By Eugene F. Fama
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Additional resources for Efficient Capital Markets: II
His disturbing finding is that the market does not react quickly to public information about insider trading. Outsiders can profit from the knowledge that there has been heavy insider trading for up to 8 months after information about the trading becomes public-a startling contradiction of market efficiency. Seyhun (1986) offers an explanation. He confirms that insiders profit from their trades, but he does not confirm Jaffe's finding that outsiders can profit from public information about insider trading.
Poterba, James and Lawrence Summers, 1988, Mean reversion in stock prices: Evidence and implications, Journal of Financial Economics 22, 27-59. , 1981, Misspecification of capital asset pricing: Empirical anomalies based on earnings yields and market values, Journal of Financial Economics 12, 89-104. , 1983, The anomalous stock market behavior of small firms in January, Journal of Financial Economics 12, 89-104. , 1988, The buying and selling behavior of individual investors at the turn of the year, Journal of Finance 43, 701-717.
These results are consistent with the "noisy rational expectations" model of competitive equilibrium of Grossman and Stiglitz (1980). In brief, because generating information has costs, informed investors are compensated for the costs they incur to ensure that prices adjust to information. The market is then less than fully efficient (there can be private information not fully reflected in prices), but in a way that is consistent with rational behavior by all investors. C. Professional Portfolio Management Jensen's (1968, 1969) early results were bad news for the mutual-fund industry.