Monday, June 23, 2014
Halliburton and the State of the Efficient Capital Markets Hypothesis
Very interesting set of opinions in Halliburton v. Erica P. John Fund, Inc. The continuing vitality of the efficient capital markets hypothesis is one of the big issues in the case, and there are numerous cites to law profs, including the law professors' amicus brief and articles by Lynn Stout, Don Langevoort, and James Cox, among others. Both big opinions cite to Lev and de Villiers. A very interesting example of when theory has a big role to play in doctrine.
From Chief Justice Roberts's majority opinion:
Even though the efficient capital markets hypothesis may have“garnered substantial criticism since Basic,” post, at 6 (THOMAS, J., concurring in judgment), Halliburton has not identified the kind of fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood, or has since been overtaken by, economic realities.
From Justice Thomas's concurrence in judgment:
The Court’s first assumption was that “most publicly available information”—including public misstatements—“is reflected in [the] market price” of a security. [Basic, 485 U.S.] at 247. The Court grounded that assumption in “empirical studies” testing a then-nascent economic theory known as the efficient capital markets hypothesis. Id., at 246–247. Specifically, the Court relied upon the “semi-strong” version of that theory, which posits that the average investor cannot earn above-market returns (i.e., “beat the market”) in an efficient market by trading on the basis of publicly available information. See, e.g., Stout, The Mechanisms of Market Inefficiency: An Introduction to the New Finance, 28 J. Corp. L. 635, 640, and n. 24 (2003) (citing Fama, Efficient Capital Markets: A Review of Theory and Empirical Work, 25 J. Finance 383, 388 (1970)). The upshot of the hypothesis is that “the market price of shares traded on well-developed markets [will] reflec[t] all publicly available information, and, hence, any material misrepresentations.” Basic, supra, at 246. At the time of Basic, this version of the efficient capital markets hypothesis was “widely accepted.” See Dunbar & Heller, [Fraud on the Market Meets Behavioral Finance, 31 Del. J. Corporate L. 455, 463–464 (2006)].
This view of market efficiency has since lost its luster. See, e.g., Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 175 (“Doubts about the strength and pervasiveness of market efficiency are much greater today than they were in the mid-1980s”). . . .