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

Evidence shows that Brantley Co's share price rises sharply on the day it announces unexpectedly high profits, but does not drift further upwards in the following weeks. Investors who bought after the announcement earned only a normal return. Which form of the efficient market hypothesis is this evidence at least consistent with?

The evidence is consistent with semi-strong form efficiency. The price jumped immediately on the public profit announcement and then showed no further abnormal gains, so public information was quickly reflected in the share price. Price movement on announcement does not indicate inefficiency.

  1. AWeak form only, because past share prices were not used to predict the rise
  2. BSemi-strong form, because publicly available information was reflected in the price quicklyCorrect
  3. CStrong form only, because the price reacted at all to the announcement
  4. DThe market is inefficient, because the price moved on the announcement

Explanation

A rapid, one-off price adjustment to newly published information with no subsequent abnormal return indicates that public information is quickly impounded in prices, which is semi-strong form efficiency. The rise on announcement is the market processing new information, so it does not show inefficiency. Strong form would require private information to be reflected as well, which this evidence does not test.

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