Question

Sometimes one observes that the price of a companyʹs stock falls after the announcement of favorable earnings. This phenomenon is A) clearly inconsistent with the efficient markets hypothesis. B) consistent with the efficient markets hypothesis if the earnings were not as high as anticipated. C) consistent with the efficient markets hypothesis if the earnings were not as low as anticipated. D) consistent with the efficient markets hypothesis if the favorable earnings were expected.

The answer is B. Why?

Answer 1

Option B.

• Efficient market hypothesis shows that when any new information is passed within any firm, it is reflected by the assets in the form of its price's.
• When the observes that the price of a company's stock falls after the announcement of favourable earnings. This phenomenon is considered to be consistent with efficient market hypothesis if the earnings were not high as anticipated.
• This is because, if the earnings do not match the expectations then the value of an asset will naturally fall.
• This will be reflected in the asset prices in accordance with the efficient market hypothesis.