Question

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last...

Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of 1.2% yesterday. This suggests that _________

A.

investors expected the earnings increase to be larger than what was actually announced.
B.

earnings are expected to decrease next quarter.
C.

Nicholas' stock will probably rise in value tomorrow.
D.

the market is not efficient.
E.

investors expected the earnings increase to be smaller than what was actually announced.
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Answer #1

When it was announced that earning will be 10% higher than last quarter then a positive abnormal return will reflect that investor have expected that earning increased to be smaller than what actually was announced by the company, so they have shown an abnormal return of 1.2%.

Rest of the options are not correct as it is not about learning expectation decreasing next quarter or marketed is Efficient or not.

Correct answer will be option (E)investors expected the earning increase to be smaller than what was actually announced.

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