The share market reaction to the arrival of unanticipated information: A test of the Uncertain Information Hypothesis to determine the efficiency of the Johannesburg Stock Exchange

Abstract

The objective of this study is to determine whether companies listed on the Johannesburg Stock Exchange (JSE) overreacted to the arrival of unanticipated information during the period 1975-1992. In this article, a modified version of the Efficient Market Hypothesis called the Uncertain Information Hypothesis (UIH) is tested in order to explain the response of rational, risk-averse investors to news of a dramatic financial nature. The findings demonstrate that regardless of whether the news was good or bad, the average pattern of price adjustments after the initial reaction was significantly positive. Because the volatility of the share prices was also shown to rise significantly after both unanticipated good and bad news, the incremental returns to shareholders can be interpreted as compensating investors for bearing the added risk associated with uncertainty. The results provide strong support for the UIH. The findings do not support the alternative hypothesis that investors consistently overreact to unexpectedly large price changes. It would appear that the JSE reacts to uncertain information in an efficient, if not instantaneous manner.