ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares
A researcher examines share price movements around the announcement of unexpected dividend increases by listed companies. Prices adjust fully within minutes of the announcement and no abnormal returns are available to investors trading afterwards. Which statement about this evidence is correct?
The evidence supports semi-strong form efficiency. Share prices adjusted quickly and fully to newly public dividend news, leaving no abnormal returns for later traders. This does not show strong form efficiency, because private information was not tested, and a price move on news is expected.
- AIt supports semi-strong form efficiency because public information is rapidly reflected in pricesCorrect
- BIt supports strong form efficiency because all information is reflected in prices
- CIt contradicts weak form efficiency because prices changed after the announcement
- DIt contradicts semi-strong form efficiency because the share price moved on the announcement
Explanation
Rapid and complete price adjustment to newly published information, with no abnormal return for later traders, is evidence of semi-strong efficiency. A price move on the news is expected in an efficient market. It does not test private information, so it does not prove strong form.
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