In an efficient market when a firm makes an announcement of a new product or product enhancement with superior technology providing positive NPV,the share price will:

Question

Quizplus · Accepted Answer

In an efficient market, the new information regarding the positive NPV from the new product or product enhancement with superior technology will be quickly and accurately reflected in the share price. Therefore, the share price will rise on the same day to the new price, which reflects the market's anticipation of increased future earnings from the new product or product enhancement. Gradual changes over the next few days, as in options (A) and (B), are less likely in an efficient market because investors quickly incorporate new information. Option (D) is incorrect because there should be a net effect on the share price due to the positive NPV, and option (E) is incorrect because the share price should rise, not drop, in response to the new information.

In an Efficient Market When a Firm Makes an Announcement