Vicarious Liability for Bad Corporate Governance: Are We Wrong About 10b-5?
James C. Spindler
University of Texas School of Law; McCombs School of Business, University of Texas at Austin
April 16, 2008
USC CLEO Research Paper No. C08-3
21st Australasian Finance and Banking Conference 2008 Paper
American Law and Economics Review, Forthcoming
I formulate a rational expectations signaling model of vicarious liability for securities fraud, particularly the much-criticized "fraud on the market" private class action arising under Rule 10b-5. I show that fraudulent misreporting by managers occurs in the absence of managerial moral hazard -- i.e., where managers simply maximize shareholder payoffs -- and that vicarious liability can serve as an appropriate deterrent, creating separating equilibrium. I then show that the particular remedy under Rule 10b-5 can perfectly deter fraud and perfectly compensate purchasers, and that Rule 10b-5 class actions may function better than critics claim.
Number of Pages in PDF File: 42working papers series
Date posted: February 4, 2008 ; Last revised: February 20, 2010
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