Question

1.Suppose that a firm is involved in a major litigation and is expected to lose its case, which would cost the firm millions of dollars.  Surprisingly, however, the firm wins the case and immediately the stock price jumps. Is the observation of the price increase consistent with the semi-strong form of the efficient market hypothesis? Explain.

2. What factors would impact the price of preferred shares?

Answer 1

1. Yes, the fall in share price is consistent with the semi-strong form of market efficiency. As per the semi-strong form of market efficiency, the stock prices reflect all the publicly available information in the stock prices. As, the news of the firm winning is case is available to the public, the stock immediately reflects it on its price in the form of increased share price.

2. The factors that impact the price of preferred stock is :

• The dividend rate : The preferred stock pays dividends to it's shareholders. As the rate of dividend rises, more shareholders prefer holding the stock. So, the rate of dividend declared impacts the price of preferred shares.
• The convertibility option : If there is an option to convert the preference shares into common stock , then the share gains importance in the eyes of the investors.
• The interest rates in the market : the share prices of preferred stock and the interest rates have an inverse relation. As the interest rates lowers. the prices of preferred share increased and vice versa.
• The profitability position of the company : If the company is profitable, the dividend declared will be higher. If the future profitability of the company is expected to be weak, then the share price would fall.