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CA Final · Advanced Financial Management · Security Analysis

Shares of Rudra Pharma trade at Rs 200. Analysts gather data over a 5-day window around an unexpected regulatory approval announced on day 0. Stock abnormal returns (AR) on days -2, -1, 0, +1, +2 were 0.5%, 1.5%, 4.0%, 0.0%, 0.0% respectively. The pre-announcement price on day -3 close was Rs 200. Ignoring compounding, what is the cumulative abnormal return (CAR) over days -2 to +2, and what is the most appropriate inference about leakage?

The cumulative abnormal return is 6.0%, the sum of 0.5, 1.5 and 4.0 percent. Since 2.0% of it, one-third, came before the announcement, this suggests information leakage or anticipation, which sits uneasily with strict semi-strong form efficiency.

  1. A6.0%; about one-third of the total reaction occurred before announcement, suggesting some information leakage or anticipationCorrect
  2. B6.0%; entire reaction occurred on day 0, so no leakage
  3. C4.0%; the day-0 AR alone is the CAR, indicating no leakage
  4. D2.0%; the pre-announcement ARs show leakage of only a third

Explanation

CAR = 0.5 + 1.5 + 4.0 + 0 + 0 = 6.0%. Pre-announcement AR = 2.0%, which is 2/6 = one-third of the total. Significant positive AR before the news suggests leakage or anticipation, which is inconsistent with strict semi-strong efficiency around the event. The 4.0% option ignores the pre-event days.

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