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A METHODOLOGY FOR DETECTING AN IMPROVED INFORMATION SYSTEM IN AN EFFICIENT MARKET
Abstract
This study develops a methodology to detect an improvement to an information system in the context of an efficient market. Current prices are viewed as predictors of future prices. An improvement to an information system is defined as a reduction of the forecast error associated with these price predictions. A distinction is made between an efficient market as used in the finance literature and an efficient allocation of resources within an economy. This study assumes that all available information is instantly impounded in the price of a security. It is not concerned with the issue of how much information should be produced in order to correctly allocate resources. The issue is simply to determine when a change to an information system actually improves the information that investors use to make price estimates. The analysis results in empirically testable hypotheses that can be used to detect the market's reactions to an improved information system. Previous studies have attempted to detect an improvement to an information system from the viewpoint of an increase in the efficiency of the market. In this study it is assumed that the market is efficient both before and after an improvement. The thrust of this paper is that there are detectable market effects to an improved information system in an efficient market. An improved information system will result in observable price and volume effects but forecast errors in an efficient market will be unbiased both before and after an improvement. In an improved information system these forecast errors will have a smaller variance.
Subject Area
Accounting
Recommended Citation
KARMON, DAVID JAMES, "A METHODOLOGY FOR DETECTING AN IMPROVED INFORMATION SYSTEM IN AN EFFICIENT MARKET" (1984). ETD collection for University of Nebraska-Lincoln. AAI8423801.
https://digitalcommons.unl.edu/dissertations/AAI8423801