Public and Private Enforcement of Securities Laws

On April 14, my co-author Mark Roe and I presented our paper entitled Public and Private Enforcement of Securities Laws: Resource-Based Evidence at the Law and Economics Seminar here at the Law School.

Recent academic work in finance has generally found that private enforcement for investor protection via disclosure and lawsuits among contracting parties is a relatively more important determinant of financial outcomes than public enforcement via financial, regulatory, and even criminal rules and penalties. However, much legal scholarship has long seen private enforcement of securities laws in the United States as poorly designed, with firms, and hence wronged shareholders, often bearing the cost of insiders’ errors and disclosure failure. Our paper seeks to clarify the discrepancy between these two areas of research.

In our paper, we develop an enforcement variable based on securities regulators’ real resources—their staffing levels and budgets. We then examine financial outcomes around the world, including stock market capitalization, trading volume, the number of domestic firms, and the number of IPOs, in light of these resource-based measures of public enforcement. We find that more intense public enforcement regularly correlates with strong financial outcomes. In comparisons between our measures of public enforcement and the measures of private enforcement prominent in recent finance scholarship, public enforcement is typically at least as important as private enforcement in explaining important financial market outcomes around the world.

The full paper is available for download here.