Suppose in Figure that the stock prices of target flims in acquisitions responde
ID: 363347 • Letter: S
Question
Suppose in Figure that the stock prices of target flims in acquisitions responded to acquisition announcements over a three-day period rather than almost instantly. a. Would you describe such an acquisition market as efficient? Why, or why not? b. Can you think of any trading strategy to take advantage of the delayed price response? c. If you and many others pursued this trading strategy, what would happen to the price response to acquisition announcements? d. Some argue that market inefficiencies contain the seeds of their own destruction. In what ways does your answer to this problem illustrate the logic of this statement, if at all? e. Immediately after some merger announcements, the stock price of the target firm jumps toa level higher than the bid price. Is this proof of market inefficiency? What might explain this price pattern? FIGURE Time Series of the Mean Price Index of the Shares of 161 Target Firms Involved in Successful Tender OffersExplanation / Answer
a. yes, it is an efficient market only. when market is responded on any given news then this type of market should be called as efficient market. in the given example, the market reacted for continuously 3 days after the announcement comes. hence the reaction is because of the announcement only, so, it can be said as efficient market only. if the market does not reacts to the news then it is said to be inefficient market. of course the reaction may not be immediate and quick towards the news, some times it happens after little time.
b. when we know that the prices of the stock increases after the news, then the best strategy to gain profits are buy and hold strategy. in reversely, if the prices are pressumed that going to be down, then short selling is best strategy. sell the stock at current market price and buy it when the prices declined upto target level. there are no fixed and rigid strategies which always provide profits in market. it is based on market movements, the investor continuously monitor and revise the investor decisons based on market conditions.
c. when acquisition announces, usually the target company prices will increase and the acquiree company shares will be declined. in this context, the investors who wants to hold stock of acquiree company will get losses, then the best strategy is short selling of the stock. the investors who hold the stock of target company, the share prices will boost.
d. when market is not reacted towards a news of a firm or announcement of a firm, it means the market is inefficient. a simple example i can say, when you beat some one, they must feel the pain and express it in different way. if they do not express it, it may because of they are acting or they really does not feel the pain. both are danger and symptoms of illness. similary the market should be react based on news, otherwise, it will be pressumed that there will be some problems in the market.
e. it is not because of market inefficieny, it is because of efficiency only.