Fraud-on-the-market theory

The Fraud-on-the-market theory assumes that when a company commits fraud and releases false information, this misinformation affects the stock’s price because investors rely on publicly available data for their decisions. As a result, all shareholders are considered to have been harmed equally by the fraud, since the stock’s value is distorted. This theory allows investors to recover damages through a class action lawsuit without having to prove that they individually relied on the fraudulent information. Essentially, it facilitates collective legal action by recognizing that the market’s price reflects the alleged misconduct.