Investors expect a company to announce a 10 percent increase in earnings, but instead the company announces a 1 percent increase. If the market is semistrong-form efficient, which of the following would you expect to happen?
a. The stock's price increases slightly because the company had a slight increase in earnings.
b. The stock's price falls because the earnings increase was less than expected.
c. The stock's price stays the same because earnings announcements have no effect if the market is semistrong-form efficient.
Answer: b. The stock's price falls because the earnings increase was less than expected.
An efficient capital market is a market that is efficient in processing ...
Answer to a question on semistrong-form efficieny is provided in the solution.