The history of fundamental analysis as a trading mechanism began with Benjamin Graham in 1928. Graham published his first book, Security Analysis in 1934. This book defined the framework of Value Investment and is now in its fifth edition.

Since that time, a great deal of research focused on specific fundamental measures as key determinants of a securities future price. The concept of efficiency is central to finance. Mainly, in an efficient financial market an asset price should be the best possible estimate of its economic value.

1.2 Definition

A financial market is efficient when widely available information to participant is reflected in stock prices.

1.3 FORMS OF EFFICIENT MARKET

There are three forms of market efficiency; the weak form, semi-strong form and strong form.

Weak Form: Stock prices reflect all of the information contained in past stock prices. The inference drawn from this is that you cannot consistently profit by spotting trends and patterns in stock prices.

Semi-strong Form: Stock prices all of publicly available information (including company accounts, industry data e.t.c). This simply implies you cannot consistently profit by analysing company accounts and other public data.

Strong Form: Stock prices reflect all information (including information known only to company insiders. The insinuation is that no one can earn excess returns by stock picking, even people with inside information.

However, this dissertation will concentrate more on using fundamental analysis to disprove the efficient market hypothesis which asserts that stock markets impounds all publicly available information about a company into stock prices in an instantaneous and unbiased manner. The implication of this assertion is that publicly available information such as financial statement figures cannot be used to detect mispriced securities; any investment strategy designed on the basis of published financial information should not prove profitable. However, in contrast to this argument, fundamental analysts believe that the markets may misprice securities and that it is possible to make an informed financial projections using financial statement information to earn an abnormal returns.

According to Fama (1970) he established the efficient market model after it has been tested and found supported by different wider markets and this became widely in use by financial communities, applied economist and financial economist. The weak forms of the efficient market hypothesis is strongly supported by evidence and the result follow and consistent with random walk model, while the strong form test is strongly supported by the efficient market hypothesis Fama, Fisher, Jensen and Roll (1969) found that the real time information such as the time of stock split, the future information on future dividend is fully reflected in this price

Grossman and Stigliz 1980 argues that if the market efficiency theory hypothesis govern the way price respond to information ,then Institutional investors and security analyst who engage in equity research will not arrive at any meaningful conclusion and the whole research will be a complete waste of time and resources. To mention but a few other argument includes the market anomalies: such as the post earning drifts, value versus growth and small cap stocks anomalies.

According to Ball and Brown (1968), even after earnings are announced, cumulative abnormal returns for stocks with unexpected positive (negative) earnings surprise continue to drift upwards (downwards). This anomaly is known as Post Earnings

Announcement Drift (PEAD). Foster, Olson and Shevlin (1984) noted that sixty days prior to an earnings announcement, combining a long position in stocks with unexpected earnings in the highest decile with a short position in stocks in the lowest decile generates an abnormal return of 25% p.a. before accounting for transaction cost, which confirms the existence of the PEAD anomaly.

Many other researchers who have argued in favour of fundamentals analysis includes: Basu (1977) studied the relationship between price-earning (P/E) ratios and excess returns, and was the first to uncover evidence that appeared to oppose the efficient market hypothesis (EMH). Basu concluded that there was an information content present in publically available P/E ratios, and portfolios built from low P/E stocks earned excess returns even after adjusting for risk. Banz in 1981,did analysis on monthly returns over the period 1931- 1975 on listed shares on the New York stock exchange. Over this interval, he observed that the fifty smallest outperformed the largest by an average of one percentage point per month. He observed a size effect, and concluded that there was a relationship between market capitalization of a firm, and its returns, even after adjusting for risk. Also In 1981, Reinganum confirmed that data on firm size could be used to create portfolios that earn excess returns.

Further fundamental anomalies were discovered, such as the book-to-market effect described by Rosenberg et al. (1984), which found that stocks with a high book-to-ma