The efficient market hypothesis is a theory describing the relationship between financially significant information and changes in the market prices of securities. The widely accepted form of this theory, upon which much of the Securities and Exchange Commission’s disclosure policy is based, is that security prices reflect all publicly available information. While publicly available information may not be the sole determinant of the price, if an issuer with publicly traded securities releases false or misleading information into the marketplace, the pricing mechanism for its securities is impaired.
Justice Harry Blackmun relied upon this theory in Basic v. Levinson1 to hold that the plaintiff in a class action under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 can invoke a presumption of reliance because investors in the public securities markets rely upon the integrity of the price of a security if the trading market for that security is efficient. An important predicate for this holding was the implementation of congressional intent to protect investors and ensure fairness in the financial markets.
