Essays On The Economics Of Capital Markets Regulation.

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In the three articles of this dissertation, I explore issues related to the regulation of the capital markets.

In the first article, "Vicarious Liability for Bad Corporate Governance: Are We Wrong About 10b-5?", 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.

In the second article, "The Effects of Managerial Short-termism on Compensation, Effort, and Fraud," I model a firm where shareholders choose the manager's compensation in light of the manager's dual roles of exerting effort and making disclosures regarding the firm's value. Because of limited contracting ability and the divergence of short-term interest between shareholder and manager, shareholders may be unable to obtain their first-best choices of effort and disclosure policy; where agency costs are too large, shareholders will be unwilling to award performance-based compensation, which induces both effort and fraudulent reporting. The principal findings are (1) fraud and effort are positively correlated, and given a poor outcome fraud is more likely to occur when effort is exerted in equilibrium and returns to effort are higher, (2) the incidence of fraud-inducing compensation increases as agency costs decrease, and (3) when agency costs are high, reductions in agency costs actually increase the incidence of fraud. Regulatory implications include that deterring fraud, even absent adjudicatory error, may be socially inefficient; rather, policy should be oriented toward internalizing costs of fraud onto shareholders.

In the final article, "IPO Underpricing, Disclosure, and Litigation Risk," I find that U.S. IPO prospectus disclosure exhibits significant correlation with first day underpricing, consistent with theories of underpricing as caused by informational asymmetry. In particular, a 1 standard deviation increase in positive prospectus disclosure is associated with almost a third reduction in first day underpricing. More disclosure also has a significant positive relation to measures of informational completeness. Further, I show that the amount of disclosure may derive from litigation risk. Controlling for measures of litigation risk, more disclosure exhibits a significant and positive relation to IPO litigation, while absent controls the relation is negative -- suggesting that the amount of disclosure responds to ex ante perceived risk of litigation.

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Product Details

  • ISBN-13: 9781244703230
  • Publisher: BiblioLabsII
  • Publication date: 9/30/2011
  • Pages: 232
  • Product dimensions: 7.44 (w) x 9.69 (h) x 0.49 (d)

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