Question

5. Kasetsart Agriculture, a Thai agricultural technology research firm, announced this morning that it 
has  hired  the  world’s  most  knowledgeable  and  prolific  agriculture  researchers.  Before  today, 
Kasetsart’s equity had been selling for 100 baht. Assume that no other information is received over 
the next week, and that the Thai stock market as a whole does not move. 
a. What do you expect will happen to Kasetsart’s share price? 
b. Consider the following scenarios: 
(i) The share price jumps to 118 baht on the day of the announcement. In subsequent days it 
floats up to 123 baht, then falls back to 116 baht. 
(ii)) The share price jumps to 116 baht and remains at that level. 
(iii) The share price gradually climbs to 116 baht over the week.  
Which  scenario(s)  indicate  market  efficiency?  Which  do  not?  Why?  Provide  a  behavioural 
interpretation for each scenario.

Answer 1

(a): I will expect Kasetsart’s share price to move up in the short run after this news (i.e. news of hiring prolific agricultural researcher is announced. After the short run the stock price will absorb this news and the price will not rise further and will stabilize after the short run increase.

(b) (i): In this case the market is not efficient as the prices moves to 118 baht from 100 baht and then to 123 baht. As such the stock has not adjusted quickly to absorb new public information. The behavioral interpretation for this case is that the stock is riding on the sentiment cycle and its prices are increasing on the euphoria among stockholders after the announcement was made.

(ii): This is a case of semi-strong form of market efficiency as the stock has adjusted quickly to absorb the new information. It increased to 116 baht after the announcement but then stabilizes at that level as it has adjusted and absorbed the new information. The behavioral interpretation for this case is that the stock is riding on the sentiment cycle and the initial euphoria has eased and so the cycle is now on a downward slope.

(iii): In this case the increase in share price is gradual and as such this is a case of strong form of market efficiency. Here all the information (including any private information) has been absorbed and this reflects in the gradual increase of share price of the company. The behavioral interpretation for this case is that investors have no heuristic-driven bias and have access to all information. As such they rely more on strong business cycles.