Insider Trading in a Globalizing Market: Who Should Regulate What?

As the market for securities becomes increasingly global, the question of whose rules should apply to any particular transaction will arise with increasing frequency. The issue is examined

Lessons from Fiascos in Russian Corporate Governance

"Bad corporate governance" is often invoked to explain poor enterprise performance, but the catch phrase is never precisely defined - neither its consequences for the real economy, nor its causes in particular countries has been adequately explained. This paper uses Russian enterprise examples to address these open questions in corporate governance theory. We define corporate governance by looking to the economic functions of the firm rather than to any particular set of national corporate laws. Firms exhibit good corporate governance when their managers maximize residuals and, in the case of investor-owned firms, make pro rata distributions to shareholders. First, using this definition, we develop a typology that shows the channels through which bad corporate governance can inflict damage on the real economy. The topology helps identify vulnerabilities to corporate governance problems that may appear in any country and it suggests a new way to tailor policy responses. Second, we explain the causes of poor corporate performance in Russia by looking to the particular conditions prevailing at privatization - untenable initial firm boundaries and insider allocation of firm shares - and the bargaining dynamics that followed. The focus on initial conditions helps expand a comparative corporate governance literature built on United States, Western European, and Japanese models. Lessons from Russian fiascos counsel caution as to "stakeholder" proposals - including labor or local communities in formal corporate governance - and generate testable hypotheses regarding potential losses from the multiple large block share ownerships typical of many U.S. firms, especially close corporations.

The Issuer Choice Debate

This article responds to Professor Romano's piece in this issue. It concerns our ongoing debate with regard to the desirability of permitting issuers to choose the securities regulation regime by which they are bound. Romano favors issuer choice, arguing that it would result in jurisdictional competition to offer issuers share value maximizing regulations. I, in contrast, believe that abandoning the current mandatory system of federal securities disclosure would likely lower, not increase, US welfare. Each issuer, I argue, would select a regime requiring a level of disclosure less than is socially optimal because its private costs of disclosure would be greater than the social costs of such disclosure. Professor Romano and I agree on most of the basic analytic building blocks for deciding whether issuer choice is a desirable reform: belief in analyzing the problem in terms of the broadly accepted principles of modem financial economics; recognition that disclosure has costs as well as benefits; and acknowledgment that incentives exist for issuers to provide at least some disclosure. We nevertheless reach the opposite conclusion on the desirability of issuer choice. To start, Romano believes that issuers' private costs of disclosure will not generally be greater than the social costs of such disclosure, whereas I show they will be. Romano argues as well that this is a special case in which any divergence of private and social costs that does exist will not lead to a market failure, at least one possibly correctable by public regulation. I show her argument to be unpersuasive. Finally, Romano interprets the existing empirical evidence as proving mandatory disclosure's lack of social value, while I show that the evidence in fact does not point in either direction. Where, as here, the theoretical case for the existence of a market failure is strong and the current program for dealing with it is widely admired, the advocate of change should have the burden of proof. Professor Romano has not met this burden. If she is serious about advancing her proposal for issuer choice, she needs to show that despite the market failure inherent in issuer choice, there is inevitably an even greater failure in the regulatory response. Absent such a showing, mandatory disclosure should be retained

Company Registration and the Private Placement Exemption

Over the last twenty years, there has been a steady shift in securities disclosure regulation away from its traditional transactional basis toward a system of company registration. Under the transaction based approach, each new public offering of a security has to be registered under the Securities Act of 1933 (the 1933 Act ), a requirement that reflects the SEC\u27s traditional concern that the most important time to have high-quality disclosure is at the moment of a securities offering. Under the company registration approach, an established, publicly traded issuer would register just once, provide information thereafter on a periodic basis, and then be able to offer and sell securities whenever it wishes, without the need to register the securities themselves. The logic of the shift to company registration rests on two pillars. One is the fact that pursuant to the periodic reporting requirements of the Securities Exchange Act of 1934 (the 1934 Act ), publicly traded issuers are already required on a continuing basis to answer most of the questions that they have been traditionally been asked to answer when they registered new offerings of securities under the 1933 Act. The other is the efficient market hypothesis, which holds that all information contained in an established issuer\u27s periodic reports is immediately reflected in the trading price of the issuer\u27s securities. Registration of new offerings, the logic suggests, serves no useful purpose since it simply involves repetition of information already reflected in the issuer\u27s secondary market share price, which in turn will set the price of the new offering

The Securities Globalization Disclosure Debate

A global market is developing for the shares of an increasing portion of the world’s 41,000 publicly-traded issuers. This trend has given rise to an active debate concerning what United States policy should be toward regulation of their disclosure practices. This Article is a comment on this debate through the eyes of an active participan

The Political Economy of Statutory Reach: U.S. Disclosure Rules in a Globalizing Market for Securities

This article addresses the appropriate reach of the US mandatory securities disclosure regime. While disclosure obligations are imposed on issuers, they are triggered by transactions; the public offering of, or public trading in, the issuers' shares. The barriers to a truly global market for equities continue to lessen: financial information is becoming increasingly globalized and it is becoming increasingly inexpensive and easy to effect share transactions abroad. It is concluded that capital allocation improvement and managerial agency cost reduction is the only viable goal for disclosure regulation in a world with a global market for securities. It is recommended that the reach of the US disclosure regime be determined by the nationality of the issuer

Civil Liability and Mandatory Disclosure

This Article explores the efficient design of civil liability for mandatory securities disclosure violations by established issuers. An issuer not publicly offering securities at the time of a violation should have no liability. Its annual filings should be signed by an external certifier – an investment bank or other well-capitalized entity with financial expertise. If the filing contains a material misstatement and the certifier fails to do due diligence, the certifier should face measured liability. Officers and directors should face similar liability, capped relative to their compensation but with no indemnification or insurance allowed. Damages should be payable to the issuer, not traders in its shares, because the true social harm from issuer misstatements is poor corporate governance and reduced liquidity. A trader is as likely to be a gainer by selling, as a loser by buying, at the misstatement-inflated price. An issuer publicly offering securities at the time of a violation should be liable to purchasers for the resulting inflation in price. Such liability is an antidote to what otherwise would be an extra incentive not to comply. This design would increase incentives for U.S. issuers to comply with periodic disclosure rules. At the same time, litigation-expensive fraud-on-themarket class actions would be eliminated. So would underwriter liability for lack of due diligence, a sharply diminishing spur for disclosure given the speed of modern offerings. For countries considering implementation of securities disclosure civil liability systems for the first time, this design helps them get it right from the start

Why Civil Liability for Disclosure Violations When Issuers Do Not Trade?

Civil damages liability for securities law periodic disclosure violations has come under attack, particularly fraud-on-the-market class-action lawsuits for investor losses incurred in connection with trading in the secondary market when the issuer has not sold shares. The main line of attack has been the weakness of the compensatory rationale for such suits. Without a compensatory justification, the attackers suggest, the availability of this cause of action is hard to defend given the very substantial use of social resources involved in the litigation that it generates. The critics are right concerning the weakness of the compensatory justification for civil liability. They ignore, however, a second potential justification: deterrence. This Paper considers the deterrence justification for civil liability. The basic question is whether civil liability should provide at least part of the system of incentives for compliance with securities-law periodic disclosure rules, or whether reliance solely on governmentally imposed administrative and criminal sanctions would be better. In most areas of public regulation, enforcement is solely governmental. There are exceptions, however, where government enforcement is supplemented by civil liability. Antitrust, consumer law, environmental law, and governmental procurement fraud prevention are prominent examples in the United States. From a social-policy perspective, is it desirable to include securities disclosure regulation among these exceptions? The analysis here should usefully inform both the ongoing debate concerning securities class-action-lawsuit reform in the United States and discussions abroad concerning increasing the use of civil liability in other countries