Blog - Investing Notes

August 15, 2007 - Do Finance Professors Believe in Market Efficiency?

Do the experts who arguably should have the most informed opinions, finance professors, believe that the U.S. stock market is efficient? Do they invest in accordance with their beliefs? In their August 2007 paper entitled "Market Efficiency and Its Importance to Individual Investors – Surveying the Experts", James Doran, David Peterson and Colby Wright seek to answer these questions via an email-initiated electronic survey of over 4,000 finance professors at accredited U.S. universities and colleges. Using data provided by 642 qualified respondents, they conclude that:

• Finance professors tend to believe that the U.S. stock market is weakly to semi-strongly efficient. Specifically,
  • Weak: 8% (59%) generally agree (disagree) that it is possible to predict future stock returns using only past returns.
  • Semi-strong: the sample is largely neutral but leaning toward agreement that it is not possible to predict future returns using only past returns and publicly available information.
  • Strong: 57% (10%) generally agree (disagree) that it is possible to predict future returns using past returns, public information and private information.
• Those who specialize in market efficiency tend to believe a little less strongly in efficiency than does the overall sample.
• 18% (42%) of the sample generally agree (disagree) that their investing goal is to beat the market, implying that the overall sample largely accepts semi-strong market efficiency. Specifically,
  • 10% generally accept market efficiency but still try to beat the market.
  • 12% generally reject market efficiency but still do not try to beat the market.
  • 15% generally reject market efficiency and do try to beat the market.
  • 27% generally accept market efficiency and do not try to beat the market.
  • The rest are noncommittal on either market efficiency or investment goals.
• Investing behavior varies somewhat by specialty:
  • The investing behavior of those who specialize in market efficiency is much like that of the overall sample.
  • Those specializing in behavioral finance and derivatives tend to invest more actively.
  • Those specializing in fields less related to market efficiency (capital structure and corporate governance) tend to invest much more passively.
• The primary driver of a finance professor’s tendency to invest actively is confidence in personal ability to outperform, regardless of belief about market efficiency.

The following table, taken from the paper, sorts respondents based on whether they invest to beat the market and based on their belief in market efficiency (average response to the three statements of belief regarding weak, semi-strong and strong efficiency). Response scales for all statements are 1 (strongly agree) to 7 (strongly disagree). Gray (black) highlighting indicates respondents whose investment goals match (do not match) beliefs in market efficiency. The table shows that about 22% of these experts exhibit dissonance between investing goals and self-reported beliefs regarding market efficiency.

In summary, finance professors generally reject the value of technical analysis and mostly reject the value of public information in predicting stock returns, but they accept the importance of private information. However, about one fifth of them adopt investing goals that disregard their stated market efficiency beliefs.

As noted in our blog entry of 4/17/07, which summarizes other results from the same survey, it would be interesting to know whether finance professors who try to beat the market succeed.

For related research, see Blog Synthesis: The Wisdom of Analysts, Experts and Gurus.