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.
Description
The Continuing Evolution of Securities Class Actions Symposium
