This Week In Finance

"Microsoft and the Judge's Announcement -- A Quick Lesson in Market Efficiency"

I'm always on the lookout for real-world examples to use to describe the concepts found in RWJ, the reaction of share prices to the recent announcement that Microsoft has, indeed, acted as a monopolist makes for pretty good class discussion. (Sidepoint: why do I keep flashing back to Claude Rains' character in Casablanca declaring that he is "shocked, positively shocked" to find out that gambling is taking place at Rick's Cafe Americain, while he is stuffing currency into his pockets? Oh well . . .)

Anyway, if you go to cnnfn.com, get a stock quote for Microsoft (MSFT), and then view the 1-week chart, you will see a sharp drop on the announcement, followed by a fairly rapid (albeit partial) recovery. Explanation: investors were somewhat surprised (unfavorably) by the initial announcement on Friday. (Interestingly, the stock price of Microsoft's key competitor in the operating systems market, Red Hat, skyrocketed.) Then, after Bill Gates and his minions, er, spokespeople, made the rounds of the weekend talk shows, and "explained" that this was "just one step in a long legal process" and generally calmed investors, the price turned around. The relative absence of volatility in the following week is undoubtedly due to the lack of additional substantive Microsoft news.

Is this not exactly the way we describe the EMH in class? Large price changes on the arrival of unexpected information? Ask students how they view the behavior of Microsoft stock (as well as that of its competitors) in response to the news, and then ask them how the market would react if it were not efficient.

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