The Fraud-on-the-Market Theory Revisited

Abstract

IN his interesting and provocative essay, Back to Basics: Regulating How Corporations Speak to the Market,' Ian Ayres criticizes our recent article dealing with the so-called fraud-on-the-market theory.2 We, in turn, have some criticisms of his criticism, which we present in this brief Essay. At the outset, however, we wish to emphasize that, despite the rather adversarial tone of Professor Ayres's article, he does not appear to disagree with either of the principal arguments we presented. First, Professor Ayres's fine article clearly shows that he agrees with our proposition that contractual rules should dictate the nature and extent of a corporation's public disclosure obligation.3 Indeed, we argued that the precise contours of the corporate disclosure obligation should be defined by the contractual fiduciary duties of care and loyalty managers and officers owe their shareholders.4 Second, and perhaps more interestingly, Professor Ayres agrees with our more controversial argument that firms should have the option of selecting an internal rule of corporate disclosure permitting them to make false statements in order to protect the value of corporate investments against ruination from premature disclosures Much of Professor Ayres's disagreement with us stems from two sources. First, he appears to believe that we were arguing in favor of some sort of bizarre mandatory rule of corporate law that would enable managers to make false statements about anything at anytime