Market efficiency with costly information

Charles M.C. Lee

Chapter 19 in Handbook on the Financial Reporting Environment, 2025, pp 375-387 from Edward Elgar Publishing

Abstract: Although market efficiency remains a polarizing topic among academics, both the focus and the tone of the discourse have changed over time. Whereas early research tended to frame market efficiency as a yes-or-no debate, most recent studies acknowledge the impossibility of fully efficient markets and focus instead on factors that affect the timely incorporation of information into price. In this article, I discuss the central economic tensions that affect market efficiency and explain why our evolving understanding of this subject is important to market-related professionals. My threefold goal is to help readers: (a) understand the most important arguments in the EMH controversy; (b) arrive at a common-sense framework for approaching this subject; and (c) consider the implications of this framework for their personal investment plans and professional aspirations (as a practitioner or an academic in a market-related field).

Keywords: Market efficiency; Information costs; Active investors; Limits to arbitrage; Return predictability; Asset pricing; Behavioral finance (search for similar items in EconPapers)
Date: 2025
ISBN: 9781800888678
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