The Antitrust Review of the Americas 2017

United States: Economics

In theory, a company’s current stock price reflects the present value of its expected future cash flows. In an informationally efficient market, the stock’s price reacts quickly to impound any news that affects the company’s future prospects. Importantly, however, a stock’s price may change even absent any company-specific news, due to changes in the broader market index or simply due to normal random fluctuations (noise). Therefore, economists typically use an analytical technique known as ‘event study’ to identify how much of a stock’s price change following some news release (or event) can reasonably be attributed to such news per se, rather than to a contemporaneous change in the broader market index or to noise.

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