Action and Reaction : News Broadcast and Stock Prices

(conceptual)

The entire business broadcast channels are flooded with the news of acquisitions, mergers, ventures, introduction of the new product, rendezvous new managers and their corresponding impact on the stock prices. As soon as any such announcement manifests the market, all the news broadcasts get jam-packed with the analysts reviews about the reaction (stock prices) of the action (news announcement).

Recently, the news dated 20 June of Facebook's introducing 15 minute video sharing on Instagram has been reviewed positively by the analysts, however,  the stock market did not reacted as expected by analysts and the new announcement failed to give immediate return to the shareholders. Another news of McDonalds dropping two halal products from its menu articulated that the stock price traded low on that day. Similarly, the launch of Ford EcoSport SUV in Indian market or acquisition of Jaguar Land Rover by Tata projected distinctive corollary on their stock prices. The illustrations are incessant.

Well, what is this action and reaction called?  The reaction (stock price movement) due to respective action (broadcasted information) is called Efficient Market Hypothesis (EMH). EMH as defined by Shiller(2001) 'this is the hypothesis that financial prices efficiently incorporates all public information and the prices can be regarded as optimal estimates of true investment value at all times'.

 Researchers have investigated this action and reaction in three subsets i.e. Week Form Hypothesis, Semi-strong hypothesis and Strong form hypothesis. Week form hypothesis tested impact of historic prices on the projected stock prices. Semi-strong hypothesis regressed the impact of broadcasted information only and strong form hypothesis tested the impact of all the information on stock prices i.e. historic prices as well as announcements.

But the question which is arising in my mind that if the market incorporates the impact so quickly, how the investors could even benefit from such market cues. The Facebook news, televised on 20 June, was followed by immediate reaction on stock prices. Same with McDonalds and many more markets news. In fact, the news announcements are comprised of their reactions on the markets.

There are many collateral studies that must be studied together to answer this question like rational and irrational behaviors of investors, arbitrage, prospect theory, expected utility theory, etc. which would be followed in our auxiliary blogs.