CS Executive · Corporate Accounting and Financial Management · Security Analysis
Shares of Kaveri Textiles Ltd. are traded in a market that is semi-strong form efficient. The company announces a surprisingly high annual profit. Which is the most likely behaviour of the share price?
The price adjusts quickly at the time of the announcement, and investors buying afterwards cannot expect abnormal gains. Semi-strong efficiency means all public information, including earnings announcements, is rapidly reflected in the share price, so a slow drift or delayed reaction would contradict it.
- AIt adjusts quickly at the announcement and thereafter shows no predictable abnormal gain for those who buy after the newsCorrect
- BIt rises slowly over the next several months, allowing investors to earn abnormal returns after the announcement
- CIt stays unchanged until the company pays a dividend
- DIt falls at the announcement because public information is already ignored
Explanation
In a semi-strong form efficient market, all publicly available information is quickly and fully reflected in prices. The price therefore jumps immediately on the announcement, and acting afterwards yields no abnormal return. A slow drift would indicate inefficiency in the market.
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