5. Geothermal corporation issued a press release before the stock market opened

Question

5. Geothermal corporation issued a press release before the stock market opened announcing that its earnings have decreased by 30% over the last year earnings. Explain how each of the following individual scenarios could be consistent with the semi-strong form of market efficiency.

(a) When trading opened after the announcement and throughout the first day, there was no stock price change after the company announced the 30% decrease in earnings.

(b) The stock price of Geothermal decreased slowly over the 30 days before the announcement of the 30% decrease in earnings.

(c) The stock price decreased by 10% immediately following the announcement but then increased throughout the day so that the closing price was only 2% below the previous day.

Explanation / Answer

As in semi strong form of market there is partial information with the investors so earlier the investors are active and they have undervalued the stocks

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