Foreword: Revisiting Gilson and Kraakman’s Efficiency Story

Gilson and Kraakman's Mechanisms of Market Efficiency1 is part of the canon of modern corporate law scholarship, one of a handful of articles that has profoundly influenced the way we think about the field. It is also enigmatic, warranting a fresh look by those who think they know what it says from some long-ago reading or second-hand references by other authors. Obligatory citations to Mechanisms often treat it as the kind of faithful embrace of a strong vision of capital market efficiency so common in the early 1980's-citing Easterbrook and Fischel for the normative implications of market efficiency, Gilson and Kraakman for how markets become efficient. But the latter is something of a citation half-truth. True, the article is an explanation of the various ways information becomes impounded in market price, and optimistically concedes that this is often a rapid and effective process. A reader inclined toward efficiency finds enough to justify his own faith. But that is not all-or really what-the article is about. The underlying insight is that there is a repertoire of mechanisms that operate with different levels of power as efficiency-drivers, depending on the relative availability and initial distribution of the information in question. In turn, relative availability is a function of the costs of acquiring and verifying it. Institutions-like underwritten public offerings-may arise to lower the costs of verifying issuer disclosures, contributing to efficiency in primary capital raising transactions. The punch line, however, is that markets will demonstrate different levels of efficiency in impounding different kinds of information. This transaction cost story means that even informational efficiency is a relative concept, filled with imperfections when the costs associated with discovery and verification are significant-hardly a bornagain confession of faith. The residual agnosticism becomes clear toward the end of the article. Gilson and Kraakman take aim at prevailing claims that insider trading should not be prohibited because it contributes to more efficient pricing for failing to recognize the difficulty the market has in decoding the informational content of an insider's trades. They then also take aim at George Benston's famous claim that the mandatory disclosure regime imposed by the federal securities laws in the 1930's delivered no appreciable value to investors. In the early 1980's, these claims held great influence over the thinking of efficiency-minded academics. Gilson and Kraakman issue a cautionary warning about assuming too much about the mechanisms of efficiency, and not paying enough attention to the cost problem. Had they been a bit bolder, then, they might have stricken "mechanisms" from their title and substituted something like "limits" or, borrowing from Grossman and Stiglitz, "impossibility."2 In any event, the limits to the efficiency aspect of the article anticipates and inspires a line of scholarship that evolved over the next twenty years about market failures-particularly in the form of agency cost problems-that make strong deregulatory claims problematic. This Symposium pays tribute to Mechanisms' originality, dispassion, rigor, and influence. The idea was to ask a diverse mix of scholars-with an emphasis on some of the best young minds that have come into this field to work recently-to take inspiration from Gilson and Kraakman and write whatever they wished about the contemporary state of mind regarding market efficiency. Some are strong critics of the efficient market hypothesis; others still work happily within its framework. Their subjects run from the stock markets themselves to matters like the law of trusts, using antitrust in securities market regulation, and how the takeover market differs in terms of the diffusion of information. Afterwards, Gilson and Kraakman respond, both commenting on the papers and offering their own reflections on Mechanisms, many years (and much thinking) later. …