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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Under the semi-strong form of the Efficient Market Hypothesis, a company announces an unexpectedly high dividend increase. Which price behaviour is expected?

Price adjusts quickly and fully at the announcement, so buying afterwards earns only normal returns. Under semi-strong efficiency, public information such as a dividend announcement is impounded immediately; gradual drift would indicate inefficiency.

  1. APrice adjusts gradually over several weeks after the announcement, allowing profit from buying after it
  2. BPrice adjusts quickly and fully at the announcement, so buying afterwards yields only normal returnsCorrect
  3. CPrice falls first and then rises to the new level
  4. DPrice changes only when insiders trade on the information

Explanation

Semi-strong efficiency means all public information is reflected promptly. After the announcement, no abnormal return can be earned by trading on it. Gradual adjustment would indicate inefficiency.

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