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

Question

Quizplus · Accepted Answer

The increase in stock price after the CEO's resignation suggests an initial overreaction by the market, followed by a correction the next day to a more reasonable price level. This is an example of overreaction and correction, which is a common occurrence in efficient markets.

Dover Lumber Announced Last Week That Its Unpopular CEO Had