XRCO just announced yesterday that its fourth quarter earnings will be 35% higher than last year's fourth quarter. You observe that XRCO had an abnormal return of −1.7% yesterday. This suggests that
A) the market is not efficient.
B) XRCO stock will probably rise in value tomorrow.
C) investors expected the earnings increase to be larger than what was actually announced.
D) investors expected the earnings increase to be smaller than what was actually announced.
E) earnings are expected to decrease next quarter.

Question

Quizplus · Accepted Answer

The negative abnormal return despite positive earnings news suggests that investors had higher expectations for the earnings increase than what was actually announced. This discrepancy led to a negative market reaction.

XRCO Just Announced Yesterday That Its Fourth Quarter Earnings Will