Question

Suppose the public expects a certain corporation to lose money this quarter with the loss equal to a loss of $5 a share. When the company announces its quarterly earnings it reports a loss equal to only $4 a share, which is still the largest loss in the history of the company. What does the efficient market hypothesis say will happen to the price of the stock when the $4 loss is announced?

Answer 1

According to the efficient market hypothesis, if a company reports a smaller loss than expected, the stock price may increase as it adjusts to the new, better-than-expected information.

Step-by-step explanation:

The efficient market hypothesis (EMH) suggests that the price of a stock reflects all currently available information. Therefore, when a company reports a quarterly loss of $4 per share, which is better than the expected loss of $5 per share, the stock price is likely to adjust to this new information. According to EMH, if the public expected a larger loss, the stock price had probably already decreased in anticipation. When the actual loss reported is smaller than expected, the stock price might increase, as the new information would be a positive surprise to the market. However, it is important to note that the EMH does not guarantee the stock price will move in a predictable way. Various factors outside of market expectations can influence the stock's movements.