The Use of Efficient Market Hypothesis: Beyond SOX

Abstract

We focus on the regulatory use of finance theory, particularly the efficient market hypothesis (EMH), in two related areas where securities pricing is at issue: shareholder appraisal cases and the use of employer stock in company-sponsored employee investment plans. Regarding shareholder appraisal cases we find that the Delaware courts seem to implicitly respect the principles of EMH when ascertaining the fair value of stock, but recognize that markets cannot operate efficiently if information is withheld. In addition, the concurrent fiduciary duty claims often brought in these cases involve high levels of scrutiny where conflicts of interest are raised. Regarding employer stock in company-sponsored employee investment plans our focus is on the explicit adoption of EMH by the Department of Labor (DOL) to exempt directed trustees from historic duties of inquiry regarding the prudence of investment directions.

Our inquiry finds that the Delaware courts and legislators believe that informational problems can necessitate fact-specific analyses of whether market price reflects fair value. In contrast, the DOL appears to believe, almost without exception, in the efficiency of markets for all publicly traded securities. As a result, its policies protect from liability fiduciaries who otherwise would have incentives to engage in reviews that could be expected to bring additional information to the markets.