The fraud-on-the-market theory is the idea that
stock
Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
prices are a function of all material information about the company and its business. It applies to
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
markets, where it can be assumed that all material information is available to
investor
An investor is a person who allocates financial capital with the expectation of a future Return on capital, return (profit) or to gain an advantage (interest). Through this allocated capital the investor usually purchases some species of pr ...
s. The theory states that under these conditions, there is a
causal
Causality is an influence by which one Event (philosophy), event, process, state, or Object (philosophy), object (''a'' ''cause'') contributes to the production of another event, process, state, or object (an ''effect'') where the cause is at l ...
link between any misstatement and any stock purchaser, because the misstatements defraud the entire market and thus affect the price of the stock. Therefore, a material misstatement's effect on an individual purchaser is no less significant than the effect on the entire market.
According to this theory, "When an investor buys or sells stock at the market price, his or her reliance may be presumed, assuming that he or she pleads that: (1) the information allegedly misrepresented was publicly known, (2) it was material, (3) the stock was traded in an efficient market, and (4) the plaintiff traded in the stock in the relevant period."
Fraud on the market theory applies to
civil enforcement of
SEC Rule 10b-5 which "prohibits any act or omission resulting in
fraud
In law, fraud is intent (law), intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate Civil law (common law), civil law (e.g., a fraud victim may sue the fraud perpetrato ...
or deceit in connection with the purchase or sale of any security". The use of this theory was established in
Basic
Basic or BASIC may refer to:
Science and technology
* BASIC, a computer programming language
* Basic (chemistry), having the properties of a base
* Basic access authentication, in HTTP
Entertainment
* Basic (film), ''Basic'' (film), a 2003 film
...
and affirmed in
Halliburton
Halliburton Company is an American multinational corporation and the world's second-largest oil service company which is responsible for most of the world's fracking operations. It employs approximately 55,000 people through its hundreds of su ...
.
See also
*
Efficient-market hypothesis
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis ...
References
{{Reflist
Civil law (legal system)
Law and economics
United States securities law