The Unimportance of Being Efficient: An Economic Analysis of Stock Market Pricing and Securities Regulation

Part I of this article describes how perceptions that market efficiency is an important regulatory objective have influenced the development of securities law. For illustration, Part I examines the role of market efficiency goals in recent debates on the scope of insider trading liability, on trading in stock index futures, and on mandatory disclosure of merger negotiations. Part II then evaluates the notion that more efficient stock markets necessarily produce more optimal resource allocation. A closer look at the economic consequences of stock prices suggests that the principal function of stock prices is not resource allocation but rather the redistribution of wealth among investors. Consequently, more efficient public stock markets may contribute little to allocative efficiency., Part III presents reasons why legal rules designed to improve market efficiency may, on the whole, produce social losses. It concludes that enhancing market efficiency should not be a goal of securities regulation and describes significant policy changes that would follow from the abandonment of efficiency as a goal.