Weary of dueling experts, the Delaware Court of Chancery has shifted its attention more toward using a stock’s market price as the best measure of fair value in statutory appraisal matters. This means that valuation experts who come up with a different value would, therefore, need to prove that the market is not efficient. What methodology can be used to prove—or disprove—market efficiency?

Look to fraud cases: Market efficiency is a key factor in federal securities fraud cases, so the methodology used in those cases can be used for appraisal cases, according to Steven P. Feinstein, Ph.D., CFA. He is an associate professor of finance at Babson College and founder and president of Crowninshield Financial Research and has been engaged in many securities fraud cases.

Feinstein gave a presentation at NACVA’s Business Valuation & Financial Litigation Super Conference in July based on research and a working paper by him and Jaime d’Almeida (d’Almeida Consulting LLC). In addition to giving background and context, he presented a framework for a market efficiency analysis based on factors from several precedential court cases, namely Cammer v. Bloom and Krogman v. Sterritt. In addition to these factors, direct empirical evidence is needed to demonstrate a cause-and-effect relationship between corporate disclosures and stock price movements (Feinstein used a Fisher exact test in his case study examples).

The September issue of Business Valuation Update has details of the framework, several case studies that demonstrate the analysis, and some suggested report language. And we look forward to their upcoming paper to which we will alert readers when it is available.