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CA Final · Advanced Financial Management · Security Analysis

A SEBI investigation finds that a director of Ganga Textiles Ltd. consistently earned abnormal profits by trading in the company's shares before undisclosed quarterly results were released. Which conclusion about market efficiency follows from this evidence?

Strong form efficiency does not hold. That form claims prices reflect all information, including private insider information, so no one can earn abnormal returns. A director consistently profiting from undisclosed results shows private information was not yet in prices, though this does not refute weaker forms.

  1. AStrong form efficiency does not holdCorrect
  2. BWeak form efficiency does not hold
  3. CSemi-strong form efficiency does not hold
  4. DAll three forms of efficiency are confirmed

Explanation

Strong form efficiency says prices reflect all information, including private or insider information, so even insiders cannot earn abnormal returns. Consistent abnormal profits from undisclosed information disprove the strong form. It does not by itself show failure of weak or semi-strong forms, since the information was not public.

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