Consider the following statement: “Local Systems Ltd released its annual earnings figure a month ago. On...

Consider the following statement: “Local Systems Ltd released its annual earnings figure a month ago. On the day of the announcement, the company’s return was 1.5%, while its expected return on that day was 0%. Since the announcement, the company’s stock price has continued to increase gradually, to this day.” Critically discuss this statement, in the context of the notion of market efficiency.

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Expert Solution

According to market efficiency, all the publicly available information and privately available information have already been discounted into the stock price and there is believed to be no additional rate of return for the investor through active investing in the market.

In this case, it can be seen that since the announcement the company's stock prices continued to increase gradually as it is reflecting a market inefficiency because-

A.this information have already been disclosed and this should have been discounted into the price earlier.

B. This information was known to the management and should have been discounted into the price as per strong form of market efficiency.

C. Post earning announcement drift is always seen as a violation of semi market form efficiency.

So, It can be seen that this market is not efficient and it is completely reflecting violation of principles of efficiency as these informations related to earning announcements have not yet been discounted as it is showing continuous improvement.

jeff jeffy answered 1 year ago

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