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Determining the overall stock market

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The CFO of firm NIC Inc. failed to disclose the lavish perks afforded to its former CEO. Specifically, NIC Inc. paid for the restoration of the former CEO's mansion at a cost of more than $2 million, and recorded the transaction as a business expense instead of as a salary to the CEO. You can assume that these expenses were a significant fraction of the firm's operating profit. When the news that NIC Inc. had mislead investors was released on January 25, the stock fell by 1.9 %. On the same day, the overall U.S. stock market fell by 2.0 %. Over the 30 days prior to the event, and the 30 days following the event, the stock price of NIC Inc. fluctuated in line with the overall stock market (zero abnormal return on average).

A. The lack of an initial stock price reaction indicates that markets are inefficient as the stock price did not react to the negative news.

B. The initial stock price reaction on Jan 25 indicates that investors viewed the disclosure as having a negative impact on the value of equity.

C. The initial stock price reaction is consistent with a "no-news" event that did not affect the value of equity.

D. The initial stock price reaction is consistent with a partially anticipated event, where some investor traded on the news in anticipation.

Reference no: EM132509739

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