As a financial analyst, you analyze two companies (A and B) in the same industry with similar operating incomes and corporate debt. Over the past five years, both companies have above industry median free cash flows. Recently, two companies announced their operation outlook for the next few years. Company A increases capital expenditure on research and development (R&D). Company B, however, decides to increase its dividends to shareholders. According to estimations from you and your colleagues, the ratio of FCF after dividends over debt of both firms will be lower than their historical records. Following the four C credit analysis, the lower ratios are bad news for both companies. However, the stock market reactions are different for the two companies.

Write a short easy to explain the following market observations. (a) The stock price of Company A dropped in the first month, but slowly increased in the next few months. (b) The stock price of Company B appreciated but only lasted for one day before starting a slow downward trend.