Regulations
The foundation of market efficiency theory is based on a hypothesis that assumes all the information is publicly available to everyone for free. However, this hypothesis is arguable both on the theoretical level and the real market practices level.
On the real market practice level, the regulatory body started to doubt on the accuracy and completeness of the information market produced after the great depression in 1929.
According to the Securities Exchange Act of 1934,
“[the implementation of regulation] is in order to protect interstate commerce, the national credit… to protect and make more effective the national banking system and Federal Reserve System, and to insure the fair and honest of markets in such transaction.”
This statement points out that the fairness and integrity of securities market need regulations to monitor and enforce.
Furthermore, M.H. Cohen ect. conducted a comprehensive investigation to examine the U.S. securities and exchange industry and then formed his noted paper “The report of the special study of the securities markets” on 1964. He stated that,
“The report points out the broad range of problems and abuses in the securities markets, including improper selling practices, misleading public relations, irresponsible investment advice, and erratic “after markets” for new issues.”
They believed that the implementation of proper regulations on the securities and exchange market is necessary for protecting public interest, as well as the industry itself. (Cohen, 1964).
In addition, Millon-Cornett (1989), in his paper examined the impact of a deregulation act called “depository institutions deregulation and monetary control act of 1980”. He found that this act produced positives abnormal returns to stockholders of large commercial banks and negative abnormal returns to the small size stockholders. This conclusion