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Gilson, Ronald J.; Kraakman, Reinier --- "Market Efficiency After the Fall: Where Do We Stand Following the Financial Crisis?" [2012] ELECD 479; in Hill, A. Claire; McDonnell, H. Brett (eds), "Research Handbook on the Economics of Corporate Law" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on the Economics of Corporate Law

Editor(s): Hill, A. Claire; McDonnell, H. Brett

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848449589

Section: Chapter 24

Section Title: Market Efficiency After the Fall: Where Do We Stand Following the Financial Crisis?

Author(s): Gilson, Ronald J.; Kraakman, Reinier

Number of pages: 20

Extract:

24. Market efficiency after the fall: Where do we stand
following the financial crisis?
Ronald J. Gilson* and Reinier Kraakman



The financial crisis created a lot of losers. Investors, from individuals who thought that highly
rated asset-backed securities were liquid, to German Landesbanks that purchased mortgage-
backed securities that they did not and perhaps could not understand, lost very large amounts
of money. Major financial institutions across the world were decimated, resulting in massive
provision of government assistance and sometimes in full nationalization or failure. Further
up the food chain, some large developed countries now face apparently unsustainable budget
deficits, and some smaller European nations ­ examples to date include Greece, Iceland,
Ireland and Portugal ­ have required large international aid packages to avoid defaults on
sovereign debt. The resulting pressure to drastically reduce government spending threatens
political stability across Europe and, should the United States seriously address budget
deficits, perhaps there as well.
Against this backdrop, one might think it of small consequence that the financial crisis is
also said to have dealt major setbacks to academic theories, most particularly the Efficient
Capital Market Hypothesis (ECMH) (Fox 2010). After all, academic proponents of positions
whose value the financial crisis is said to have degraded suffer no material losses other than
to their egos. Indeed, academic theories by their nature operate to solicit their contradiction,
a point famously stressed by Thomas Kuhn (1962) almost 50 years ago.
Nevertheless, two things make this iteration of theory and response to the ECMH differ-
...