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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

In an event study of an earnings announcement, the abnormal returns for five days around the event (days -2, -1, 0, +1, +2) for a stock are 0.1%, 0.2%, 2.5%, 0.1%, -0.1%. What is the cumulative abnormal return (CAR) over the window, and what does the pattern indicate for semi-strong efficiency?

The cumulative abnormal return is 2.8%, the sum of the five daily abnormal returns. Because almost all of it appears on the announcement day and there is no significant drift afterwards, the market absorbed the public news immediately, which is consistent with semi-strong form efficiency.

  1. A2.8%; price adjusted almost entirely on the announcement day, consistent with semi-strong efficiencyCorrect
  2. B2.8%; price drifted slowly after the announcement, indicating inefficiency
  3. C2.5%; price adjusted on the announcement day, consistent with semi-strong efficiency
  4. D3.0%; price reacted before the announcement, indicating insider trading only

Explanation

CAR = 0.1 + 0.2 + 2.5 + 0.1 - 0.1 = 2.8%. Nearly all the reaction (2.5%) occurs on day 0 with no meaningful drift afterward, which is what semi-strong efficiency predicts. The 2.5% option omits the other days; 3.0% ignores the negative sign on day +2.

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