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http://ssrn.com/abstract=803064
 
 

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Fraud on a Noisy Market


Larry E. Ribstein (Deceased)


University of Illinois College of Law; PERC - Property and Environment Research Center

September 16, 2005

U Illinois Law & Economics Research Paper No. LE05-022

Abstract:     
Behavioral finance raises questions about market efficiency, suggesting that noise, and not just information, moves securities prices. This creates a conundrum for the fraud on the market theory. While some fraud remedy is arguably necessary to ensure adequate disclosure, behavioral finance raises doubt about the efficiency of fraud remedies in noisy markets. These issues are particularly important in the wake of the Supreme Court's opinion in Dura v. Broudo Pharmaceuticals, Inc., which tightens proof of loss causation in fraud on the market cases and creates uncertainty about the future of the fraud on the market theory. This paper argues for interpreting Dura to sharply constrain the fraud on the market theory. It also proposes dealing with the need to deter fraud by allowing state courts and legislatures to supplement federal liability. More broadly, this paper suggests that, contrary to the assertions of many of its proponents, the indeterminacy of behavioral economics generally, and behavioral finance in particular, may support reducing rather than increasing legal paternalism.

Number of Pages in PDF File: 33

JEL Classification: K0, K2, K4, G1, G3

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Date posted: September 14, 2005  

Suggested Citation

Ribstein (Deceased), Larry E., Fraud on a Noisy Market (September 16, 2005). U Illinois Law & Economics Research Paper No. LE05-022. Available at SSRN: http://ssrn.com/abstract=803064 or http://dx.doi.org/10.2139/ssrn.803064

Contact Information

Larry Edward Ribstein (Deceased) (Contact Author)
University of Illinois College of Law ( email )
504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
217-244-9881 (Phone)
217-244-1478 (Fax)
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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