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Class action and financial markets: insights from law and economics

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Author Info

  • Donatella Porrini
  • Giovanni B. Ramello

Abstract

Purpose – Class action (CA) has long been used in practice (mainly in the USA) and studied by academics especially in the shareholder protection area. This paper aims to apply the same practice within the current financial meltdown context. Design/methodology/approach – The paper faces the issue by comparing ex ante regulation with an ex post regulatory system, basically dependent on the action of the consumer who can sue firms that behave unfairly. The arguments are provided by the law and economics (LE) approach. Findings – According to LE, pure economic loss is a private loss that is not socially relevant but simply implies a redistribution of wealth. Consequently, wrongful behavior that induces reallocation of costs and benefits with no consequences on social welfare is not considered socially harmful, so is not necessarily subject to compensation. Since pure economic loss is very often financial, the above reasoning also applies to financial markets. However, the same LE arguments suggest that in financial markets, the policy of internalizing pure economic loss by means of CAs can be more far-sighted than simply compensating the victims: the liability system has the particular feature of producing deterrence and driving the market towards an efficient outcome. Originality/value – The paper maintains that CA intended as a complementary ex post regulatory device can play a significant role in addressing a failure that ex ante regulation has not in financial markets. This is coherent with the LE tradition that interprets tort law remedies as a solution for internalizing externalities and providing the correct incentive to the markets.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 3 (2011)
Issue (Month): 2 (July)
Pages: 140-160

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Handle: RePEc:eme:jfeppp:v:3:y:2011:i:2:p:140-160

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Related research

Keywords: Financial markets; Laws and legislation; Legal action; Torts; United States of America;

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References

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  1. Edward L. Glaeser & Andrei Shleifer, 2001. "The Rise of the Regulatory State," NBER Working Papers 8650, National Bureau of Economic Research, Inc.
  2. Alberto Cassone & Giovanni Ramello, 2011. "The simple economics of class action: private provision of club and public goods," European Journal of Law and Economics, Springer, vol. 32(2), pages 205-224, October.
  3. Haidar, Jamal Ibrahim, 2009. "Investor protections and economic growth," Economics Letters, Elsevier, vol. 103(1), pages 1-4, April.
  4. Lopez-de-Silanes, Florencio & Shleifer, Andrei & La Porta, Rafael, 2008. "The Economic Consequences of Legal Origins," Scholarly Articles 2962610, Harvard University Department of Economics.
  5. Valimaki, Mikko, 2010. "Introducing Class Actions in Finland: an Example of Lawmaking without Economic Analysis," POLIS Working Papers 152, Institute of Public Policy and Public Choice - POLIS.
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  8. Dyck, Alexander & Morse, Adair & Zingales, Luigi, 2007. "Who Blows the Whistle on Corporate Fraud?," CEPR Discussion Papers 6126, C.E.P.R. Discussion Papers.
  9. Giovanni B. Ramello & Donatella Porrini, 2004. "Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement," LIUC Papers in Economics 153, Cattaneo University (LIUC).
  10. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
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  12. Jain, Satish (ed.), 2010. "Law and Economics," OUP Catalogue, Oxford University Press, number 9780198067733.
  13. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
  14. Antony W. Dnes, 2005. "Enron, corporate governance and deterrence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(7), pages 421-429.
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  16. Field, Alexander James, 1991. "Do legal systems matter?," Explorations in Economic History, Elsevier, vol. 28(1), pages 1-35, January.
  17. Marta Cenini & Barbara Luppi & Francesco Parisi, 2011. "Incentive effects of class actions and punitive damages under alternative procedural regimes," European Journal of Law and Economics, Springer, vol. 32(2), pages 229-240, October.
  18. G.G.A. de Geest & G. Dari Mattiacci, 2005. "Soft Regulators, though judges," Working Papers 05-06, Utrecht School of Economics.
  19. Rose-Ackerman, Susan, 1991. "Regulation and the Law of Torts," American Economic Review, American Economic Association, vol. 81(2), pages 54-58, May.
  20. Kolstad, Charles D & Ulen, Thomas S & Johnson, Gary V, 1990. "Ex Post Liability for Harm vs. Ex Ante Safety Regulation: Substitutes or Complements?," American Economic Review, American Economic Association, vol. 80(4), pages 888-901, September.
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Citations

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Cited by:
  1. Ramello, Giovanni B., 2012. "Aggregate litigation and regulatory innovation: Another view of judicial efficiency," International Review of Law and Economics, Elsevier, vol. 32(1), pages 63-71.
  2. Alberto Cassone & Giovanni Ramello, 2011. "The simple economics of class action: private provision of club and public goods," European Journal of Law and Economics, Springer, vol. 32(2), pages 205-224, October.
  3. Juergen Backhaus & Alberto Cassone & Giovanni Ramello, 2011. "The law and economics of class actions," European Journal of Law and Economics, Springer, vol. 32(2), pages 165-168, October.

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