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.

Answer 1

Answer:

The correct option is A, abnormal price change at the announcement

Explanation:

Abnormal price increase before the announcement would only  be the case if the there was insider dealing, that is there exists information leakage.

An abnormal price decrease cannot be the case, the market prices a share based on its earnings' strength, in other words a stock with high dividends prospect is priced high.

Option D is wrong there would a price change stemming from the announcement made about large cash dividends payout