T12.19 Reaction of Stock Price to New Information in Efficient and Inefficient Markets  (Figure 12.12)

Efficient market reaction: The price instantaneously adjusts to and fully reflects new information; there is no tendency for subsequent increases and decreases.Delayed reaction: The price partially adjusts to the new information; 8 days elapse before the price completely reflects the new informationOverreaction: The price overadjusts to the new information; it “overshoots” the new price and subsequently corrects.

Price ($)

Days relativeto announcement day

–8

–6

–4

–2

0

+2

+4

+6

+7

220

180

140

100

Overreaction andcorrection

Delayed reaction

Efficient market reaction

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