The Adjustment Of Stock Prices To New Information

Topics: Errors and residuals in statistics, Stock market, Dividend Pages: 28 (9043 words) Published: February 2, 2015
The Adjustment Of Stock Prices To New Information
Eugene F. Fama
University of Chicago, Graduate School of Business
Eugene.Fama@GSB.uchicago.edu
Lawrence Fisher
Rutgers, The State University of New Jersey
lfisher@newark.rutgers.edu
Michael C. Jensen
Harvard Business School
mjensen@hbs.edu
Richard Roll
Anderson Graduate School of Management
University of California, Los Angeles
rroll@anderson.ucla.edu

For an electronic copy of this paper, please visit: http://ssrn.com/abstract=321524

Abstract
There is an impressive body of empirical evidence which indicates that successive price changes in individual common stocks are very nearly independent. Recent papers by Mandelbrot and Samuelson show rigorously that independence of successive price changes is consistent with an “efficient” market, i.e., a market that adjusts rapidly to new information. It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the observed independence of successive price changes. There has been very little actual testing of the speed of adjustment of prices to specific kinds of new information. The prime concern of this paper is to examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split. In doing so we propose a new “event study” methodology for measuring the effects of actions and events on security prices.

Keywords: efficient markets, effect of information on stock prices, stock splits, dividend increases, market conditions, rate of return, effect of split(s) on return(s), residuals, average dividends, dividend “increases”, and dividend “decreases”. © Copyright 1969. Eugene F. Fama, Lawrence Fisher, Michael C. Jensen And Richard Roll. All rights reserved.

International Economic Review, Vol. 10 (February, 1969).
Reprinted in Investment Management: Some Readings, J. Lorie and R. Brealey, Editors (Praeger Publishers, 1972), and Strategic Issues in Finance, Keith Wand, Editor, (Butterworth Heinemann, 1993)
You may redistribute this document freely, but please do not post the electronic file on the web. I welcome web links to this document at http://ssrn.com/abstract=321524. I revise my papers regularly, and providing a link to the original ensures that readers will receive the most recent version. Thank you, Michael C. Jensen

Electronic copy available at: http://ssrn.com/abstract=321524

The Adjustment Of Stock Prices To New Information

Eugene F. Fama, Lawrence Fisher, Michael C. Jensen, and Richard Roll1 International Economic Review, Vol. 10 (February, 1969).
Reprinted in Investment Management: Some Readings, J. Lorie and R. Brealey, Editors (Praeger Publishers, 1972), and Strategic Issues in Finance, Keith Wand, Editor, (Butterworth Heinemann, 1993)

1. Introduction
There is an impressive body of empirical evidence which, indicates that

For an electronic copy of this paper, please visit: http://ssrn.com/abstract=321524

successive Price changes in individual common stocks are very nearly independent.2 Recent papers by Mandelbrot (1966) and Samuelson (1965) show rigorously that independence of successive price changes is consistent with an “efficient” market, i.e., a market that adjusts rapidly to new information.

It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the observed independence of successive price changes. There has been very little actual testing of the speed of adjustment of prices to specific kinds of new information. The prime concern of this paper is to examine the process by which common stock prices adjust to the information (if any) that is implicit in a stock split.

1

This study way suggested to us by Professor James H. Lorie. We are grateful to Professors Lorie, Merton H. Miller, and Harry V. Roberts for many helpful comments and criticisms. The research reported here was...

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