According to the efficient-market theory, what effect would...

According to the efficient-market theory, what effect would the following events have on the price of GM's stock? a. A surprise announcement that the government is going to lower business taxes next July 1 b. A decrease in business taxes on July 1,6 months after Congress passed the legislation c. An announcement, unexpected by experts, that the United States will impose quotas on imports of Chinese cars during the coming year d. Implementation of $\mathbf{c}$ by issuing regulations on December 31

According to the efficient-market theory, what effect would the following events have on the price of GM's stock?
a. A surprise announcement that the government is going to lower business taxes next July 1
b. A decrease in business taxes on July 1,6 months after Congress passed the legislation
c. An announcement, unexpected by experts, that the United States will impose quotas on imports of Chinese cars during the coming year
d. Implementation of $\mathbf{c}$ by issuing regulations on December 31

Key Concepts

Efficient Market Hypothesis

The efficient market hypothesis (EMH) states that security prices fully reflect all available information. According to this theory, any new information—whether announced or event-driven—is quickly, if not immediately, incorporated into the asset’s price, leaving little room for predictable excess returns.

Incorporation of New Information

This concept refers to the market’s ability to process and assimilate fresh data into asset prices. When new information that affects a company’s value is released, investors react and adjust their expectations, causing an immediate change in the stock price to reflect the updated reality.

Role of Anticipation in Price Movements

Anticipated events may already be factored into stock prices if the market expects them to occur. Conversely, when events are unexpected, their impact is more pronounced because the new details were not pre-emptively priced in, leading to a more abrupt adjustment in the stock’s value.

Timing of Events and Market Reaction

The timing of information release is crucial. Announcements about future events influence current expectations, while the actual implementation of these events often causes little change if the market had already adjusted its pricing based on earlier news. This timing dynamic helps explain different market reactions to initial broadcasts versus subsequent realizations of an event.

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