Sometimes one observes that the price of a company's 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.

Question

Quizplus · Accepted Answer

If the earnings were not as high as anticipated, the efficient markets hypothesis predicts that the stock price will fall even if the earnings are favorable. This is because the market has already priced in the expected earnings and any deviation from that expectation will result in a change in the stock price. Therefore, the phenomenon of a stock price falling after the announcement of favorable earnings is consistent with the efficient markets hypothesis if the earnings were not as high as anticipated.

Sometimes One Observes That the Price of a Company's Stock