- A pharmaceutical company announces that it has received Food & Drug Administration (FDA) approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company’s earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. If the markets are assumed to exhibit strong form efficiency, what will happen when the company releases its next earnings report?
a. The stock price will not change, because the market had already incorporated the information about the FDA approval announcement in the stock price.
b. There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price.
c. The stock price will increase and settle at a new equilibrium level.
- The degree of market efficiency affects investors and market participants but has important implications for financial managers as well. In efficient markets, accounting adjustments that do not affect the firm’s expected cash flows or the risk of cash flows are ……… to affect the price of a security.
a. less likely
b. more likely
