Question

Create a fictitious example that demonstrates the difference between semi-strong form efficiency and strong form efficiency. Make sure to clearly convey the differences.

Answer 1

Company X has announced and begun work on a massive new project a three quarters ago. However the project has very recently run into regulatory roadblocks. However, the regulatory hurdles are an ongoing matter between the company and the regulatory authority. Hence this information is the privy of a few company officials and a few government officials. It is not yet public information.

Strong-form efficiency : In the upcoming quarterly earnings call, the company discloses the regulatory hurdles. There is no big move in the stock price. This is because all information about the stock (both public and non-public) is already incorporated into the price of the stock

Semi-strong efficiency : In the upcoming quarterly earnings call, the company discloses the regulatory hurdles. The company stock falls by 10%. Certain investors make a huge profit by shorting the stock before the earnings call. They are privy to the information due to their proximity to the officials. This is how investors can outperform the market in a semi-strong form efficient market - by having access to material non-public information.