How do stock prices act as a signal for the future value of the firm?
A) If firms merge, stock prices could rise indicating that the merger can result in greater profitability.
B) If stock prices rise, they could be indicating future profitability for the firm.
C) If stock prices fall, they could be indicating declining economic conditions.
D) All of these possibilities are correct.

Question

Quizplus · Accepted Answer

All of these possibilities are correct. Stock prices reflect the market's perception of the future prospects of a company. A rise in stock prices could indicate increased profitability or positive news, such as a merger or favorable economic conditions. Conversely, a fall in stock prices could indicate declining profitability, negative news, or unfavorable economic conditions. Therefore, fluctuations in stock prices can signal the future value of a firm.

How Do Stock Prices Act as a Signal for the Future