Fraud-on-the-Market Liability in the ESG Era

Fraud-on-the-market (“FOTM”) suits are thought to generate considerable benefits for society – namely, those associated with increased stock-market liquidity and price accuracy. But these suits are also said to impose outsized costs. The federal courts have thus long tried to efficiently screen out FOTM claims that do not sufficiently implicate the benefits, even if judges do not always describe their work in these terms.

In Halliburton II (2014), the Supreme Court rejected arguments for shifting the relevant FOTM screening framework to an inquiry into price impact (burden on the plaintiff) rather than on the longstanding inquiry into market efficiency (burden … Read more

Marginal Benefits of the Core Securities Laws

To many, the core securities laws on disclosure, fraud, and insider trading are desirable from an investor-protection perspective. But the dominant law and economics view is dubious of this thinking. Under this view, securities prices are discounted to reflect obstacles to the cash flows investors expect to receive, thereby preserving the returns those investors would expect even absent those obstacles. Information asymmetry in the stock market presents such an obstacle, and is therefore addressed by such a discount. Private ordering thus saves the day.

In Marginal Benefits of the Core Securities Laws, I aim to shed more light on … Read more

Making a Market for Corporate Disclosure

Public-company information has great social value. However, it is widely thought that left to their own devices, firms will under-disclose information about their condition and prospects. This thinking is embodied in the mandatory-disclosure regime that sits at the foundation of modern securities law. But government-compelled disclosure in this area—including piecemeal additions to the disclosure regime based on the latest Washington fad—leaves much to be desired.

In our recent article, Making a Market for Corporate Disclosure, we argue that the under-disclosure concern could be addressed in a far broader way by constructing a well-regulated market for tiered access to corporate … Read more

Making a Market for Corporate Disclosure

Mandatory disclosure sits at the foundation of modern securities regulation. Public companies must produce and share a wide variety of information about their condition and prospects, and they must do so on their own dime.

There can be little doubt that corporate information has great social value. Much has been written on the connection between more informative securities prices, on the one hand, and improved capital allocation and corporate governance, on the other. Nevertheless, it is equally as clear that having the government dictate the amount, format, and timing of corporate disclosure will leave society with less than the optimal … Read more

Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed

Corporate information that moves stock-market prices has long sat at the center of modern securities regulation in the United States. The Great Depression-era securities laws at the foundation of the field require much mandatory disclosure of this type of information. They also include a strict anti-fraud regime to ensure the credibility of those disclosures of that information. And for a half century now, that regime has been interpreted to prohibit insiders from trading on the same information. All of these laws have been motivated by both concerns for fairness and economic efficiency.

Today, a new body of securities law is … Read more

Stock-Market Law and the Accuracy of Public Companies’ Stock Prices

The following post comes to us from Kevin S. Haeberle, Post-Doctoral Research Scholar, Program in the Law & Economics of Capital Markets, Columbia Law School & Columbia Business School.

It is well understood that society is better off when public companies’ stock prices are more accurate—that is, when stock prices better reflect firms’ actual values. Enhanced stock-price accuracy, the argument goes, leads to improved corporate governance and capital allocation—thereby increasing social wealth. But it is widely believed that those who make stock prices more accurate are unable to capture the full social benefits of their work—meaning that market forces, … Read more