The foundation of market efficiency theory is based on a hypothesis that assumes all the information is publicly available to everyone for free. However, this hypothesis is arguable both on the theoretical level and the real market practices level.
On the real market practice level, the regulatory body started to doubt on the accuracy and completeness of the information market produced after the great depression in 1929.
According to the Securities Exchange Act of 1934,
“[the implementation of regulation] is in order to protect interstate commerce, the national credit… to protect and make more effective the national banking system and Federal Reserve System, and to insure the fair and honest of markets in such transaction.”
This statement points out that the fairness and integrity of securities market need regulations to monitor and enforce.
Furthermore, M.H. Cohen ect. conducted a comprehensive investigation to examine the ...view middle of the document...
In addition, Millon-Cornett (1989), in his paper examined the impact of a deregulation act called “depository institutions deregulation and monetary control act of 1980”. He found that this act produced positives abnormal returns to stockholders of large commercial banks and negative abnormal returns to the small size stockholders. This conclusion means that without regulations, the market will operate in a way which in favor of certain group of market participants.
These studies are empirical evidences that challenging the market efficiency theory.
On the theoretical level, Verrecchia(1983), in his paper “Discretionary disclosure”, stated that,
“A manager’s decision to disclose or withhold information depends upon the effect of that decision on the price of a risky asset.”
He proved that if the information’s potential impact is below a threshold, it will not be released to the public by managers.
Another study conducted by Einhorm (2005) reported that the voluntary disclosure depends crucially on the quality of mandated disclosure requirement.
These studies provide the theoretical evidence that not all the information is publicly available to investors.
All in all, from the regulatory body’s point of view, the market should not be trust but also need to be monitored.
Securities exchange act of 1934, Sec. 2. Retrieved November 23, 2010, from http://www.sec.gov/about/laws/sea34.pdf
Cohen M.H., 1963, Report of Special Study of Securities Market, Doc. No. 95, 88th Cong., 1st Sess. Retrieved November 23, 2010, from
Verrecchia, R., 1983, Discretionary Disclosure, Journal of Accounting and Economics, Vol. 5, 179-194. Retrieved November 23, 2010, from http://zfkj.znufe.edu.cn/Images/UpFile/2009123165229957.pdf
Einhorn, E. 2005. The nature of the interaction between mandatory and voluntary disclosures. Journal of Accounting Research 43: 593 – 621. Retrieved November 23, 2010, from
Millon-Cornett, M.H. and H. Tehranian, 1989, Stock Market Reactions to the Depository
Institutions Deregulation and Monetary Control Act of 1980, Journal of Banking and Finance 13, 81-100.