Securities Law Commons^™

Do Individual Investors Affect Share Price Accuracy? Some Preliminary Evidence, Alicia Davis Evans

Law & Economics Working Papers Archive: 2003-2009

A common belief is that individual investors are noise traders that distort stock prices. Because accurate share prices are important for economic functioning, the market effect of retail investors has significant regulatory implications. This paper, employing a new NYSE retail trading data set and the R2 metric of share price informedness, contributes to the debate by demonstrating that as the proportion of trading by individual investors increases, the R2 of firms decreases. Adherents of the R2 methodology hold that lower R2's imply more accurate stock prices. The results of an instrumental variable estimation suggest that this relationship is a causal …

Changing The Paradigm Of Stock Ownership From Concentrated Towards Dispersed Ownership? Evidence From Brazil And Consequences For Emerging Countries, Erica Gorga

Cornell Law Faculty Working Papers

This paper analyzes micro-level dynamics of changes in ownership structures. It investigates a unique event: changes in ownership patterns currently taking place in Brazil. It builds upon empirical evidence to advance theoretical understanding of how and why concentrated ownership structures can change towards dispersed ownership.

Commentators argue that the Brazilian capital markets are finally taking off. The number of listed companies and IPOs in the Sao Paulo Stock Exchange (Bovespa) has greatly increased. Firms are migrating to Bovespa’s special listing segments, which require higher standards of corporate governance. Companies have sold control in the market, and the stock market has …

Taking Certification Seriously – Why There Is No Such Thing As An Adequate Representative In A Securities Fraud Class Action, Richard A. Booth

Working Paper Series

Securities fraud class actions (SFCAs) arising under Rule 10b-5 are well established as a feature of the legal landscape, but they are a vestige of a largely outdated view of investor behavior and preferences. In the 1960s, most investors were undiversified stock pickers. Today, most investors hold stock through well diversified institutions. As a result, most investors are net losers from SFCAs. Moreover, it is arguable that it is irrational for most investors not to be diversified. A passive investor who fails to diversify assumes unnecessary risk for the same expected return that diversified investors enjoy. Given that federal securities …

The Tyranny Of The Multitude Is A Multiplied Tyranny: Is The United States Financial Regulatory Structure Undermining U.S. Competitiveness?, Elizabeth F. Brown

Elizabeth F Brown

This Article examines whether the U.S. regulatory structure undermined U.S. competitiveness with foreign financial markets, particularly the United Kingdom's markets.

The Trouble With Stockjobbers: The South Sea Bubble, The Press And The Legislative Regulation Of The Markets, Benedict Sheehy

Benedict Sheehy

Abstract: The South Sea Bubble Act of 1721 is often taken as the first securities legislation. Further it is understood to be a response to a stock market scandal. In fact, the Act was enacted prior to the scandal and indeed the likely cause of the collapse of the stock bubble itself. This article reviews the historical context, including the finance of government of the era, the development of the South Sea Company and its bubble, the legislation, burst and subsequent effects. It places securities legislation in its historical context as part of a broader movement in corporate law, shifting …

Going Public, Selling Stock, And Buying Liquidity, Richard A. Booth

Working Paper Series

It is a well known anomaly of corporation finance that initial public offerings (IPOs) tend to be underpriced. That is, it appears that shares tend to be offered at a price that is below what the market would bear. Scholars have offered several explanations, most of which focus on various sorts of underwriter opportunism (and insider acquiescence therein). But it is difficult to believe that competition among underwriters does not force offerings to be made at the highest possible price, particularly in view of the numerous alternatives to traditional underwriting methods that have arisen in recent years. The persistence of …

The Missing Link Between Insider Trading And Securities Fraud, Richard A. Booth

Working Paper Series

In a recent article, I argued that diversified investors - the vast majority of investors - would prefer that securities fraud class actions under the 1934 Act and Rule 10b-5 be dismissed in the absence of insider trading or similar offenses during the fraud period. See Richard A. Booth, The End of the Securities Fraud Class Action as We Know It, 4 Berk. Bus. L. J. 1 (2007), http://ssrn.com/abstract=683197. In this article, I draw on the classic case, SEC v. Texas Gulf Sulfur Company, to show that the federal courts originally viewed securities fraud as inextricably connected to insider trading …

Turning A Blind Eye: Wall Street Finance Of Predatory Lending

Patricia A. McCoy

Today, Wall Street finances up to eighty percent of subprime home loans through securitization. The subprime sector, which is designed for borrowers with blemished credit, has been dogged by predatory lending charges, many of which have been substantiated. As subprime securitization has grown, so have charges that securitization turns a blind eye to financing abusive loans. In this paper, we examine why secondary market discipline has failed to halt the securitization of predatory loans.

When investors buy securities backed by predatory loans, they face a classic lemons problem in the form of credit risk, prepayment risk, and litigation risk. Securitization …

Give Me Equity Or Give Me Death - The Role Of Competition And Compensation In Building Silicon Valley, Richard A. Booth

Working Paper Series

In this essay, I argue that the preeminence of Silicon Valley as an incubator of technology companies is attributable to equity compensation. Ronald Gilson, relying on the work of AnnaLee Saxenian and others who have noted the tendency of Silicon Valley employees to job hop, has suggested that California law prohibiting the enforcement of non-compete agreements was a major factor in the rise of Silicon Valley (and the demise of Route 128). I extend this line of thought by suggesting that California employers may have relied on equity compensation as a substitute way to bind employees. I argue further that …

A Complete Property Right Amendment, John H. Ryskamp

ExpressO

The trend of the eminent domain reform and "Kelo plus" initiatives is toward a comprehensive Constitutional property right incorporating the elements of level of review, nature of government action, and extent of compensation. This article contains a draft amendment which reflects these concerns.

China’S Market Participation: The Case For A Paradigm Shift In Analyzing China’S Capital Market Regulation, David P. Finn

ExpressO

This paper deals with recent reforms governing China’s state owned enterprises and how those reforms affect both the domestic and international markets

Predatory Structured Finance, Christopher L. Peterson

ExpressO

Predatory lending is a real, pervasive, and destructive problem as demonstrated by record settlements, jury awards, media exposes, and a large body of empirical scholarship. Currently the national debate over predatory mortgage lending is shifting to the controversial question of who should bear liability for predatory lending practices. In today’s subprime mortgage market, originators and brokers quickly assign home loans through a complex and opaque series of transactions involving as many as a dozen different strategically organized companies. Loans are typically transferred into large pools, and then income from those loans is “structured” to appeal to different types of investors. …

Explaining The Value Of Transactional Lawyering, Steven L. Schwarcz

ExpressO

This article attempts, empirically, to explain the value that lawyers add when acting as counsel to parties in business transactions. Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value primarily by reducing regulatory costs, thereby challenging the reigning models of transactional lawyers as “transaction cost engineers” and “reputational intermediaries.” This new model not only helps inform contract theory but also reveals a profoundly different vision than existing models for the future of legal education and the profession.

Compensation Representatives: A Prudent Solution To Excessive Ceo Pay, Lawton W. Hawkins

ExpressO

Currently, CEO pay is determined by a company’s board of directors, subject to limited shareholder approval in certain circumstances. However, as Lucian Bebchuk and Jesse Fried have demonstrated, boards of directors and CEOs do not necessarily engage in real arms length bargaining over CEO pay. Instead, CEOs may exert managerial power to extract economic rents above and beyond what they could have obtained in an arms length negotiation. To address the problem, Bebchuk and Fried have proposed that large shareholders be allowed to nominate candidates for the board, and that companies be required to pay the expenses for any proxy …

The Equivalence Approach To Securities Regulation, Tzung-Bor Wei

ExpressO

Abstract

In the past, academics and regulators debated two competing approaches to international securities regulation, namely “harmonization” and “regulatory competition.” More recently, a third approach to securities regulation has emerged – the “equivalence” approach. Under this model, a host country exempts foreign firms from certain host country rules when the firms’ home country rules are sufficiently similar, or “equivalent.” Many regulators have come to embrace equivalence, which is rapidly becoming a key principle in international finance.

This paper studies the concept of equivalence. It begins by defining “equivalence,” highlighting that different regulators manipulate the term to give it contrasting meanings. …

Ringing The Bell On The Nyse: Might A Nonprofit Stock Exchange Have Been Efficient?, Stephen F. Diamond

ExpressO

Abstract

This spring the New York Stock Exchange, Inc. (Exchange or NYSE) completed an historic restructuring. On March 7, 2006, the NYSE completed its merger with Archipelago Holdings Inc. (Archipelago), a publicly traded electronic trading platform. As a result, the old NYSE itself became the New York Stock Exchange LLC, a wholly owned subsidiary of NYSE Group, Inc. (NYSE Group). The former members, or seat holders, of the NYSE received one of three forms of consideration: all cash, all stock in NYSE Group, or a package of cash and stock. The NYSE Group then allowed those former members to offer …

Bond Repudiation, Tax Codes, The Appropriations Process And Restitution Post-Eminent Domain Reform, John H. Ryskamp

ExpressO

This brief comment suggests where the anti-eminent domain movement might be heading next.

The Chameleon Effect: Beyond The Bonding Hypothesis For Cross-Listed Securities, Cally Jordan

ExpressO

This paper is based on a presentation made at the New York Stock Exchange Conference on the Future of Global Equity Trading, March 12, 2004, Sarasota, FL.

Looking back, was it a momentary enthusiasm? The dramatic increase in cross-listed securities, particularly in the United States, was one of the remarkable phenomena of the 1990s capital markets. The bonding, or corporate governance, hypothesis was one of the more intriguing theories to surface to explain the phenomenon. Cross-listing, the hypothesis suggested, might be a bonding mechanism by which firms, incorporated in a jurisdiction with “weak protection” of minority shareholder rights or poor …

Managing Risk On A $25 Million Bet: Venture Capital, Agency Costs, And The False Dichotomy Of The Corporation, Robert P. Bartlett Iii

ExpressO

An implicit dichotomy of the corporation exists in legal scholarship. On one side of the dichotomy rests the publicly-held corporation suffering from a significant conflict of interest between its managers and dispersed shareholders; on the other side, the closely-held corporation plagued by inter-shareholder conflict.

This Article argues that understanding the agency problems that can exist within a firm demands a rejection of this traditional dichotomy and the theories of the firm built upon it. Using venture capital finance, this Article demonstrates for the first time how this dichotomy obscures how all firms - public and private - often face the …

How The Legal System Can Help Millions Retire: A Call For Improved Application Of The Suitability Standard, Ryan Z. Keller

ExpressO

An increased awareness in legal circles of the value of aggressive investments is necessary and the recommended solution should have two divergent effects on broker liability. On one hand, a broker who recommends growth investments should find his potential liability has decreased because the legal profession no longer solely focuses on financial loss. On the other hand, a broker who invests conservatively should discover his liability has potentially increased because his recommendations may not be in the client’s best interest. The value of both of these effects is that it causes brokers to have a substantially greater incentive to invest …

Manipulative Behavior In Auction Ipos, Mira Ganor

ExpressO

Book-building, the prevailing method for initial public offerings (IPOs), is widely considered flawed, because it results in stock under-pricing. Auction-IPO, on the other hand, is considered, by conventional wisdom, an alternative method that will eliminate the under-pricing. This paper shows how, contrary to customary belief, auction-IPOs may well result in under-pricing. In auction-IPOs, the under-pricing of the stock price is induced by undetected investors’ manipulative strategic behavior. I analyze the requirements for such strategic behavior in a linear model. To reduce investors’ incentive to manipulate their bid in the auction, this paper proposes to restrict auction participants from trading in …

Enron And The Special Purpose Entity. Use Or Abuse? The Real Problem - The Real Focus, Neal F. Newman

ExpressO

In December of 2001, Enron Corporation filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; one of the largest corporate bankruptcy filings at that time. When the investigations commenced and the tangled Enron web was unraveled, it was discovered that Enron had perpetrated a very sophisticated form of accounting fraud through its repeated use of what are referred to as Special Purpose Entities (“SPEs”). In their most basic forms, SPEs are business entities formed for the purpose of conducting a well specified activity such as construction of a gas pipeline, or collection of a specific group of accounts …

The Dutch Auction Myth, Peter B. Oh

ExpressO

The initial public offering process is under assault. Critics of this process have woven a complex set of interconnected objections to the orthodox method for conducting IPOs, pricing of shares, and allocating them to preferred investors. These critics instead point to online auctions as an alternative IPO method that can provide more equitable access, efficient prices, and egalitarian allocations. These claims rest on Google’s recent IPO and W.R. Hambrecht + Co.’s OpenIPO mechanism, conventionally regarded as impure variants of what is known as a descending-bid or Dutch auction (Dutch IPO).

This article assesses the empirical and theoretical case for Dutch …

Using Spread And Net Trading Range To Measure Risk In Suitability Cases, Richard A. Booth

Working Paper Series

Suitability is one of the most common issues that arises in securities arbitrations. Yet it is also one of the most difficult issues to resolve. Up to now there has been no easy and reliable way to compare the risk of one stock or portfolio with another stock or portfolio measured as of the time the investment decision in question was made. As I argued in an earlier article, spread is potentially a promising way to measure risk in real time as perceived collectively by competing market makers. But with the advent of decimal quotes and other recent changes in …

Attorneys As Gatekeepers: Sec Actions Against Lawyers In The Age Of Sarbanes-Oxley, Lewis D. Lowenfels, Alan R. Bromberg, Michael J. Sullivan

ExpressO

Following the enactment of the Sarbanes-Oxley Act on July 30, 2002, the Securities and Exchange Commission has substantially increased the number of actions it has initiated against lawyers. And a substantial number of these recent SEC actions against counsel to public companies (both internal and external) have highlighted the SEC’s resolve to hold lawyers accountable for not performing adequately their SEC-conceived role as “gatekeepers” to prevent fraud and other violations of the federal securities laws. This “gatekeeper” concept has been and is being implemented through SEC actions addressing a wide variety of alleged transgressions in a wide diversity of factual …

The Different Tax Treatment Of Investment Advisory Fees And Brokerage Fees; The Lower The Fiduciary Duty The Better The Tax Consequences, Barry W. Rickert

ExpressO

The current tax laws favor brokerage fees as compared to investment advisory fees, even though investment advisors are held to a higher standard of fiduciary duty. My article examines the different tax treatment of investment advisory fees and brokerage fees, analyzes the policy considerations of such treatment and proposes alternatives to the current system. Considering the large number of American investing in the securities markets, it is important that our tax laws be written in a way that encourages taxpayers to seek investment professionals who are held to higher standards of conduct. The policy implications of brokerage fees receiving preferable …

Equal Treatment Of Foreign Shareholders In Transnational Securities Class Action Against A Foreign Issuer—A Chinese Example, Clark Yao

ExpressO

As the world economy and financial markets become increasingly more integrated, cross-boarder securities transaction becomes a daily event. Because Unite States has the world’s largest and arguably most liquid capital markets, it has attracted a significant number of foreign companies to cross-list their stocks in a U.S. stock exchange. Unavoidably, such transactions will not only bring out fortune, but also disputes between transacting parties. Relying on the powerful federal securities law , U.S. investors who have bought or sold such stocks have routinely sued foreign stock issuers through class action when the stock prices went down, alleging their loss is …

Rediscovering The Economics Of Loss Causation , Richard Kaplan, Madge Thorsen, Scott Hakala

ExpressO

Abstract This article explores the economic principles and theories underlying loss causation in the context of securities fraud litigation. It explains the difference between “investment loss” and recoverable “inflationary loss” and posits that the latter consists of the difference between inflation in stock prices caused by the fraud at the time of purchase and inflation in the price at the time of sale. It reviews scenarios in which inflationary loss due to fraud may occur and would be recognized as a matter of economic theory as well as a matter of law. It urges that Dura v. Broudo Pharmaceuticals, 125 …

Tracing, Peter B. Oh

ExpressO

Tracing is a method that appears within multiple fields of law. Distinct conceptions of tracing, however, have arisen independently within securities and remedial law. In the securities context plaintiffs must “trace” their securities to a specific offering to pursue certain relief under the Securities Act of 1933. In the remedial context victims who “trace” their misappropriated value into a wrongdoer’s hands can claim any derivative value, even if it has appreciated.

This article is the first to compare and then cross-apply tracing within these two contexts. Specifically, this article argues that securities law should adopt a version of the “rules-based …

Breaking The Bank: Revisiting Central Bank Of Denver After Enron And Sarbanes-Oxley, Celia Taylor

ExpressO

No abstract provided.