has been put forward until now, therefore this phenomenon still exists as an irrefutable argument against market efficiency.

Conclusion

The objective of this paper was to determine whether securities markets reflect the main features of efficient market hypothesis or the opposite occurs. In order to analyze these points this paper has looked at the results of different case studies and comprehensive investigations presented by academic community. From these empirical evidences it can be clearly seen that in practice markets display ineffective performance rather than effective one. Results showed that noticeable delay happens in the stock prices reflection of newly announced information which contradicts the assumption that stock prices quickly and immediately reflect new information. The next principal limitation of this hypothesis is about predictability of stock price. Analyses revealed that with the help of technical and fundamental analyses it is possible to predict stock prices movement in the future and get excess return. One of the main drawback of efficient market hypothesis appeared after the emergence of behavioural finance theory. This theory proved that stock prices movement is subject to investor sentiment and may over or under reacted by investors. Which destroyed the assumption of efficient market hypothesis about all investors rationally act in their decision-making process. The subsequent limitation of efficient market hypothesis revealed by examining small firms affects over the market. Efficient market hypothesis still unable to explain continuing abnormal return associated with small firms. Although these evidences show inefficient performance of the markets, it can be efficient in some way. However it became clear that efficient market hypothesis faced with significant loss of faith among investors due to substantial changes occurred in recent decades. Nowadays it is very crucial to set up new financial theory that will meet the requirements of current market and economical conjuncture.

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