While eating in an exclusive restaurant in New York City, you overhear two executives negotiating a merger. When you check the news about the two companies after lunch you find there is no public information about any merger. Thus, you buy shares of stock in both firms and make a killing when the merger is announced publicly two days later. This is a violation of ______________ market efficiency.

Question

Quizplus · Accepted Answer

This scenario is a violation of strong form market efficiency, which posits that all information, both public and private (or insider information), is already reflected in stock prices. Buying shares based on overheard non-public information and profiting from it when the merger is announced violates this principle, as it demonstrates an ability to gain an advantage through access to insider information not yet reflected in the stock prices.

While Eating in an Exclusive Restaurant in New York City