This Article posits that the essential role of securities regulation is to create a competitive market for sophisticated professional investors and analysts (information traders). The Article advances two related theses-one descriptive and the other normative. Descriptively, the Article demonstrates that securities regulation is specifically designed to facilitate and protect the work of information traders. Securities regulation may be divided into three broad categories: (i) disclosure duties; (ii) restrictions on fraud and manipulation; and (iii) restrictions on insider trading-each of which contributes to the creation of a vibrant market for information traders. Disclosure duties reduce information traders' costs of searching and gathering information. Restrictions on fraud and manipulation lower information traders' cost of verifying the credibility of information, and thus enhance information traders' ability to make accurate predictions. Finally, restrictions on insider trading protect information traders from competition from insiders that would undermine information traders' ability to recoup their investment in information. Normatively, the Article shows that information traders can best underwrite efficient and liquid capital markets, and, hence, it is this group that securities regulation should strive to protect. Our account has important implications for several policy debates. First, our account supports the system of mandatory disclosure. We show that, although market forces may provide management with an adequate incentive to disclose at the initial public offering (IPO) stage, they cannot be relied on to effect optimal disclosure thereafter. Second, our analysis categorically rejects calls to limit disclosure duties to hard information and self-dealing by management. Third, our analysis supports the use of the fraud-on-the-market presumption in all fraud cases even when markets are inefficient. Fourth, our analysis suggests that in cases involving corporate misstatements, the appropriate standard of care should, in principle, be negligence, not fraud.
Basic, Class Action, Class Certification, fraud-on-the-market, Halliburton, securities litigation, mandatory disclosure, Efficient Market, agency cost, Information Asymmetry, analysts, accurate pricing, liquidity, insider trading, fraud and manipulation, governance structure
Duke Law Journal
Goshen, Zohar and Parchomovsky, Gideon, "The Essential Role of Securities Regulation" (2006). All Faculty Scholarship. 549.
Banking and Finance Law Commons, Corporate Finance Commons, Economic Policy Commons, Finance Commons, Law and Economics Commons, Policy Design, Analysis, and Evaluation Commons, Political Economy Commons, Portfolio and Security Analysis Commons, Public Law and Legal Theory Commons, Securities Law Commons