Music Doctors just announced yesterday that its first quarter sales were 35% higher than last year's first quarter. You observe that Music Doctors had an abnormal return of −2% yesterday. This suggests that
A) the market is not efficient.
B) Music Doctors stock will probably rise in value tomorrow.
C) investors expected the sales increase to be larger than what was actually announced.
D) investors expected the sales 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 positive news of a 35% increase in sales suggests that investors had higher expectations for the sales growth than what was actually announced. In an efficient market, stock prices adjust to reflect all available information, and in this case, the negative return indicates that the actual sales figures fell short of market expectations.

Music Doctors Just Announced Yesterday That Its First Quarter Sales