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60 N.Y.U. L. Rev. 761 (1985)
Efficient Markets, Costly Information, and Securities Research

handle is hein.journals/nylr60 and id is 775 raw text is: EFFICIENT MARKETS, COSTLY INFORMATION, AND SECURITIES RESEARCH JEFFREY N. GORDON* LEWIS A. KORNHAUSER** Courts, administrative policy makers and legal scholars have widely embraced the the- ory that well-developed markets are efficienL In this Article, Professors Gordon and Kornhauser cast doubt on the wisdom of reliance on the efficient market hypothesis as applied to various areas of corporate law. Their charge is that legal decision makers and scholars have misunderstood the assumptions and limitations of the theory and have neglected recent critical economics scholarship. Professors Gordon and Korn- hauser begin by detailing the assertions of the hypothesis in relation to the workings of securities markets, focusing on various asset pricing models used to test the hypothesi& They then examine critically the interrelation between the hypothesis and the processes by which information is acquired and reflected in market price Finally, they explore the legal policy implications of the problems they have exposed: markets are not as efficient as once thought, and we may not be able accurately to test the efficiency of a given market. CONTENTS INTRODUCTION ................................................ 762 I. UNDERSTANDING SECURITIES MARKETS .................. 766 A. Ideal Capital Markets in Simple Worlds ............... 767 B. The Efficient Market Hypothesis ....................... 770 C. Asset Pricing Models .................................. 772 L Positive Expected Returns Model ................... 772 2. Capital Asset Pricing Model ....................... 775 II. INFORMATION ACQUISITION AND EFFICIENT MARKETS .... 786 III. POLICY IMPLICATIONS .................................... 796 © 1985 by Jeffrey N. Gordon and Lewis A. Kornhauser. * Associate Professor of Law, New York University. B.A., 1971, Yale University; J.D., 1975, Harvard University. ** Professor of Law, New York University. B.A., 1972, Brown University; J.D., 1976, Ph.D., 1980, University of California, Berkeley. We would like to acknowledge the careful comments of William Carney, Robert Clark, Robert Cooter, Frank Easterbrook, Daniel Fischel, Eleanor Fox, Ronald Gilson, Henry Hansmann, David Leebron, Robert Mundheim, Dan Prentice, Roberta Romano, Helen Scott, Jack Slain, Jeff Strnad and participants in seminars and workshops at the University of Cali- fornia, Berkeley, Oxford University, the University of Pennsylvania, and the University of Toronto. William Massey, N.Y.U. '86, and David Goldstaub, N.Y.U. '85, provided valuable research assistance. Remaining errors are, of course, ours alone. The Filomen d'Agostino and Max E. Greenberg Research Fund of New York University School of Law provided both authors with generous financial support for which we are grateful. 761 Imaged with the Permission of N.Y.U. Law Review

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