A Reputational Theory of Corporate Law
60 Pages Posted: 13 Apr 2015
Date Written: April 11, 2015
How does corporate law matter? This Article provides a new perspective on the longstanding question by suggesting that the main impact of corporate law is not in imposing sanctions, but rather in producing information. The process of litigation or regulatory investigations produces information on the behavior of defendant companies and businesspeople. This information reaches third parties and affects the way that outside observers treat the parties to the dispute. In other words, litigation affects behavior indirectly, through shaping reputational sanctions.
The Article then explores how exactly information from the courtroom translates into the court of public opinion. By analyzing the content of media coverage of famous corporate law cases, we gain two sets of insights. First, we learn that judicial scolding does not necessarily hurt the misbehaving company’s reputation. The reputational impact of litigation depends on factors such as whom the judge is scolding, what she is scolding them for, and how her scolding compares to the preexisting information environment. Second, we flesh out the ways in which information flows from the courtroom get distorted. Information intermediaries selectively disseminate certain pieces of information and ignore others. And defendant companies produce smokescreens in an attempt to divert the public’s attention.
Recognizing that corporate law affects behavior by facilitating reputational sanctions carries important policy implications. The Article reevaluates key doctrines in corporate and securities laws according to how they contribute to information production. In the process we refocus timely and practical debates, such as the desirability of open-ended standards and liberal pleading mechanisms and the proper scope of judicial review of the Securities and Exchange Commission’s actions.
Keywords: Corporate Governance, Reputation, Corporate Law, Fiduciary Duty Litigation, Securities Law, SEC, Corporate Litigation, Securities Litigation, Law and Social Norms, SEC settlements
JEL Classification: D83, K22, K41
Suggested Citation: Suggested Citation