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Current stock price of Mercury Inc. is $10 per share. After a few days, the EPS for the second quarter will be announced. Compared to
Current stock price of Mercury Inc. is $10 per share. After a few days, the EPS for the second quarter will be announced. Compared to $1.00 in the first quarter, EPS will be $1.20 for the second quarter, which is a very big growth (but this is future news so nobody including you and John knows about it now). John thinks that market is perfectly efficient, so the new stock price will rise instantly to $12 per share on the future earnings announcement date. You learned Ball and Brown (1968) in your Accounting Theory class, and a friend of yours, John, who didn't take the course tells you like this: "If this firm's EPS, which will be announced soon, is very high, stock prices will rise instantly, so I have no chance to buy it before it rises. I cannot buy it now as well because I don't know whether the announced EPS will be good or bad in advance. So, I cannot get a profit from the investment into this stock no matter when I buy it." Do you agree with John? Why or why not? (Hint: You need to depend on the findings of Ball and Brown (1968) and assume all the market and investor conditions are the same as those reported in that paper. Don't make your own assumption.) Current stock price of Mercury Inc. is $10 per share. After a few days, the EPS for the second quarter will be announced. Compared to $1.00 in the first quarter, EPS will be $1.20 for the second quarter, which is a very big growth (but this is future news so nobody including you and John knows about it now). John thinks that market is perfectly efficient, so the new stock price will rise instantly to $12 per share on the future earnings announcement date. You learned Ball and Brown (1968) in your Accounting Theory class, and a friend of yours, John, who didn't take the course tells you like this: "If this firm's EPS, which will be announced soon, is very high, stock prices will rise instantly, so I have no chance to buy it before it rises. I cannot buy it now as well because I don't know whether the announced EPS will be good or bad in advance. So, I cannot get a profit from the investment into this stock no matter when I buy it." Do you agree with John? Why or why not? (Hint: You need to depend on the findings of Ball and Brown (1968) and assume all the market and investor conditions are the same as those reported in that paper. Don't make your own assumption.)
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