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70 Va. L. Rev. 549 (1984)
The Mechanisms of Market Efficiency

handle is hein.journals/valr70 and id is 559 raw text is: THE MECHANISMS OF MARKET EFFICIENCY*
Ronald J. Gilson and Reinier H. Kraakman**
O F all recent developments in financial economics, the efficient
capital market hypothesis (ECMH) has achieved the widest
acceptance by the legal culture. It now commonly informs the aca-
demic literature on a variety of topics;1 it is addressed by major
law school casebooks and textbooks on business law;2 it structures
* Copyright 0 1983 by Ronald J. Gilson & Reinier H. Kraakman.
** The authors are, respectively, Professor of Law, Stanford University, and Assistant
Professor of Law, Yale University. Gilson's research for this article was supported in part by
the Stanford Legal Research Fund, made possible by a bequest from the estate of Ira S.
Lillick, and by gifts from friends of the Stanford Law School. Both authors gratefully ac-
knowledge the support of the Yale Law School and the Stanford Law School Law and Eco-
nomics Program.
We are grateful to David Baron, Lucian Bebchuk, Michael Bradley, Dennis Carlton,
Daniel Fischel, Henry Hansmann, Thomas Jackson, Douglas Leslie, Henry Manne, Robert
Mnookin, Mitchell Polinsky, Roberta Romano, Katherine Schipper, Myron Scholes, Ken-
neth Scott, Joel Seligman, Edward Sherry, Steven Sheffrin, Oliver Williamson, and to par-
ticipants in the Yale Law School Civil Liability Workshop for helpful comments on an ear-
lier draft of this article.
1 See, e.g., H. Kripke, The SEC and Corporate Disclosure: Regulation in Search of a Pur-
pose 83-139 (1979) (disclosure under the federal securities laws); Barry, The Economics of
Outside Information and Rule 10b-5, 129 U. Pa. L. Rev. 1307, 1330-59 (1981) (disclosure
under the federal securities laws); Bines, Modern Portfolio Theory and Investment Manage-
ment Law: Refinement of Legal Doctrine, 76 Colum. L. Rev. 722 (1976) (fiduciary duty of
portfolio managers as trustees); Easterbrook & Fischel, Corporate Control Transactions, 91
Yale L.J. 698, 723-31, 729 & n.84 (1982) (freezeouts of minority shareholders); Fischel, Effi-
cient Capital Market Theory, the Market for Corporate Control, and the Regulation of Cash
Tender Offers, 57 Tex. L. Rev. 1 (1978) (regulation of tender offers); Lorie, Insider Trading.
Rule 10b-5, Disclosure, and Corporate Privacy- A Comment, 9 J. Legal Stud. 819 (1980)
(insider trading); Note, A Reconsideration of the Stock Market Exception to the Dissenting
Shareholder's Right of Appraisal, 74 Mich. L. Rev. 1023, 1040-44 (1976) (shareholder rights
in corporate acquisitions).
2See, e.g., W. Klein, Business Organization and Finance: Legal and Economic Principles
241-43 (1980); R. Posner & K. Scott, Economics of Corporation Law and Securities Regula-
tion 155-94 (1980); R. Pozen, Financial Institutions: Cases, Materials and Problems on In-
vestment Management 139-86 (1978); D. Ratner, Institutional Investors: Teaching Materials
67-95 (1978); L. Soderquist, Securities Regulation: A Problem Approach 173-77 (1982); L.
Solomon, R. Stevenson & D. Schwartz, Corporations Law and Policy: Materials and
Problems 431-53 (1982). There remain exceptions. See, e.g., R. Jennings & H. Marsh, Secur-
ities Regulation: Cases and Materials xix-xx (5th ed. 1982) ([S]pace does not permit, nor
are we convinced of the utility of, the inclusion of diverse and irreconcilable economic opin-

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