Suppose XYZ Corporation is traded on the New York Stock Exchange.XYZ's closing price on Monday is $20 per share.After the market closes on Monday,XYZ makes a surprise announcement that it has obtained a major new customer.XYZ's stock will likely
A) open at $20 per share on Tuesday and then increase as more investors read the announcement in the Wall Street Journal.
B) remain at $20 per share because in efficient markets the price already reflects all information.
C) open above $20 because the positive news will result in a higher valuation even though the stock has not yet traded.
D) open below $20 because the surprise announcement creates more uncertainty.

Question

Quizplus · Accepted Answer

The positive news of obtaining a major new customer is likely to cause an increase in demand for XYZ's stock, leading to a higher opening price on Tuesday. This is because the news is new information that was not reflected in Monday's closing price of $20. Efficient market hypothesis assumes that all information is already reflected in the stock price, but this surprise announcement is an exception to this assumption. Therefore, option B is incorrect. Option A is also incorrect because the market does not have to wait for the Wall Street Journal to read the announcement before reacting to the news. Option D is incorrect because while the announcement may initially create uncertainty, the fact that it is positive news is likely to outweigh the uncertainty in the minds of investors, resulting in a higher opening price.

Suppose XYZ Corporation Is Traded on the New York Stock