Investments, tenth edition

cnbc.html.   

36

32

28

24

20

16

12

8

4

0

−4

−8

−12

−16

−135 −120 −105 −90 −75 −60 −45 −30 −15

0

15

30

Days Relative to Announcement Date

Cumulative Abnormal Return (%)

 Figure 11.1 

Cumulative abnormal returns before takeover 

attempts: target companies  

 Source: Arthur Keown and John Pinkerton, “Merger Announcements and 

Insider Trading Activity,”  Journal of Finance  36 (September 1981). Used with 

permission of John Wiley and Sons, via Copyright Clearance Center. Updates 

courtesy of Jinghua Yan. 

bod61671_ch11_349-387.indd   351

bod61671_ch11_349-387.indd   351

7/17/13   3:41 PM

7/17/13   3:41 PM

Final PDF to printer

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352

P A R T   I I I

  Equilibrium in Capital Markets

 This point has been stressed by 

Grossman and Stiglitz.  

6

    They  argued 

that investors will have an incen-

tive to spend time and resources to 

analyze and uncover new informa-

tion only if such activity is likely to 

generate higher investment returns. 

Thus, in market equilibrium, effi-

cient information-gathering activ-

ity should be fruitful. Moreover, 

it would not be surprising to find 

that the degree of efficiency differs 

across various markets. For example, 

emerging markets that are less inten-

sively analyzed than U.S. markets 

or in which accounting disclosure 

requirements are less rigorous may 

be less efficient than U.S. markets. 

Small stocks that receive relatively 

little coverage by Wall Street ana-

lysts may be less efficiently priced 

than large ones. Still, while we 

would not go so far as to say that you 

absolutely cannot come up with new 

information, it makes sense to con-

sider and respect your competition.   

6

 Sanford J. Grossman and Joseph E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,”  American 

Economic Review  70 (June 1980). 

−15

−10

−5

0

5

10

15

Minutes Relative to Mention

0.75

0.50

0.25

0.00

−0.25

−0.75

−0.50

−1.00

−1.25

−1.50

Cumulative Return (%)

Midday-Positive

Midday-Negative