Question

Assume that markets are efficient. During a trading day, American Golf, Inc., announces that it has lost a contract for a large golfing project that, prior to the news, it was widely believed to have secured. If the market is efficient, how should the stock price react to this information if no additional information is released?

Answer 1

The price of American Golf's stock should decrease.

Stocks are priced according to the expected cash flows of corporations. Since the market expected that American Golf was going to make money on this new golfing project, the price of their stock probably increased. If the project is cancelled, then the price of the stock should decrease to the level it was before the project was announced or considered possible.