After the public announcement of the merger of two firms an investor makes abnormal returns by...

After the public announcement of the merger of two firms an investor makes abnormal returns by going long on the target firm and short on the acquiring firm. This most likelyviolates which form of market efficiency?A. Semi-strong form only B. Weak and semi-strong forms C. Semi-strong and strong formsD. Weak form only

Expert Solution

The theory of efficient market hypothesis states that it is impossible for an investor to beat the market since market anomalies do not exist.

Efficient Market Hypothesis:

1.Weak form efficiency: Weak form efficiency assumes that all available information is reflected in the prices. So, it is not possible to use technical analysis to achieve high returns.

2.Semi-strong efficiency: Semi-strong efficiency assumes that stock prices have been factored all public information. So, it not possible to use fundamental analysis to beat the market.

3.Strong form efficiency: Strong efficiency assumes that all information, public and private are reflected in stock prices. So, it is not possible to use insider trading to beat the market.

If the market was semi-strong efficient, investors reacting after the merger announcement would not be able to make abnormal returns. A market that is not strong form efficient. But the market could be weak form efficient.

Hence, the answer is option C.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago

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