Eugene Fama and his Security Prices Theory

4 April 2015
This paper examines to what extent security prices are a good estimate of “Intrinsic Value” on modern developed capital markets, based on a philosophy of analyst Eugene Fama.

A paper which discusses Fama’s philosophy, which concedes that in a efficient market the price of securities is a good estimate of the intrinsic value of the capital market, that information should flow freely and that the price of the securities should reflect the information that is available. In addition, the participants in the market should make decisions about the based on the information that they already have. The paper defines Intrinsic value, capital markets and securities, the types of securities that exist and current events involving the Enron Corporation and its collapse to determine whether or not we indeed have an efficient market in which securities are a good estimate of the intrinsic value of the modern day capital market.
With all this information being understood lets discuss whether or not Fama’s beliefs are valid in the modern capital market.

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First of all let’s examine whether or not by definition today’s capital markets are efficient. Fama believes that an efficient market is one in which there is an almost free flow of current information. The efficiency of our current market is questionable at best. While Enron was sinking its shareholders were not given current accurate information pertaining to the financial state of the company. Another aspect of this inefficiency is that the market will make decisions based on what has already occurred or what may occur in the future.

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