Academic

Fisch on Private Securities Litigation

By Lawrence Solum

Jill E. Fisch (University of Pennsylvania Law School) has posted Confronting the Circularity Problem in Private Securities Litigation (Wisconsin Law Review, Vol. 2009, p. 333, 2009) on SSRN. Here is the abstract:

Many critics argue that private securities litigation fails effectively either to deter corporate misconduct or to compensate defrauded investors. In particular, commentators reason that damages reflect socially inefficient transfer payments - the so-called circularity problem. Fox and Mitchell address the circularity problem by identifying new reasons why private litigation is an effective deterrent, focusing on the role of disclosure in improving corporate governance.

The corporate governance rationale for securities regulation is more powerful than the authors recognize. By collecting and using corporate information in their trading decisions, informed investors play a critical role in enhancing market efficiency. This efficiency, in turn, allows the capital markets to discipline management, producing a governance externality that improves corporate decision-making and benefits non-trading shareholders. As this article shows, this governance externality justifies compensating informed traders for their fraud-based trading losses.

Full post as published by Legal Theory Blog on April 21, 2009 (boomark / email).