The economic analysis of the duty of ad-hoc disclosure and related issues in this paper led to the following conclusions: Due to information asymmetries between issuers and investors, a regula-tion of the rules of disclosure is necessary, which reduces the incentive for individual investors to costly gather information, and transfer this in-formation process onto issuers. The legislator‟s goal for such reason can be found in the safeguarding of capital market efficiency as to both correct pricing and liquidity (or sufficient investor participation). The duty of ad-hoc disclosure should fully be transferred to the issuer, as it is the cheapest cost avoider and has sufficient own interests to provide correct and timely information. Nevertheless, legislation must avoid that the issuer can be held liable for information as if it was advice by detail-ing which information has to be given in which form. Furthermore, it must be ensured that investors are not flooded with information, but that only a sensible amount of pertinent information as opposed to advertising information is published. For the lesion of this duty of disclosure, not only the issuer as an entity, but as well the board members should be held liable, as this introduces additional incentives for compliance and adds liable capital for possible damaged parties. Nevertheless, both legislator and jurisdiction will have to limit the risk of abusive investor claims, which are likely to occur in such a constellation. If liability for defective ad-hoc disclosure can be established, the awarded damage should be out-of-pocket measure, as it limits liability to the actual amount of damage and does not transfer the risk of an investment in a way inconsistent with the general principles of the capital market. Furthermore, it provides advantages in processing multiple claims and can be unequivocally determined by a finance-mathematical method based on the Capital Asset Pricing Model.
Outline
A. Introduction
a. Importance and motivation
b. Outline
B. Role of information in capital markets and price influence
a. Efficient capital market hypothesis
b. Behavioral finance
i. Information traders and noise traders
ii. Publications effects
iii. Ease-of-processing effects
iv. Bounded willpower and emotional influences
v. Halo effect
vi. Conformity effect
c. Random walk hypothesis and technical analysis
d. Empirical pricing process
e. Summary
C. Necessity of rules for ad-hoc disclosure
a. Protection of information as public and collective good
b. Motivation of investor participation
c. Guarantee of information processing
d. Avoidance of future market ignorance
e. Protection of informed investor choices
f. Prevention of agency conflicts
g. Prevention of the destruction of company value
h. Rather insufficient results in efficiency measures
i. Summary
D. Ad-hoc-disclosure
a. German law
i. Object of legal protection of regulations concerning ad-hoc disclosure
1. Efficiency of capital market and price integrity
2. Investors as a group
3. Individual investor
4. Summary
ii. Duty of ad-hoc disclosure
iii. Defective ad-hoc disclosure
iv. Legal protection in criminal liability
v. Legal protection in civil liability
1. Licit plaintiff
2. Defendant
a. Issuer
b. Board
c. Both issuer and board
3. Bases for claims
a. Pre-2002 bases
b. §§ 37b, c German Securities Trading Act (WpHG)
c. § 826 German Civil Code (BGB)
d. Summary
4. Culpability
a. § 37b, c German Securities Trading Act (WpHG)
b. § 826 German Civil Code (BGB)
5. Damage
a. §§ 37b, 37c German Securities Trading Act (WpHG)
b. § 826 German Civil Code (BGB)
6. Loss causation and burden of proof
a. §§ 37b, 37c German Securities Trading Act (WpHG)
b. § 826 German Civil Code (BGB)
c. Facilitation of proof
7. Assertion of rights
8. Statute of limitation and exclusion
9. Summary
b. US law
i. Duty of ad-hoc disclosure
ii. Legal protection in civil liability
1. Licit plaintiff
2. Defendant
3. Basis for claims: Rule 10b-5 Securities Exchange Act
4. Culpability
5. Damage
6. Causation and burden of proof
7. Statute of limitation
8. Assertion of rights
iii. Summary
E. Mathematical determination of damages awarded
a. Rescission
b. Out-of-pocket measure
i. Damage according to German Law
ii. Damage according US Law
iii. Flaws of those methods
iv. Finance-mathematical models of damage computation
1. Damage as price minus true value
a. Fundamental analysis
b. Comparable index approach
c. Event study approach
d. Summary
2. Damage according to the Capital Asset Pricing Model
F. Economic analysis of the duty of disclosure
a. Issuer as cheapest cost avoider
b. Issuer’s self-interest
c. Prevention of detrimental behavior inside the issuer’s company
d. Risk of over-information
e. Risk of liability for advice
f. Negative 3rd-party effects such as free-riders’ gains
g. Summary
G. Economic analysis of liability of board members
a. No duty of disclosure
b. Infringement on the liability system
c. Economic efficiency of enterprise liability
d. Risk of misuse
e. Deterring effect on business decisions
f. Additional cost to the company/all shareholders
g. Preferential treatment of shareholders
h. No additional security for plaintiffs
i. No additional incentive for correct behavior
j. Summary
H. Economic analysis of damage
a. No damage at all
b. Out-of-pocket expense
c. Trivialized damage and shift of the burden of proof
d. Out-of-court settlements
e. Rescission
i. Shift of the risk of investment
ii. Bounded rationality and negative externalities
iii. Over-compensation and over-deterrence
iv. Inequality between shareholders
v. Summary
f. Duty to mitigate damage
I. Economic analysis of the assertion of rights
a. US-law: Class action
b. German Law: Representative Proceedings
c. Summary
J. Conclusion
Research Objectives and Topics
The work examines the economic justification and legal framework of ad-hoc disclosure requirements, analyzing how these regulations influence market efficiency, investor protection, and the liability of issuers and board members under both German and US law.
- Economic analysis of information disclosure and its impact on capital market efficiency.
- Comparative legal study of ad-hoc disclosure rules and civil liability in Germany and the US.
- Evaluation of mathematical models for damage calculation (e.g., Capital Asset Pricing Model).
- Assessment of the economic efficiency regarding the board members' liability and damage mitigation.
- Critique of procedural mechanisms like class actions and representative proceedings in securities litigation.
Excerpt from the Book
a. Efficient capital market hypothesis
The efficient capital market hypothesis, developed by E. Fama in the 1970s, claims that share prices at any time reflect available information, whereas three forms exist: According to the strong form, security prices reflect all information, public or not, whereas the semi-strong form would agree only as to already public news. The weak form at last claims that share prices only contain past, but not actual and future information.
The information analysis and thus its incorporation in the prices are effectuated by professional traders, who constantly gather information and react on it. This advantage in information provides them with above-average gains, and those gains, vice versa, provide an incentive for further gathering of information. Nevertheless, it must be underlined that those above-average gains are not made at the expense of the general investing public, [but] are incentive and adequate compensation for the effort undertaken in the interest of all market participants, i.e. correct market prices which reflect the true value of a share with all information incorporated. Due to the work of professional traders, individual investors in small shares can rely on the correctness of prices. They do not need to costly gather information and can be simple price takers.
Empirical studies have proven both the content of the efficient capital market hypothesis and the enormously short amount of time (only several minutes) after which a piece of information becomes incorporated. Nevertheless, the concept has as well been criticized:
At first, we must keep mind the so-called efficient capital market hypothesis paradox: if too many investors believe the share price to incorporate all information available and rely on it, market prices cease to incorporate all information as too few investors gather it, and vice versa. If only few investors rely on price integrity, the efficient capital market hypothesis works, as investors gather avidly information to reach an insider status which allows them to make gains.
Summary of Chapters
A. Introduction: Discusses the motivation behind ad-hoc disclosure rules, highlighting the need to protect investors and maintain market integrity after corporate scandals.
B. Role of information in capital markets and price influence: Explores the efficient market hypothesis versus behavioral finance theories, analyzing how information flows influence pricing.
C. Necessity of rules for ad-hoc disclosure: Details why regulation is required to treat information as a public good and prevent agency conflicts and the destruction of company value.
D. Ad-hoc-disclosure: Analyzes the specific legal frameworks and liability regimes for defective disclosure in German and US law.
E. Mathematical determination of damages awarded: Evaluates finance-mathematical models, such as the Capital Asset Pricing Model, used to compute damages in litigation.
F. Economic analysis of the duty of disclosure: Assesses the economic justification for placing disclosure duties primarily on the issuer.
G. Economic analysis of liability of board members: Weighs the arguments for and against holding individual board members liable for disclosure failures.
H. Economic analysis of damage: Examines different damage measures, including out-of-pocket expenses and rescission, from an economic efficiency perspective.
I. Economic analysis of the assertion of rights: Reviews the mechanisms for collective legal action, such as class actions and representative proceedings, regarding their economic impact.
J. Conclusion: Summarizes findings, advocating for regulated disclosure and out-of-pocket damage measures as economically efficient solutions.
Keywords
Ad-hoc disclosure, Capital market efficiency, Efficient capital market hypothesis, Behavioral finance, Insider trading, Issuer liability, Board member liability, Civil liability, Out-of-pocket measure, Rescission, Securities litigation, Class action, Representative proceedings, Investor protection, Information asymmetry
Frequently Asked Questions
What is the core focus of this research?
The work provides an economic and legal analysis of ad-hoc disclosure requirements, investigating how companies communicate material information and how liability is managed when this information is incorrect or omitted.
What are the primary thematic areas covered?
The key themes include the role of information in capital markets, the necessity for legal disclosure mandates, comparative analysis of German and US liability regimes, methods for calculating damages, and the economic efficiency of litigation procedures.
What is the ultimate research goal of this paper?
The primary goal is to determine the most economically efficient approach to regulating ad-hoc disclosures, balancing investor protection with the operational needs of issuers and the market.
Which scientific methods are employed?
The study primarily uses a law and economics approach, combining legal dogmatics with behavioral finance concepts and finance-mathematical models to evaluate the effectiveness of disclosure regulations.
What is examined in the central chapters of the work?
The main sections cover the legal duties of issuers, the justifications for holding board members liable, the mathematical models for calculating investor damages, and an evaluation of collective legal action mechanisms like class actions.
Which keywords best characterize this research?
The most relevant keywords include ad-hoc disclosure, capital market efficiency, issuer liability, board member liability, securities litigation, and investor protection.
How does this work handle the issue of "damage" in legal disputes?
It discusses various damage calculation methods, advocating for the "out-of-pocket" measure as the most economically appropriate approach compared to alternatives like rescission.
What unique perspective does this paper offer on board member liability?
The paper systematically weighs the deterrence benefits of board liability against the risks of deterring efficient business decisions and increasing costs for shareholders.
How is the "general investment mood" concept utilized in this study?
The research analyzes the role of "general investment mood" as a legal concept to facilitate the proof of causation for investors, while simultaneously critiquing its potential for abuse in litigation.
- Citar trabajo
- Dipl. oec. iur. univ; MBA (University of Dayton) Veronika Fischer (Autor), 2006, Ad-hoc disclosure - A law and economics approach, Múnich, GRIN Verlag, https://www.grin.com/document/131569
