ACCA Applied Skills · Financial Management · Efficient market hypothesis (EMH) and practical considerations in the valuation of shares
Company X's shares trade in a market the directors believe to be semi-strong form efficient. The directors intend to announce a profitable project that is already fully public knowledge through a regulatory filing made last month. The shares trade at $5.00. Which of the following is the most likely effect of the announcement on the share price, and the reason?
The share price should show no significant change. In a semi-strong efficient market, all publicly available information, including last month's regulatory filing, is already reflected in the price, so a later announcement of the same news contains nothing new for investors to react to.
- ANo significant change, because the information is already reflected in the priceCorrect
- BA rise, because the formal announcement gives new information to investors
- CA fall, because the market overreacts to company announcements
- DA rise, because insiders will now be able to trade on the news
Explanation
In a semi-strong efficient market, prices already reflect all public information, including the earlier filing. A repeat announcement gives no new information, so no abnormal price movement is expected. Insider trading is not relevant because the information is already public.
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