ESG Investing

The Role of Financial Economics in Securities Fraud Cases

Topics - ESG Investing

${ numberSection } ${ text }
The Role of Financial Economics in Securities Fraud Cases

Modern financial economics is becoming increasingly influential in securities fraud law. The efficient markets hypothesis has provided a framework for the analysis of certain questions and a basis for generating empirical evidence on the value of information in individual cases.

Of particular importance is an empirical technique derived from the efficient markets hypothesis — the event study. Event studies are useful to establish, among other things, materiality, as well as to calculate damages in securities fraud litigation.

At the time this article was published, event study analysis already had been used in five SEC enforcement actions. Event study analysis is useful at all stages of litigation to both defendants and plaintiffs. The analysis is applicable, not just in SEC insider trading cases, but in all types of securities fraud actions, including private suits.

The article describes event study as an empirical technique developed by academic financial economists and shows how it is relevant in securities fraud law. It also shows its application in SEC enforcement actions to establish materiality and calculate disgorgement. In particular, they show how regulators and the courts used an event study to calculate how much in ill-gotten gains an executive recruiter should be required to disgorge after he was shown to have traded on nonpublic information about a CEO change at a telecommunications company.

Published in

The Business Lawyer

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.