Question

Assume that a company announces an unexpectedly large cash dividend to its shareholders. In an efficient market without information leakage, one might expect:

a. An abnormal price change at the announcement.

b. An abnormal price increase before the announcement.

c. An abnormal price decrease after the announcement.

d. No abnormal price change before or after the announcement.

Short answer

The correct answer is ‘a’.

Step-by-step solution

Definition

The efficient market truly reflects the price of a share with respect to its publicly available information.

Explanation 

Based on the definition above it is expected that the publicly available information should lead to a full price adjustment, after the announcement of dividend is made to its shareholders.