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Article
Materiality and the Efficient Capital Market Model: A Recipe for the Total Mix
William & Mary Law Review (1984)
  • Roger J. Dennis
Abstract
During the past thirty years, prodigious empirical and theoretical research and commentary has provided an economic perspective on the operation of capital markets. The literature has focused on the efficient capital market model, which posits that security prices fully reflect all available, relevant information. A corollary of this thesis posits that security prices react promptly and in an unbiased manner to any new information. Although researchers have debated the parameters of the efficient market model, they agree that the model accurately represents the market's actual operation.
 
Not surprisingly, the operation of capital markets also has been a central concern in securities litigation. In many cases, the determinative issues involve the importance of particular information to the investor and the processing of such information by the market. These issues often are decided under a legal standard of "materiality." Materiality may be important in several types of rule 10b-5 litigation, tender offer cases, and proxy litigation, among other areas.
 
The legal standard of materiality, however, has developed largely without reference to the findings of the efficient capital market researchers. This Article will compare legal notions of materiality with the treatment of materiality in efficient capital market theory. The Article presents an overview of the current state of research on the efficient capital market model, a discussion of the legal tests of materiality, and a comparison of the legal standard and the economic model in different contexts. This Article's premise is that recognition and use of the economic model will lead to more accurate, predictable determinations of materiality in the context of securities litigation. Courts that consider the results of efficient capital market research in analyzing the materiality issue will have a better understanding of when information becomes public, how the market processes information as an aggregate, and how different estimates of the significance. of new information quickly combine to create an unbiased equilibrium market price.
Disciplines
Publication Date
March, 1984
Citation Information
Roger J. Dennis. "Materiality and the Efficient Capital Market Model: A Recipe for the Total Mix" William & Mary Law Review Vol. 25 Iss. 3 (1984)
Available at: http://works.bepress.com/roger_dennis/8/