Question

Empirical results in nichols and wahlen's study showed that

a. analysts' forecasts of future earnings are optimistically biased.
b. the capital markets are inefficient with respect to earnings information because investors overreact to earnings surprises.
c. an investor could earn excess returns if the investor could predict accurately the sign of the change in working capital one year ahead.
d. unexpected changes in earnings have a strong positive association with abnormal stock returns

Answer 1

The empirical results in Nichols and Wahlen's study showed that unexpected changes in earnings have a strong positive association with abnormal stock returns. Option number d is correct.

Step-by-step explanation:

The empirical results in Nichols and Wahlen's study showed that unexpected changes in earnings have a strong positive association with abnormal stock returns. This means that when a company's earnings deviate from analysts' expectations, there is a significant impact on the company's stock price.

Investors can potentially earn excess returns by accurately predicting the sign of the change in working capital one year ahead, which suggests that there is an opportunity for market inefficiencies to exist in relation to earnings information.