The economics of money, banking, and financial markets

stock prices will respond to announcements only when the 

information being announced is new and unexpected. If the news is expected, no stock 

price response will occur. This is exactly what the evidence shows: Stock prices do 

reflect publicly available information.

Sometimes an individual stock price declines when good news is announced. 

Although this seems somewhat peculiar, it is completely consistent with the workings 

of an efficient market. Suppose that although the announced news is good, it is not as 

good as expected. HFC’s earnings may have risen by 15%, but if the market expected 

earnings to rise by 20%, the new information is actually unfavorable, and the stock 

price declines.

Efficient Market Prescription for the Investor

What does the efficient market hypothesis recommend for investing in the stock market? 

It tells us that hot tips and investment advisers’ published recommendations—all  

of which make use of publicly available information—cannot help an investor out-

perform the market. Indeed, it indicates that anyone without better information than 

other market participants cannot expect to beat the market. So what is an investor 

to do?