INTERNATIONAL ECONOMIC REVIEW February, 1969 VoL. 10. No. 1 THE ADJUSTMENT OF STOCK PRICES TO NEW INFORMATION* BY EuGENE F. FAMA, LAWRENCE FISHER MICHAEL C. JENSEN AND RICHARD RoLLI THERE IS an impressive body of empirical evidence which indicates that successive price changes in individual common stocks are very nearly inde- endent. 2 Recent papers by Mandelbrot [11] and Samuelson [16]show rigor- ously that independence of successive price changes is consistent with al efficient"market, i.e. a market that adjusts rapidly to new information. It is important to note, however, that in the empirical work to date the usual procedure has been to infer market efficiency from the observed inde pendence of successive price changes. There has been very little actual testing of the speed of adjustment of prices to specific linds of new infor- mation. The prime concern of this paper is to examine the process by which common stock prices adjust to the information (if any) that is implicit in a 2. SPLITS, DIVIDENDS, AND NEW INFORMATION: A HYPOTHESIS More specifically, this study will attempt to examine evidence on two related questions:(1)Is there normally some unusual" behavior in the rates of eturn on a split security in the months surrounding the split? and (2)if splits are associated with "unusual"behavior of security returns, to what extent can this be accounted for by relationships between splits and changes Manuscript received May 31, 1966, revised October 3, 1966. This study way suggested to us by Professor James H. lorie We are grateful to Professors Lorie, Merton H. Miller, and Harry V. Roberts for many helpful com- ments and criticism The research reported here was supported by the Center for Research in Security Prices, Graduate School of Business, University of Chicago, and by funds made available to the Center by the National Science Foundation 2 Cf Cootner [2] and the studies reprinted therein, Fama [3], Godfrey, Granger, and Morgenstern [8]and other empirical studies of the theory of random walks in specu lative prices 3a precise definition of" unusual"behavior of security returns will be provided