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CMA Final · Strategic Financial Management · Efficient Market Hypothesis

Under the semi-strong form of the Efficient Market Hypothesis, Anand Pharma announces a bonus issue that the market had fully anticipated through public disclosures. The share closes at ₹400 the day before the announcement. What is the expected price reaction on announcement (ignoring the mechanical bonus adjustment) and long-run abnormal return?

No abnormal price change should occur on announcement, and no later abnormal return. Under semi-strong efficiency, public information is reflected in the price immediately, and a fully anticipated event is already in the ₹400 price. Delayed drift or reversal would contradict semi-strong efficiency.

  1. APrice jumps sharply and then drifts down
  2. BNo abnormal price change on announcement and no subsequent abnormal returnCorrect
  3. CPrice falls on announcement and then rises over weeks
  4. DPrice rises slowly over several weeks after announcement

Explanation

In a semi-strong efficient market, public information is impounded immediately. Since the event was already anticipated, the price already reflects it, so there is no abnormal change at announcement. A slow drift or reversal would indicate inefficiency, hence the other options are inconsistent.

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