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Abstract:
This Article posits that the essential role of securities regulations is to create a competitive market for information traders (analysts). The Article advances two related theses - one descriptive and the other normative. Descriptively, it demonstrates that securities regulation is specifically designed to facilitate and protect the work of analysts. Normatively, the Article shows that analysts are the only group that can best underwrite efficient and liquid capital markets and, hence, it is the group securities regulation should strive to protect. By protecting analysts, securities regulations enhance efficiency and liquidity in financial markets. This protection, in turn, benefits other types of investors by reducing transaction costs. Furthermore, by protecting analysts, securities regulation represents the highest form of market integrity by ensuring accurate pricing to all investors, and improves the allocation of resources in the economy.

Securities regulation may be divided into three broad categories: disclosure duties; restrictions on fraud and manipulation; and restrictions on insider trading - each of which contributes to the creation of a vibrant market for analysts. Disclosure duties reduce analysts - costs of gathering information, and diminish the ability of analysts to produce biased analyses in exchange for pay. Restrictions on fraud and manipulation lower analysts' cost of verifying the credibility of information, and enhance analysts' ability to make accurate predictions. Finally, restrictions on insider trading protect analysts from competition from insiders that would undercut the ability of analysts to recoup their investment in information, and thereby drive analysts out of the market. Thus, the effect of securities regulation is to develop and secure a competitive market for analysts.

Moreover, a competitive market for analysts reduces management agency costs. While courts can discern fraud or illegal transfers, they are ill-equipped to evaluate the quality of business decisions. Judicial oversight can curtail breaches of the duty of loyalty but not breaches of the duty of care; the tasks of curbing breaches of the duty of care and restraining inefficient investments are performed by analysts. Furthermore, a competitive analysts' market generates positive externalities for the rest of the economy by improving the information market and facilitating the operations of the investment banking industry.

Our account has important implications for several policy debates. First, our account supports the system of mandatory disclosure. We show that while 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 the 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 regardless of how efficient financial markets are. Fourth, our analysis suggests that in cases involving corporate misstatements, the appropriate standard of care should, in principle, be negligence, not fraud.

fraud on the market, mandatory disclosure, efficient market, agency cost, Information asymmetry, information externalities, buy-side analysts, sell-side analysts, accurate pricing, liquidity, insider trading, fraud and manipulation, governance structure

Abstract:
In this Essay, we present a brand new efficiency-based justification for the ban on insider trading. Adopting a broad-market approach to the problem enables us to transform conventional theorizing - which suggests that property rights in inside information must be allocated within the firm, either to shareholders or to managers - and present a third, superior option: allocating the property right to market analysts. This new conceptualization of the problem enables one to see that the crucial issue underlying insider trading policy is: which group-insiders or market analysts can best provide efficiency and liquidity to financial markets?

We argue, contrary to the accepted lore, that market analysts are superior to insiders in providing efficiency and liquidity to financial markets. Although insiders have ready access to inside information, they are isolated from external competition, and thus, if allowed to exploit this information through trade, they would seek to preserve and exploit their market power over inside information. Analysts, on the other hand, operate in a fiercely competitive environment, and, thus, process new information to the market as expeditiously as possible. Furthermore, because analysts possess greater financial resources, are able to diversify their investments, and frequently diverge in assessing stock prices, they also provide superior liquidity to financial markets.

Moreover, we show, for the first time, that competition among analysts generates a myriad of positive externalities for the economy. Competition among analysts is responsible for the burgeoning market for financial information, and the welter of financial media to which we are exposed. In addition, the analysts' market creates economies of scale for the investment banking industry as a result of continuous monitoring and pricing of stocks, attracting many foreign companies to list their shares on U.S. capital markets. None of this would occur if insiders were allowed to trade. Because of their ready access to inside information, insiders would consistently beat analysts when competing against them, eventually driving analysts out of the market. Given the substantial benefits derived from competition among analysts, we submit that insiders should be banned from appropriating inside information; or as we suggest, they should be assigned, what we call, a negative property right in inside information to allow a competitive information market to develop. We believe that the novel theorizing we develop presents a compelling economic case for retaining the prohibition on insider trading.

Finally, our broad market analysis provides a comprehensive analytic framework for analyzing the efficiency tradeoffs implicated by two unresolved aspects of insider trading: selective disclosure and warehousing.

Abstract:
Based on an economic analysis, the Article presents an innovative and comprehensive theory accounting for the problems inherent in self-dealing (i.e., conflict of interests). The theory enables the author to provide a unique presentation and evaluation of the relative efficiency of the solutions to the conflict of interests problem adopted by corporate laws.

Self-dealing presents a major problem in corporate law. It finds its particular expression in everyday corporate actions and deals between corporations and their controlling parties, subsidiaries, directors, corporate officers, or any other entity in which shareholders may have an interest. Conflict of interests in the context of corporate law may be controlled by a variety of means, ranging from the absolute prohibition of self-dealing to the prohibition of voting with conflicting interests (the "majority of the minority" vote), the imposition of fairness duties, and non-interventionary approaches.

The Article proposes a novel claim: The solution adopted is a choice between a "property rule" or a "liability rule". While a property rule prevents any transaction from proceeding without the minority owner's consent, a liability rule allows transactions to be imposed on an unwilling minority, but ensures that the minority is adequately compensated in objective market-value terms.

The choice between the two types of rules is a function of the total transaction costs in a particular legal system. These transaction costs include both the negotiation costs attendant upon a property rule, as well as the adjudication costs associated with a liability rule. The Article further reveals that the sum of transaction costs is influenced by the efficacy of the judicial system and of extra-legal mechanisms, such as the market for corporate control, the capital market, and the type of investors active in the market.

An empirical survey and analysis of several countries ? U.S., Canda, Germany, and Italy -- reveals and confirms the main theoretical claims of this Article. Indeed, leaving aside path-dependence-theories, there is not a single efficient solution suitable for every country; any solution chosen to cope with the self-dealing problem must conform to the local conditions of a given country.

Abstract:
The value of the freezeout option is important in many legal policy issues concerning corporate law. In this article, we present, for the first time, a method for determining the value of the minority stock and the freezeout option. We price the freezeout option with two different sets of assumptions regarding the controlling shareholder informational advantage, using both an exogenous and endogenous stock prices in our pricing. The result of our model indicates that when using an exogenous market price to determine fair value, the freezeout option has a low value and the minority stock is only slightly discounted. This result implies that the use of publicly known information, excluding market prices, in determining a fair value for minority stocks will not cause expropriation of minority shareholders and will not lead to inefficiency in corporate and controlling owners' decisions. Additionally, our model shows that a complete reliance on market prices will lead to inability to positively price and trade minority shares. Any consistent and predictable use of market prices by the courts in the valuation process will cause a discount relative to the weight given to market prices in that process. Combining both results it can be said that, indeed, in an efficient market, prices do reflect fair value, but this is so because courts do not heavily and consistently base their valuations on market prices. Empirical studies support our results.

freezeout, appraisal, asymmetric information, inside information, efficient market, courts performance

Abstract:
Voting is at the center of collective decision making within corporate law. While scholars have identified various problems with the voting mechanism, insincere voting - in the form of strategic and conflict of interest voting - is the most fundamental. As shown in this article, insincere voting distorts the voting mechanism at its root, undermining its ability to determine transaction efficiency. As further demonstrated, strategic and conflict of interest problems coincide with one another: Voting strategically often means being in conflict, and many fact patterns pose aspects of both problems. Nonetheless, although the solutions to both problems are different, in essence the problems are similar. In fact, all solutions to the problems of insincere voting are variations on two basic rules, namely, property rules and liability rules. Property rule protection, affords ex ante protection to minority shareholders who are being pressured to enter into a deal. Liability rule protection, affords ex post protection to the voter, allowing the transaction to take place without the consent of the minority while affording adequate compensation to them at a later date.

Voting, strategic voting, conflict of interest, liability rules, property rules