The concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security -such as a share of a particular corporation's common stock-should be the present value estimate of the firm's expected cash flows discounted by its appropriate rate of return (also called the intrinsic value of the stock). Amost all financial theory and decision models assume that the financial markets are efficient. The informational efficiency of financial markets determines the ability of investors to "beat" the market and eam excess (or abnormal) returns on their investments. If the markets are efficlent, they will react rapidly as naw relevant information becomes available. Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated in stock prices. toentify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current markat prices refiect all relevant publicly avallable information. This statement is conslatent with: Semistrong form efficiency, Strong form effelency Weak form emidency Consicer that there is a semistrong form of efficency in the mankets. A pharmectutical comosny announces that it has received Federal Drog Administrotion approval for a new allergy drug that completely prevents hay fever. The consensus andyst forecast for the companfs eamings per share (EPS) is $4.50, but insiders know thit, with this new drvg, eamings wiff increase and drive the LPS to 55.00. What will bappen when the company releoses its next earnings report? Identify the form of capital market efficiency under the efficient market hypothesis described in the following statement: Current market prices reflect all relevant publicly avallable information. This statement is consistent with: Semistrong form efficiency Strong form efficiency Weak form efficiency Consider that there is a semistrong form of efficiency in the markets. A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the compary's eamings per share (EPS) is $4.50, but insiders know that, with this new drug, eamings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report? The stock price will increase and settle at a new equilibrium level. The stock price will not change, because the market already incorporated that information in the stock price when the announcement was made. There will be some volatility in the stock price when the earnings report is released; it is difflcult to determine the impact on the stock; price
