Should judges assume that markets are efficient?

ECONOMISTS HAVE long argued about the workings of financial markets. Some, like Eugene Fama, argue that markets adjust swiftly to include all available information, an idea supported by the difficulty of predicting short-term stockmarket moves. Others, like Robert Shiller, posit that psychology has a big effect on market prices, pointing out that share prices fluctuate far more than fundamental variables such as dividends. The pair were jointly awarded the Nobel prize in economics in 2013 (along with Lars Peter Hansen).

The question is puzzling judges (or “chancellors”) in Delaware, where more than half of America’s public companies are listed. Last year the chancery court of Delaware decided that some shareholders of Aruba Networks, a company that Hewlett Packard (HP) acquired in 2015, should be awarded just $17.13 per share—the price before the deal was announced. HP paid $24.67. The judgment deferred entirely to the market, above all other evidence of what Aruba might be worth—including what HP was willing to pay. It was overturned by Delaware’s supreme court on April 16th.

Usually, if investors differ from the market in their opinion of a company’s value, they can buy or sell its shares. The exception is during a takeover. If most shareholders vote to sell at a given price, the rest must sell at that price, too. A...



via The Economist: Finance and economics Business Feeds

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