Law Commons^™

Informed Trading And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

Articles

Informed trading--trading on information not yet reflected in a stock's price-- drives the stock market. Such informational advantages can arise from astute analysis of varied pieces of public news, from just released public information, or from confidential information from inside a firm. We argue that these disparate types of trading are all better regulated as part of the broader phenomenon of informed trading. Informed trading makes share prices more accurate, enhancing the allocation of capital, but also makes markets less liquid, which is costly to the efficiency of trade. Informed trading thus poses a fundamental trade-off in how it affects …

Economic Crisis And The Integration Of Law And Finance: The Impact Of Volatility Spikes, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Articles

The 2008 financial crisis raised puzzles important for understanding how the capital market prices common stocks and in turn, for the intersection between law and finance. During the crisis, there was a dramatic five-fold spike, across all industries, in “idiosyncratic risk”—the volatility of individual-firm share prices after adjustment for movements in the market as a whole.

This phenomenon is not limited to the most recent financial crisis. This Article uses an empirical review to show that a dramatic spike in idiosyncratic risk has occurred with every major downturn from the 1920s through the recent financial crisis. It canvasses three possible …

The Irrational Auditor And Irrational Liability, Adam C. Pritchard

Articles

This Article argues that less liability for auditors in certain areas might encourage more accurate and useful financial statements, or at least equally accurate statements at a lower cost. Audit quality is promoted by three incentives: reputation, regulation, and litigation. When we take reputation and regulation into account, exposing auditors to potentially massive liability may undermine the effectiveness of reputation and regulation, thereby diminishing integrity of audited financial statements. The relation of litigation to the other incentives that promote audit quality has become more important in light of the sea change that occurred in the regulation of the auditing profession …

Looking A Gift Horse In The Mouth: An Analysis Of Free Internet Stock Offerings, Joel Michael Schwarz

Michigan Telecommunications & Technology Law Review

How much should an investor pay for one share of stock in Yahoo? Or a share of stock in America Online? As publicly traded companies, one need only consult the stock charts in any local newspaper to determine the value the market has placed on these shares. Despite what many Internet sector analysts have professed to be astronomically high valuations, these publicly traded companies possess easily verifiable valuations determined by the free market forces that constitute the building blocks of our economy, and safeguarded by the oversight of federal regulators such as the Securities & Exchange Commission ("SEC"). But what …

The New Schoolmaster In Finance, Hiram L. Jome

Michigan Law Review

The purpose of this article is to present the attitude and views of the Securities and Exchange Commission on various financial problems. Several phases of the commission's thinking are in the writer's opinion extreme and questionable, or even unsound. Its actions have not always been consistent with its official views. Since the writer's purpose, however, has been merely to describe and not to criticize, no attempt has been made to appraise the work of the commission.

Specific Performance - Oral Option To Buy Stock - Effect Of Provision To Fix Price By Arbitration, Michigan Law Review

Michigan Law Review

Defendant, who owned all the common stock of a bank, gave an oral option to sell it at a fixed price to plaintiff. Plaintiff was to investigate the bank's books, assets, and liabilities in order to determine the true value of the stock. If the true value did not equal the agreed price, the parties were to meet and set the amount of the diminution. In the event of disagreement, a third party was to be called in. Plaintiff expended considerable sums for investigation before defendant renounced the option and prevented further investigation. In an appeal from an interlocutory order …