Nicholas Manufacturing just announced yesterday that its fourth quarter earnings will be 10% higher than last year's fourth quarter. Nicholas had an abnormal return of −1.2% yesterday. This suggests that
A) the market is not efficient.
B) Nicholas' 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 the announcement of higher earnings suggests that investors had higher expectations for the earnings increase than what was announced. This discrepancy between expectations and actual announcements led to a negative market reaction.

Nicholas Manufacturing Just Announced Yesterday That Its Fourth Quarter Earnings