If a firm receives bad news about its future earnings prospects, what should happen to the stock price in order to maintain the required return desired by new investors?
A)The stock price should increase.
B)The stock price should decrease.
C)The stock price remains unchanged.
D)The stock price remains the same, but dividends will decrease.

Question

Quizplus · Accepted Answer

If there is bad news about a firm's future earnings prospects, investors will likely perceive the firm as having higher risk and lower potential for growth. This will result in a decrease in demand for the stock, causing the stock price to decrease in order to maintain the required return desired by new investors.

If a Firm Receives Bad News About Its Future Earnings