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Consider the following news release, were investors being rational? Why or why not? Discuss based on the assumption of an efficient market.
Dividend?hopes?and bid speculation help boost Prudential (The Financial Times, August 5 2010)
Prudential is expected to lift its interim dividend by 5 per cent to 6.6p and could boost its future pay-out rate with results due next Thursday, according to analysts.
Shares in Prudential up 2.3 per cent to 582p, were also helped by renewed rumours that it was vulnerable to a takeover approach following the collapse of its $35bn bid for AIA earlier this year.
Dealers reported speculation that an Asian buyer was working on a potential offer of about 700p per Prudential share, which would value the insurer at nearly £18bn.
Really have no clues of starting this question, thank you for your help in advance.
in an efficient market ,according to the MM theory ?dividend is irrevalent,and that the Profit is always the king.however,the price of share arise,indicate a higher need of the share,in the EMH,investor may see a high expectations of Prudential’s growth in the future,and this lead to an up of the price.From this point of view,it seems that the asian buyer is rational ,however,the potential price is 20%higher than the market price.Thus,i suppose the investor of the asian is not rational,AIA may be rational i guess.
The question is not solely about whether the Asian buyer is rational.
It is also about the fact that the share price increased 2.3% , and whether shareholders were being rational in increasing the share price by that amount.
It partly depends on when the expectations of the increased dividends and speculation about the Asian buyer first appeared – is it todays news, or was there already expectations (which had therefore already been reflected in the share price).
Also, if the rumours about the buyer are true, then the share price should be much higher (because he will have to offer at least as much as the current share price, but might not need to offer much more!!)
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