Keep Your ‘Invisible Hands’ to Yourself: Freeing Corporate Governance from the Cult of the ‘Efficient Market’

29 Pages Posted: 13 Nov 2020

See all articles by David C. Donald

David C. Donald

Chinese University of Hong Kong - Faculty of Law

Date Written: November 13, 2020


A highly idealized notion of perfectly efficient securities markets has in recent decades justified firmly binding corporate governance to the needs of the secondary market for corporate shares. With prices assumed to reflect value perfectly through the rational behavior of traders, tying corporations and their management closely to markets was understood to bring corporate actors into alignment with value maximization. Modern corporate governance theory worked to bind corporations to this wellspring of efficiency by, among other things, requiring a company’s shares to be fully liquid through listing, its assets to be easily transferable through takeovers, and its management to be lined up squarely with market forces (executive managers incentivized by share price).

Longstanding work in financial economics and clear historical evidence consistently show, however, that securities markets do not produce objectively grounded stock prices. Traders seek to buy low and sell high for any reason that makes this possible. While this activity may often be correlated with the fundamental value of a company’s products, services or management, it is not determined by them. Equally so for investors that buy and hold an index of securities long term, macroeconomic trends are of primary import. Neither trading strategy can be said to be is determined by an “objective” value of an individual company’s products, services or management.

US corporations and the US economy have paid dearly for locking corporate activity to the assumed cult of market efficiency. Corporations with long histories of creating valuable technology are liquidated for cash payouts, while market-inflating share repurchases prop up share price and balloon executive compensation. Executive directors maneuver like hedge funds with their personal shares and options, monitored by a board of independent directors who know little about the company.

Intermediated, relationship-oriented channels of finance, like venture capital investment and bank lending, have long achieved a more informed, articulated view of companies’ productive activity, albeit with the risk of institutionally constricted vision. Today, more data, better connectivity, and systems capable of processing that data make it possible for such financing to be used without sacrificing breadth of information. Its use can free corporations from the arbitrary whirl of securities trading. An ecosystem of funds using ensemble machine learning could provide sufficient capital, liquidity and as much variety of opinion as the secondary market. This could replace belief in a fantastic market with factually determined price and free management to focus on guiding a productive enterprise.

Keywords: Corporate Governance, Market Efficiency, Behavioral Finance, Fintech, Ensemble Machine Learning, Venture Capital

Suggested Citation

Donald, David C., Keep Your ‘Invisible Hands’ to Yourself: Freeing Corporate Governance from the Cult of the ‘Efficient Market’ (November 13, 2020). The Chinese University of Hong Kong Faculty of Law Research Paper No. 2020-35, Available at SSRN: or

David C. Donald (Contact Author)

Chinese University of Hong Kong - Faculty of Law ( email )

Faculty of Law
6/F, Lee Shau Kee Building
Shatin, New Territories
Hong Kong
852 3943 1042 (Phone)
852 2696 1040 (Fax)


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