Question

Suppose a company issues a press release announcing a new line of business that has a positive NPV of $30 per share of stock outstanding. In an efficient market, what will happen to the stock price at the time of the announcement? What will happen to the stock price in the days following the announcement assuming no new news becomes available about the company? Explain your responses.

Answer 1

In an Efficient market, all the publicly available information and privately available information have already been discounted into the stock price so and the company will be announcing that it is entering into a new line of business that will increase the positive net present value of a company, the kind of private information which have already been known to the insiders of company and they should have been discounted into the stock price, and there should not have been any movement into the stock price because these are privately available information and they have to be discounted in to the stock price.

In the following days of the announcement the share price will have only reacted to new informations which are random in nature so those new informations are never known to public or private employees so market can only react to such news which are completely new in nature whereas market cannot react to any news which is known to management because they are insider information.