Question

Explain what the market reaction will be in an efficient market if a firm announces a fully anticipated filing for bankruptcy.

Answer 1

In an efficient market, all the information is accessible to all the firms, investors and economic agents so that no one is expected on average to beat the market. This also implies that there is no unexploited profit opportunity available to the market players. Now if some of the firms have announced that they will get bankrupt this information will be available to all the market participants so that the bankruptcy will be priced in to the market. Since prices will reflect market expectations, there will be no change in the expectations related to prices.