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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

In an event study of a dividend announcement, the abnormal returns (in %) of a share over five days around the event (days -2 to +2) are: -0.2, 0.3, 3.1, 0.4, -0.1. Based on these, what is the cumulative abnormal return (CAR) over days -2 to +2, and what does it indicate about the speed of price adjustment if the market is semi-strong efficient?

The cumulative abnormal return is the sum of daily abnormal returns, which is 3.5%. Since 3.1% of it occurred on the announcement day and later days show negligible changes, the price adjusted immediately to the news, which is consistent with semi-strong market efficiency.

  1. ACAR is 3.5%; most of the adjustment occurred on the event day itself, consistent with semi-strong efficiencyCorrect
  2. BCAR is 3.5%; the continued drift after the event day shows inefficiency
  3. CCAR is 3.1%; the adjustment was complete only after day +2
  4. DCAR is 3.9%; prices anticipated the news before day -2

Explanation

CAR = -0.2 + 0.3 + 3.1 + 0.4 - 0.1 = 3.5%. The bulk (3.1%) arrives on the event day with only small residuals afterwards, consistent with fast adjustment. Option D adds absolute values wrongly; option C uses only the event day.

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