One of the persistent tropes in the debate over the desirability of
private securities class-action lawsuits is that innocent shareholders pay the
damages. The claim that shareholders are indeed innocent has rarely been
examined. In this Paper, I take the assertion seriously, tracing the use of the
concept from its origins as a rhetorical antiregulatory device from the 1890s
through about 1920; its disappearance as the rising New Deal concern with
corporate power led to a variety of academic, regulatory, and popular
efforts to achieve shareholder empowerment; its reemergence in the 1970s
as modern finance theory; and its separation of the shareholder from the
corporation and reconceptualization of her as a passive, diversified
receptacle of profit. The dominant economic thinking has been so widely
accepted that rejuvenated claims of shareholder innocence are made at least
as often by those in favor of regulation as by those against it.
Following my presentation of this history, I argue that the
contemporary innocent-shareholder argument ignores both the reality and
emerging theory of shareholder empowerment, and make some suggestions
as to why and how shareholders can and should be expected to take a share
of responsibility for market integrity. Damages awards in class-action
lawsuits help to create the proper incentives.
Description
The Continuing Evolution of Securities Class Actions Symposium
