The economics of fraud-on-the-market: At what point does harm occur in a securities fraud case

This study will analyze the economic effects of the Fraud-on-the-Market (FOTM) theory of securities fraud, and whether the FOTM theory can be applied to establish transaction causation and loss causation. Fraud-on-the-market (FOTM) is the means by which investors bring federal lawsuits to recover trading losses attributable to misinformation disseminated by publicly traded corporations. FOTM has traditionally been applied to establish transaction causation. Little research has been conducted on whether FOTM can also be applied to establish loss causation. This study will answer the central question of when harm occurs: (1) when the stock is bought (acceptance of the price inflation theory), or (2) when the stock value declines (rejection of the price inflation theory). Behavioral finance theory has important implications for FOTM theory and will be used to explain investor behavior within the context of loss causation.