Mandatory Arbitration and the Market for Reputation

41 Pages Posted: 2 May 2019

See all articles by Roy Shapira

Roy Shapira

Stigler Center, University of Chicago Booth School of Business; Interdiscplinary Center (IDC)

Date Written: April 23, 2019

Abstract

Is mandatory arbitration of shareholder claims desirable? With the blessing of the Supreme Court, mandatory arbitration provisions with class action waivers have become common in contract, consumer, and labor law. Policymakers now consider importing this trend to corporate and securities laws as well. The existing debate centers around consent and compensation: Can shareholders be held to consent to arbitration provisions in the company’s corporate governance documents? Are shareholders better off with arbitration, given that litigation currently offers them very little compensation (with high fees)? This Article adopts a different, information-production perspective. It examines how the choice between litigation and arbitration affects the effectiveness of market discipline. Litigation, regardless of the legal outcomes, produces a positive externality: information on corporate behavior. Internal memos, emails, spreadsheets, and transcripts that are exposed in the process give us a glimpse into how the company-in-question is ran. This information helps outside observers reassess their willingness to do business with the parties to the dispute. In other words, litigation shapes the reputations of companies and businesspersons. By shifting from litigation to arbitration, we are likely to save administrative costs, but lose some of the effectiveness of reputational deterrence. While adopting a mandatory arbitration provision can be desirable for a given company, the ex ante effects of allowing such provisions would be overall detrimental to the market.

Keywords: Arbitration, Shareholder Litigation, Reputation, Section 220 Requests, Whistleblowing, PSLRA, SEC Enforcement, Mandatory Arbitration Provisions, Information Production, Law and Reputation, Economic Analysis of Law

JEL Classification: K22, K41, K42, L14

Suggested Citation

Shapira, Roy, Mandatory Arbitration and the Market for Reputation (April 23, 2019). Boston University Law Review, Vol. 99 (Forthcoming). Available at SSRN: https://ssrn.com/abstract=3376781 or http://dx.doi.org/10.2139/ssrn.3376781

Roy Shapira (Contact Author)

Stigler Center, University of Chicago Booth School of Business ( email )

Walker Hall
Chicago, IL 60637
United States

Interdiscplinary Center (IDC) ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-9602410 (Phone)
972-9-9527996 (Fax)

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