The Essential Role of Securities Regulation


This Article posits that the essential role of securities regulations is to create a competitive market for information traders (“analysts”). The Article advances two related theses—one descriptive and the other normative. Descriptively, it demonstrates that securities regulation is specifically designed to facilitate and protect the work of analysts. Normatively, the Article shows that analysts are the only group that can best underwrite efficient and liquid capital markets and, hence, it is the group securities regulation should strive to protect. By protecting analysts, securities regulations enhance efficiency and liquidity in financial markets. This protection, in turn, benefits other types of investors by reducing transaction costs. Furthermore, by protecting analysts, securities regulation represents the highest form of market integrity by ensuring accurate pricing to all investors, and improves the allocation of resources in the economy. Securities regulation may be divided into three broad categories—disclosure duties; restrictions on fraud and manipulation; and restrictions on insider trading—each of which contributes to the creation of a vibrant market for analysts. Disclosure duties reduce analysts’ costs of gathering information, and diminish the ability of analysts to produce biased analyses in exchange for pay. Restrictions on fraud and manipulation lower analysts’ cost of verifying the credibility of information, and enhance analysts’ ability to make accurate predictions. Finally, restrictions on insider trading protect analysts from competition from insiders that would undercut the ability of analysts to recoup their investment in information, and thereby drive analysts out of the market. † Professor of Law, Columbia Law School. †† Professor of Law, Pennsylvania University Law School. For invaluable comments and criticisms we thank Avi Bell, Jack Coffee, Rob Daines, Stanislav Dolgopolov, Mel Eisenberg, Merritt Fox, Yair Galil, Vic Goldberg, Jeff Gordon, Henry Hansmann, Vic Kahana, Donald Langevoort, Tamara Lothian, Louis Lowenstein, Paul Mahoney, Curtis Milhaupt, Katharina Pistor, Ed Rock, Roberta Romano, Alex Raskolnikov, Hillary Sale, Guhan Subramanian, and Josh Wilkenfeld. For excellent research assistance we thank Mustapha Cheabid, Sean McEldowney, Yaad Rotem, and Avital Sealman-Tene. The Essential Role of Securities Regulation (3) Thus, the effect of securities regulation is to develop and secure a competitive market

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@inproceedings{Goshen2004TheER, title={The Essential Role of Securities Regulation}, author={Zohar Goshen and Gideon Parchomovsky and ZOHAR GOSHEN and Yair Galil and Vic Goldberg and Jeff Gordon and Henry B. Hansmann and Vic Kahana and Donald Langevoort and Tamara Lothian and L . L . Lowenstein and Paul G. Mahoney and Curtis Milhaupt and Katharina Pistor and Ed Rock and Roberta Roman{\`o} and Alex Raskolnikov and Hillary A. Sale and Guhan Subramanian}, year={2004} }