The Curious Incidence of the Dog that Didn't Bark and Establishing Effect-and-Cause in Class Action Securities Litigation

Nejat Seyhun, University of Michigan

Abstract

In this paper, we argue that the traditional assumptions made by the securities experts in establishing market efficiency, namely “in a perfectly efficient market, there should be no significant price movements without some identifiable news event” or, conversely, that there should be significant price movements only with some identifiable news event, are wrong, can mislead the court and need to be rejected. A recent case-in-point is the AIG decision, where the court was misled by an expert report asserting this strong requirement in establishing cause-and-effect. Our manuscript describes in detail the difficulties in understanding and interpreting the empirical evidence and thereby establishing cause-and-effect, and presents a novel test to overcome these difficulties.