Document Type
Article
Publication Date
2009
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.
Keywords
Securities law, corporations, corporate misconduct, fraud-based trading losses, damages, transfer payments, inefficiency, deterrence, disclosure, transparency, corporate governance externality, market efficiency
Publication Title
Wisconsin Law Review
Repository Citation
Fisch, Jill E., "Confronting the Circularity Problem in Private Securities Litigation" (2009). All Faculty Scholarship. 264.
https://scholarship.law.upenn.edu/faculty_scholarship/264
Included in
Business Law, Public Responsibility, and Ethics Commons, Business Organizations Law Commons, Corporate Finance Commons, Law and Economics Commons, Political Economy Commons, Securities Law Commons
Publication Citation
2009 Wisc. L. Rev. 333