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Confronting the Circularity Problem in Private Securities Litigation

By Jill Fisch


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

Topics: Securities law, corporations, corporate misconduct, fraud-based trading losses, damages, transfer payments, inefficiency, deterrence, disclosure, transparency, corporate governance externality, market efficiency, Corporations, Law and Economics, Securities Law, Business Organizations Law, Law and Economics, Securities Law
Publisher: NELLCO Legal Scholarship Repository
Year: 2009
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