Question

Provided no other information and an efficient market, the CAR five days before a dividend announcement day, it is most likely to be _______________ .
Select one:
Much greater than zero
Zero
Much smaller than zero

Answer 1

The correct answer is Much Smaller than Zero

The CAR refers to the Cummulative Abnormal return, When there is new discovery or announcement then on the date of announcement the Cummulative abnormal return will rise substantially on that date. And, before and after the event it will remain flat. Before the announcement, the CAR will show flat value less than zero because of release of negative information but after the announcement, it will remain flat in positive number which will be at the level of price attained on announcemnt date.

Therefore, 5 days before the dividend announcement, CAR will be negative