The main objective of this chapter is for students to demonstrate that they can identify the psychological phenomena that obstruct market efficiency and the associated implications for managers’ behavior.

After completing this chapter students will be able to:

1. Differentiate among the different definitions of market efficiency.
2. Identify pricing phenomena involving reversals and price drift that lie at the heart of the market efficiency debate.
3. Explain how the limits of arbitrage can interfere with market efficiency even inthe presence of smart money.
4. Describe the implications of the market efficiency debate for corporate financial decisions involving project selection, earnings guidance, stock splits, and new equity issues.