The Inefficient Capital Market and the Implications of the "Incomplete Revelation Hypothesis"
Meier, Joseph A.
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The Efficient Markets Hypothesis (EMH) has spurned debate in academia since the theory was published. The seminal work of Fama (1970) on the EMH states that market prices fully reflect all publicly available information. Bloomfield's (2002) "Incomplete Revelation Hypothesis" (IRH) asserts that statistics that are more costly to extract from public data are less completely revealed in market prices. This alternative to the EMH can account for many of the phenomena that are central to financial reporting but inconsistent with the EMH. The IRH also clarifies that informational inefficiency does not necessarily apply to a trader's level of irrationality. In addition, the IRH suggests that extraction costs viable and must be recognized. Here, it is hypothesized that Bloomfield's IRH model can (a) link price reactions and extraction costs, (b) elicit models for return predictability (drift), (c) provide tools for financial analysis and investment practice, (d) better characterize a managers' financial reporting behavior, and (e) recognize financial reporting regulation and its effects.