When activist investors want to connect poor Cyberpunk rollout with its stock price, I am reminded of the 24 year initial jail sentence of Jamie Oli, the ex-tax accountant from Dynegy. Activists may feel they can connect stock price fall with perceived causes, or cause with effect, the mathematics of causality, unfortunately, is not linear.
If there is something bigger than a stock market crash or a meteor hurtling down on earth, it's the death of an economic theory. After all, if the economics is right, we can still detect and divert a catastrophe. Economics is why we think we live today and is what we think will be the reason generations will live tomorrow.
But unfortunately, good theories last for a generation after which they are thrashed or rehashed. Scientifically the Grand Unification Theory remains elusive and somewhere the construction and reconstruction attempts have pushed scientists to recreate the laboratory Big Bang.
The new emerging theories, we believe, will unify science and emerging economic theories, which are much broader in their scope. So here we are with the young, ready to bury the old. The Efficient Market Hypothesis is one such theory that has reached burial ground after nearly half a century of existence. And like always markets are ahead of the event. The US markets have given many cues starting in 2000 that Eugene Fama's market hypothesis might be deficient.
But what is so important about this theory that even its marginalizing deserves such attention globally, in India, and in other emerging markets? EMH makes many assumptions. First, it says that supernormal returns are not possible. Second, it says, news that matters gets discounted in the price.
This also means that anything which can affect the price is new information. This extrapolated assumption has justified the "Impact Analysis" industry i.e. how new news will affect prices. So, first, there is a multi-billion dollar information industry and then another multi-billion-dollar industry that studies the impact of the news on the asset prices (popularly known now as the stock market).
The latter industry, what used to be called 'Equity Research' is under tremendous stress in America. There are studies written to revive the industry. The crash of 2000 has questioned the accountability of research and how to make Wall Street pay for research. The best Wall Street research firm gives an accuracy of 34 percent with two open recommendations a week. The stresses are building up especially with Sarbanes-Oxley 2002 corporate governance act tightening around the financial intermediaries.
Overall, the industry is figuring out a revenue model for the inaccurate, unaccountable work, which takes away a sizeable part of the already shrinking market commission. Order flows are moving to electronic systems, as clients don't want research that does not work. There is also a joke about selling 'Equity Research' by passing it on with a 50 dollar note inside. "Some motivation", they call it to open the glossy inconsequential pages.
And if this internal struggle was not enough, we have questions being raised about huge bonuses, and bestsellers written, rightfully asking, "Where are the customer yachts?"
We also have the famous Jamie Oli case, an ex-tax accountant with Dynegy, an energy trading firm. The judge presiding over the case had to rework his economics after Oli's lawyers proved that it was tough to quantify the impact of news released by Oli on the price fall. American law firms have proved in their recently published research that market prices are far from efficient and sentencing someone to 24 years of prison on a flawed economic hypothesis is harsh. Recent research papers have also gone ahead and proved that New York Stock Exchange prices are inefficient. Oli finally got a reduced sentence of six years.