The Paradox of Fraud-on-The-Market Theory: Who Relies on the Efficiency of Market Prices?

44 Pages Posted: 20 May 2011

See all articles by Grigori Erenburg

Grigori Erenburg

University of Western Ontario - King's University College

Janet Kiholm Smith

affiliation not provided to SSRN

Richard L. Smith

University of California, Riverside - Anderson Graduate School of Management

Date Written: June 2011

Abstract

Our evidence points to an inconsistency between the efficient markets hypothesis and the way U.S. courts have applied the hypothesis in cases involving allegations of fraud on the market. Based on a sample of securities class action cases, we find that (1) some cases certified for class action status do not satisfy the conditions for even weak-form efficiency; (2) numerous opportunities exist for cost-effective investors (those who can trade quickly and at low cost) to profit by using simple momentum-based strategies; (3) including such investors as class members effectively subsidizes their strategies and overstates damages from reliance on market efficiency; (4) when such investors can profit by rejecting market efficiency, standard measures of damage overstate the fraud-related damage of other investors; and (5) because of endogeneity, the factors that commonly are relied on by the courts for determining market efficiency bear little or no relation to weak-form efficiency.

Suggested Citation

Erenburg, Grigori and Smith, Janet Kiholm and Smith, Richard L., The Paradox of Fraud-on-The-Market Theory: Who Relies on the Efficiency of Market Prices? (June 2011). Journal of Empirical Legal Studies, Vol. 8, Issue 2, pp. 260-303, 2011. Available at SSRN: https://ssrn.com/abstract=1840234 or http://dx.doi.org/10.1111/j.1740-1461.2011.01209.x

Grigori Erenburg

University of Western Ontario - King's University College ( email )

266 Epworth Avenue
London, Ontario N6A 2M3
Canada

Janet Kiholm Smith

affiliation not provided to SSRN

No Address Available

Richard L. Smith (Contact Author)

University of California, Riverside - Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States
951-827-3554 (Phone)

HOME PAGE: http://www.agsm.ucr.edu/

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
553
PlumX Metrics