Question

Dover Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level.

This is an example of a(n):

A) over-reaction and correction.
B) underpricing.
C) delayed reaction.
D) pre-activity action.
E) efficient market reaction.

Answer 1

A. Over reaction and Correction

Step-by-step explanation:

Over reaction is the situation whereby investors gets over excited due to an emotional response on an event leading to a security becoming overbought or over sold until it returns to its intrinsic value. In this case, the increase in price came from the announcement that the unpopular CEO had resigned. Correction on the other hand refers to the drop in prices of stock from their current peak. After the overreaction, correction occured in which the price dropped and remained constant at the dropped price.