Do extreme market value ratios mean that the market is informationally inefficient? A study of the Warsaw Stock Exchange

Karasiński Jacek () and Zduńczak Patryk ()
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Karasiński Jacek: Department of the Financial Systems of the Economy, Faculty of Management, University of Warsaw, Poland
Zduńczak Patryk: Faculty of Management, University of Warsaw, Poland

Journal of Economics and Management, 2021, vol. 43, issue 1, 206-224

Abstract: Aim/purpose – The aim of this paper is to verify whether extremely high values of market value ratios are the symptoms of informational inefficiency of the market in a weak form. The authors intend to examine whether these phenomena co-occur with each other. Design/methodology/approach – Following Bachelier’s strict random walk model, we quantified a weak-form informational market efficiency with the use of the percentage of normality tests in stock returns run (Expanded Shapiro–Wilk, D’Agostino-Pearson and Jarque–Bera), which indicate that the analyzed distribution is normal (a null hypothesis cannot be rejected). The empirical study was based on the comparison of the market value ratios (P/E and P/BV) and the informational efficiency measure at the level of particular companies, listed on the Main Market and NewConnect of the Warsaw Stock Exchange, and grouped into eight sectors. In order to do this, we analyzed scatterplots, descriptive statistics, Pearson’s and Spearman’s rank correlation coefficients. The dataset covered 214 companies (based on the assumptions made) in the period from 2016, December 31 to 2020, March 23. Findings – Results obtained indicated that, in most cases, the extremely high values of market value ratios did not co-occur with market inefficiency. Hence, the outstandingly high market value ratios do not have to be the symptoms of market inefficiency. Research implications/limitations – Following a common belief shared in the industry, but still not examined yet, this study examines the possible co-occurrence of extremely high market valuation and market inefficiency, but does not exploit it fully. The authors encourage other researchers, especially, to apply other market value ratios and to come up with their own ideas for market efficiency proxies. What is more, this study has been conducted on a relatively small market, thus the conclusions drawn from the study on the WSE should be tested on other, more developed markets. Originality/value/contribution – According to the authors’ knowledge, this study is one of the first trying to examine if the extremely high market value ratios are the symptoms of the informational inefficiency of the market.

Keywords: efficient market hypothesis; weak-form efficiency; market value ratios; stock markets; random walk (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:jecman:v:43:y:2021:i:1:p:206-224:n:18

DOI: 10.22367/jem.2021.43.10

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