Effective securities regulation contributes to financial stability by establishing a sound environment for capital formation. It fosters the efficient allocation of resources within an economy, without the need for government direction of those resources. In the United States the federal securities laws are predicated on the theory that full disclosure by companies will enable participants in the public securities markets to price securities efficiently, and that this pricing mechanism will then foster the efficient allocation of resources among businesses competing for capital. Such efficient pricing should reduce speculation and undue price volatility. In order for full disclosure to be an effective basis for regulation, however, the disclosure must be free from fraud.