The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market
Autor: radhika • December 30, 2014 • Essay • 627 Words (3 Pages) • 1,415 Views
I agree with all the assertions made in the case-The September 11 Terrorist Attack, the Enron Scandal, and the Stock Market. This case reflects the semi-strong form of market efficiency because this form deals with how quickly the prices reflect the public information announcement and it specifically evaluates the event effect on the market returns.
If the security prices reflect not only on the information that contains the past time series of stock prices but also on all publicly available information, then the market is said to be in a semi-strong form of efficiency. Generally, in the semi-strong form of market efficiency, announcement of new information immediately influences the investors’ psychology. Thus, the stock market immediately reacts to the announcement of any new event including mergers and acquisitions, announcement of dividend and earning, issuance of new equity and debt, stock split, overseas listings, corporate name change, business expansion and macro-economic changes. There are various factors that affect stock market price behavior; they bring out over or under-reaction in the market.
If people perceive the news is good enough to get return then they invest resulting in an overall progress of a market and if they perceive the news to be bad the case is opposite. The case shows the reaction to the bad news in the stock market and the analysis of the effect of event to the stock prices is done with the help of Gordon model;
Po=D1/Ke +g
The formula explains that the price of stock is directly proportional to the expected dividend and the growth rate, and inversely proportional to the rate of return.
The case shows that the September 11 terrorist attack is obviously a bad news and hence investor predicts further insecurities and fear of possibilities of similar attack so, the existing investors withdrew their investments and the new investors becomes unwilling to invest which ultimately leads the market to experience slow growth
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