SESSION TOPIC: STOCK MARKET PRICE BEHAVIOR SESSION CHAIRMAN: BURTON G. MALKIEL EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* EuGENE F FAMA** I.Ⅰ NTRODUCTION THE PRIMARY ROLE of the capital market is allocation of ownership of the economys capital stock. In general terms, the ideal is a market in which prices provide accurate signals for resource allocation: that is a market in which firms can make production-investment decisions, and investors can choose among the securities that represent ownership of firms' activities under the assumption that security prices at any time fully reflect"all available in formation. a market in which prices always "fully reflect"'available informa tion is called"efficient This paper reviews the theoretical and empirical literature on the efficient markets model. After a discussion of the theory, empirical work concerned with the adjustment of security prices to three relevant information subset is considered. First, weak form tests, in which the information set is jus historical prices, are discussed. Then semi-strong form tests, in which the con- cern is whether prices efficiently adjust to other information that is obviously publicly available (e. g, announcements of annual earnings, stock splits, etc. are considered. Finally, strong form tests concerned with whether given in vestors or groups have monopolistic access to any information relevant for price formation are reviewed We shall conclude that with but a few ex ceptions, the efficient markets model stands up well Though we proceed from theory to empirical work, to keep the proper historical perspective we should note to a large extent the empirical work in this area preceded the development of the theory. The theory is presented first here in order to more easily judge which of the empirical results are most relevant from the viewpoint of the theory. The empirical work itself, however will then be reviewed in more or less historical sequence Finally, the perceptive reader will surely recognize instances in this paper where relevant studies are not specifically discussed. In such cases my apol ogies should be taken for granted. The area is so bountiful that some such injustices are unavoidable. But the primary goal here will have been complished if a coherent picture of the main lines of the work on efficient markets is presented, along with an accurate picture of the current state of the arts * upported by a grant from the National Science Foundation. I am indebted Robert Aliber, Ray Ball, Michael Jensen, James Lorie,Merton Miller Charles Nelson Roll, william Taylor, and Ross Watts for their helpful comments * University of Chicago-Joint Session with the Econometric Society 1. The distinction between weak and strong form tests was first suggested by harry Roberts 38