Objective Measures of Market Efficiency: Applications to Securities Class Actions and Valuations

Abstract

For every U.S.-listed security for every year between 2001-2017, I run four different event studies to calculate four separate objective measures of the efficiency of the market for that security for that year, which provide an objective characterization of the market for that security in that year to be sufficiently efficient or otherwise. I apply these methodologies to Petrobras's ADR (PBR on NYSE) in 2001-2017, and conclude that the Petrobras Court got it partially right and partially wrong when it certified a 2010-2015 class period, because the market for PBR was sufficiently efficient in 2010, 2011, and 2014 and not sufficiently efficient in 2012, 2013, and 2015. I apply these methodologies to the valuation of each U.S.-listed firm in 2001-2017; here are three examples: a) the market for GS (Goldman Sachs Group, Inc., common equity) was sufficiently efficient in each year in 2001-2017, and therefore, market prices represented value for Goldman Sachs over 2001-2017, b) the market for MSFT (Microsoft Corporation, common equity) was sufficiently efficient in 2001 and 2003-2017, and therefore, market prices represented value for Microsoft Corporation in 2001-2017 except 2002, and c) the market for AAME (Atlantic American Corporation, common equity) was not sufficiently efficient in any year in 2001-2017, and therefore, market prices did not represent value for Atlantic American Corporation in 2001-2017.