Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:
A) the expected part of the announcement.
B) market inefficiency.
C) the unexpected part of the announcement.
D) the systematic risk.
E) None of these.

Question

Quizplus · Accepted Answer

Shareholders discount many corporate announcements because they have prior expectations. Therefore, any changes in the price are mostly driven by the unexpected part of the announcement, as this is what alters the prior expectations. Option A is incorrect as the expected part of the announcement has already been factored in by shareholders. Option B is unlikely as markets are generally efficient most of the time. Option D is incorrect as systematic risk affects the entire market and not just one particular announcement. Therefore, the correct answer is C.

Shareholders Discount Many Corporate Announcements Because of Their Prior Expectations