Question

On 3/31/2020, Company ABC released its quarterly report, showing the sales in the first quarter had tumbled 30% as pandemic hit. However, the stock price for company ABC rose by 3% (instead of fell by 3%) after the report is released. Does this mean a failure of the Market Efficient Theory? please write equations and solve step by step

Answer 1

This is reflecting that all the informations have already been discounted into the price because even if the company has reported bad quarter, the share of the company did not fall because all the information have already been discounted into the stock price.

Strong form of market efficiency reflects that there there is no scope for making an additional return because the privately available information and publicly available information have already been discounted into the stock price so earnings are always known to the management and those have already been discounted into the stock price.

still this is a violation of market efficiency because upon the earning announcement, the stock should not have reacted as everything would have been discounted but instead it reacted on the upside so it can be said that it was not a random information for the investors as it was known to the management and it was classified as a private information so it is a violation of market efficiency as stock price should not have moved after the announcement of quarterly earnings.