Efficient-market theory holds that stock demand curves are essentially flat

Evidence

On the efficient-market view expressed by Scholes, however, the demand curve for a corporation’s stock is flat: ”… the demand curve facing individual shareholders is essentially horizontal” (Scholes 1972, p. 182). Equivalently, the price elasticity of demand “the percentage change in the quantity of a good demanded divided by the corresponding percentage change in its price” (Begg, Fischer, and Dornbusch 1997, p. 57) is in the case of stock “virtually infinite” (Scholes 1970, p. 1). Above a certain price level, the stock would not be purchased at all; below that level, there would be effectively infinite demand for it. The view that the demand curve for a stock is flat seems to have been deeply counterintuitive to traditional finance scholars, and I suspect remains so to many practitioners, yet Scholes concluded that his Ph.D. research, an empirical study of “secondary distributions” (sales of large blocks of already-issued stock), was consistent with this view (Scholes 1970, 1972). — Donald MacKenzie, An Engine, Not a Camera, 1503

Categorization

• DEFINE: defines price elasticity of demand and the flat-demand-curve claim central to efficient-market orthodoxy.
• XREF: connects to the performativity thesis: Scholes’s efficient-market theory becoming a self-fulfilling empirical reality is a classic performativity case, resonating with the book’s core argument. — connects to: Efficient-market theory still assumed securities had intrinsic value rooted in corporate fundamentals — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 342; Efficient-market theory holds stocks are interchangeable rights to income streams — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 460
• QUESTION: Worth chasing: whether later empirical work (post-1990) still supports the near-flat demand curve, especially given shifts in index-fund and passive investing demand.