Sample Thesis Paper
The market value of a share is affected by many factors. The analysis of the relationship between the book value and the market value of a share is based on the philosophy that the book value is one of the important factors that influence the market value of a share. The factors analyzed here therefore are those relating to the relationship between the market values and the book values.
Information Asymmetry: The market value of a share is expected to reflect all the information known about the company. The efficient market hypothesis holds that the share price reflects all the information about the past the present and the future of the company and it is therefore impossible to make abnormal returns based on such information. The book value of a company represents past and present information according to the theory the book value cannot have a relationship with the market value (Jones, 2001). However information cost something and the analysis of information requires skills and interpretation. Since the cost of information cannot be borne by everybody and the skills required for the analysis of such information are also not universal there exist information asymmetry which makes some investors better positioned to use information than others. Information asymmetry influences the market values since investors do not make the same judgments about the stock (Francis and Schipper, 1999).
Rationality of Agents: The market price of a company is also affected by the investment objectives of the participants in the stock markets. The participants in the stock markets are members of the public whose investment objectives vary widely. According to the rationality principle in economics, investors would always act to maximize their gains (Dussault, 2004). They should therefore prefer a company with a higher book value and should also not invest in a company whose market value is higher than the book value without reasonable justifications. The implications of this principle are that the higher the book value the higher the market value should be according to rationality. However several studies in behavioural finance indicate that investors are not always acting rationally and there exist conditions under which investors act irrationally. This would reduce the relationship between the book value and the market value of the shares of a company.