Question

IBM announced its 1982 earnings per share (EPS) for the fourth quarter of 1982 on Friday, January 21, 1983. EPS was up 28 percent from the fourth quarter of 1981. Nevertheless, IBM's stock price dropped by $3.25 to $94.625. Security analysts explained the price drop by noting that an unexpectedly large part of the increase was due to an accounting restatement required by the Financial Accounting Standards Board's order FASB 52. The "true" increase in EPS was thought to be correspondingly less. On Monday, January 24, IBM's stock price dropped by $.75 more, although overall market indexes were down sharply (-2.75 percent). Later in the day, IBM issued a statement clarifying the impact of FASB 52. IBM's EPS would have been just as high under prior accounting rules (FASB 8). "'The confusion on Friday was that we didn't have enough detail,' [said] Barry Tarasoff, an analyst at Goldman, Sachs & Co. ‘WeIl, we got it today, and the fourth quarter looks fine.' On Tuesday, IBM's stock price rose by $2.125. Is this an efficient market at work? Discuss carefully.

Answer 1

This is not an Efficient market because when the results would have been announced, the result would have been completely priced into the stock in an efficient market, as all the privately available information and the publicly available information have already been discounted into the stock price in efficient market so in this case it should have been discounted as this was a private information and there would have been no reaction on the announcement of the results and when the impact of the accounting standards were also announced the share prices fluctuated in respect to that even though the movement was not completely recognisable but it did fluctuate in respect to market news so it can be said that this is not an Efficient market as Efficient market completely advocates for complete discounting of the price and information and there will be no descrepency between the price and the value and only new information can cause movement in the stock price and hence it can be said that this stock is not following the principles of Efficient market and this is not an Efficient market.