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ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares

Brava Co announces unexpectedly strong annual results. The market is semi-strong form efficient. The share price was $4.00 before the announcement, and the new information is worth an extra $0.30 per share. Over the following weeks, what is the most likely share price behaviour?

The price should jump almost immediately to about $4.30 and then follow a random pattern. In a semi-strong form efficient market, new public information is incorporated quickly and without bias, so there is no gradual drift or systematic correction afterwards.

  1. AThe price jumps to about $4.30 almost immediately and then moves randomlyCorrect
  2. BThe price rises gradually from $4.00 to $4.30 over several weeks
  3. CThe price stays at $4.00 until insiders trade on the information
  4. DThe price rises above $4.30 and then falls back as investors correct the overreaction

Explanation

In a semi-strong efficient market, public information is reflected rapidly and without bias, so the price moves to about $4.30 on announcement. Later movements are random. Option B describes slow adjustment, which indicates inefficiency; option D implies systematic overreaction, also inefficient.

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