Consider each of the following.

1. An investor expects to make abnormal gains on her stock market investments by analysing published annual reports, relevant newspaper articles, industry reports and published share prices.

2. Dorsal plc, a business listed on the London Stock Exchange, received a confidential letter from a rival business on 30 July 2019 offering to buy all its shares at a premium of 20 per cent on their current market value. At a private meeting, convened on the same day, the directors of Dorsal plc agreed to accept the offer and made a public announcement of this decision on 3 August 2019.

3. Juniper plc is an airport operator that is listed on the London Stock Exchange. Recently, the board of directors agreed to change the business’s depreciation policy concerning airport runways. In future, these assets will be written off over 100 years rather than­50­years. This change, which will reduce the annual depreciation charge over the next 50 years, is solely designed to increase reported profits over that period and thereby create a better impression to investors of business performance.

Required:

(a) What is the maximum level of market efficiency that the investor is assuming in (1) above? Briefly explain your answer.

(b) What would be the share price reaction to the announcement in (2) above under the strong form of market efficiency and why?

(c) What is the maximum level of market efficiency that the board of directors is assuming in (3) above that is consistent with such behaviour? Briefly explain your answer.