Which of the following statement is correct? The stock market is...
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Accounting
Which of the following statement is correct?
The stock market is a side show because firms with stocks traded in the stock market already finished their IPO and get the capital needed from the market. So the day-to-day stock price fluctuations do not concern the CEOs everyday decisions.
How stock price moves in the public stock market does not affect those startup companies CEOs who do not own any publicly traded stocks.
Market efficiency is different from the efficiency of the real economy. The two do not interact with each other. Market efficiency is mainly meaningful for investors but not relevant to the people who do not involve in the financial market in any way.
CEOs may use the market price of their stocks as a guidance to their real decisions. For example, suppose all investors use the following trading rule: when CEOs destroy firm fundamentals, investors will all buy the stocks to push up stock prices. If such rule existed, CEOs might have an incentive to destroy firm fundamentals because their compensation is linked to the stock price.
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