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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