Forensic Expert Testing in Securities Class Actions: the Application of the Cammer Factors as a Tool to Test Market Efficiency

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An “event study” is a useful tool performed by experts to measure the effect of the disclosure of information on the price of a particular security. This effect is measured by assessing the statistical significance of any “abnormal returns” that correlate to the specific news event. For example, it was recently reported that 1.9billion euros supposedly held on behalf of German blue-chip company Wisecard “probably didn’t exist” (the Information)[1] In three days of trading the share price dropped by 75% from €104.50 to €25.80.

An event study could be used to assess the effect of the above Information on the share price drop and that could then be adduced as evidence in proceedings to prove the materiality or significance of the Information on the share price. Of course, the above is a topical and obvious example of the effect that information can have on a share price; there are many shades of grey.

Nonetheless, event study evidence is premised on a fundamental assumption of market efficiency. If markets are not efficient then event study analysis has little insight on the correlation between information and share price. A United States decision in Cammer v Bloom 711 F Supp 1264 LDNT 1989 developed five factors which allow a party to test the efficiency of a market for a particular stock. These factors have recently been applied with approval for the first time by the Federal Court of Australia in TPT Patrol v Myer Holdings Ltd [2019] FCA 1747. They are useful in so far as they allow a practitioner or expert to quickly test for market efficiency.

Efficient Market Hypothesis

Broadly, the efficient market hypothesis holds that the price of a traded security, such as shares in a publicly listed company, incorporates all publicly available information that is relevant to the valuation of a company. As new information arises, shareholders views of the company change creating a correction to the share price.[2] On the other hand, an inefficient market is one that does not incorporate all available information into the price. Market inefficiencies arise for a variety of reasons including human emotion. For example, some academics hold the opinion that the market for trading in “bitcoin” is inefficient.[3] This is an understandable opinion when regard is had to the price history of that product.

In order to assess market efficiency, it needs to be viewed in the context of the particular market as a whole and in the context of the particular security within that market. As to the former, the particular market in question is usually the Australian Securities Exchange (ASX) which is generally regarded as efficient.[4] As to the latter, market efficiency needs to be analysed on an individual security basis.

The Cammer Factors

The United States decision of Cammer v Bloom sets out five factors that act as guidelines for testing market efficiency in a particular stock. These are particularly useful as they allow a practitioner to easily test for market efficiency at the investigation stage of a proceeding or when formulating a Defence. The factors are discussed below:

            (i) Average weekly trading volume

The average weekly trading volume of a stock is the average of the volume of shares traded in a given week. The first factor states that a weekly trading volume greater than one percent of the securities total shares on issue justifies a presumption of efficiency. A two percent volume leads to an even greater level of efficiency. As noted in Cammer, at 1286, “the reason the existence of an actively traded market suggests there is an efficient market is because it implies significant investor interest in the company. Such interest, in turn, implies a likelihood that many investors are executing trades on the basis of newly available or disseminated corporate information.”

            (ii) Amount of analyst coverage

The second factor refers to the amount of analyst coverage that a particular stock receives. A higher level of analyst coverage supports market efficiency. This is on the basis that analysts are supposed to closely review covered stocks and make buy or sell recommendations accordingly.

            (iii) The existence of market makers

The third factor is the existence of market makers and arbitrageurs. These ordinarily take the form of sophisticated institutional investors. They tend to point toward market efficiency because of their sophistication and use of complex valuation methods. A glance of the register of substantial shareholders will usually tell of the existence of any market makers. The annual report of the relevant entity will contain this information as the entity is required to file such information in accordance with ASX Listing Rule 4.10.4.

            (iv) Market Capitalisation

Fourth, the size of the company expressed by its market capitalisation. In Cammer this was expressed as whether or not the company was eligible to file “S-3 registration statements.” As noted in TPT Patrol, a similar statement is not required to be filed in Australia however there is an analogy with market capitalisation and size. A large market capitalisation tends toward efficiency although no judicial commentary has been made on what exactly constitutes “large.”

            (v) Relationship between news and price

Finally, as the efficient market hypothesis rests on the market quickly absorbing new information, it is necessary to examine how the stock in question absorbs news into the share price. Price reactions on days where there is significant news is indicative of this cause and effect relationship.

Application of the above factors provides a quick view of the efficiency of a particular security. Aside from TPT Patrol (discussed below), the Cammer factors have been considered in two other Australian cases including In the matter of HIH Insurance Limited [2016] NSWSC 482; 113 ACSR 318 and Earglow Pty Ltd v Newcrest Mining [2015] FCA 328; 106 ACSR 49 (Earglow). In Earglow, in the context of event study evidence (at 91) Beach J held:

now in order to use event studies at the first stage trial in the proceedings before me, one matter that will need to be established on the evidence is the “semi-strong” version of the efficient capital market hypothesis … unsurprisingly, reference may have to be made to the well-known proxy factors referred to in Cammer v Bloom.”

Application of the Factors

TPT Patrol was the first Australian case to explicitly adopt the Cammer factors as guidelines for assessing the efficiency of a particular market. This is unsurprising given that it was the first securities class action to proceed to judgment in Australia.

After outlining each of the factors, Beach J applied the facts of the entity in question against each of the five factors to conclude, at 722, that the market in Myer securities was efficient during the control period. Relevantly:

(i) the average weekly trading volume for Myer was around 5.4% of all shares on issue, much higher than the 1% to 2% required by the first Cammer factor;

(ii) during the relevant period, 11 analysts covered the Myer security on the ASX. This was enough to tend toward an efficient market. When applying the second Cammer factor in the US decision of Lehocky v Tidel Tech Inc 220 FBD 491, the United States District Court for the Southern District of Texas held that “four” analysts was “relatively neutral in terms of finding market efficiency.” It follows that more than four may swing the balance in favour of efficiency;

(iv) fourth, Myer’s average market capitalisation during the relevant period was $1,151million. This was compared against the average market capitalisation for listed companies on the ASX during the same period which was found to be between $787million and $876million. At [706] “these tests lend significant support to a presumption of market efficiency in the trading of Myer shares.”

(v) finally, with heavy emphasis on the expert’s statistical analysis the Court found (at 718) that there was the necessary cause and effect relationship between the trading price of Myer shares and price sensitive company announcements.

Future Effects and Limitations

The above facts are useful in so far as they provide a reliable set of guidelines with which to test market efficiency at an early stage.

Some caution needs to be ascribed to following the United States examples closely. This is because of the divergent position on reliance and causation. In the United States, the “fraud on the market” doctrine holds that a finding of market efficiency leads to a “rebuttable presumption” that investors relied on the soundness of the market price when purchasing shares. In Australia, market-based or indirect causation requires the shareholder to have purchased securities on market at an inflated price, there is no need to establish individual reliance. Indirect causation was accepted in TPT Patrol. However, it is important to recognise that market based causation is accepted as a principle of law, it still needs to be put to proof in each individual case along with the inflation based measure of loss.

Finally, the Cammer factors are not solely determinative of market efficiency. Where some factors are not positive it is possible to supplement this with other evidence. For example, it may be that a particular security is not widely followed by analysts thereby failing Cammer factor 2, this could be supplemented by qualitative evidence from a market analyst describing the market for securities of that kind.


25 June 2020

[1] Australian Financial Review, “there was speculation about kidnap threats: J Cap”, 23 June 2020

[2] TPT Patrol at [669]

[3] Urquhart, Andrew, the Inefficiency of Bitcoin, University of Southhampton

[4] TPT Patrol at [676]

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