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The efficiency of stock markets is one of the crucial assumptions for the stock price maximization...

The efficiency of stock markets is one of the crucial assumptions for the stock price maximization objective. Assuming that the markets are perfectly efficient which of the following is the correct stock price response after a surprise good news?

a.

An immediate increase in the stock price on the announcement but no price drift thereafter

b.

An immediate increase in the stock price and a gradual decrease in the days thereafter

c.

No change in stock prices

d.

An immediate increase in the stock price and a gradual increase in the days thereafter

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Answer #1

when the markets are perfectly efficient, it will mean that all the privately available information have already been discounted into the stock price and any announcement of the surprise good news is not going to get a reaction from the market as well.

all the good news are known to the management earlier and they are the part of the privately available information so they are already discounted in stock price.

Correct answer will be option ( d) An immediate increase in the stock price and gradfual decrease in days thereafter.

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