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23 Cardozo L. Rev. 675 (2001-2002)
Securities Regulation as Lobster Trap: A Credible Commitment Theory of Mandatory Disclosure

handle is hein.journals/cdozo23 and id is 697 raw text is: SECURITIES REGULATION AS LOBSTER TRAP: A CREDIBLE COMMITMENT THEORY OF MANDATORY DISCLOSURE Edward Rock* What functions does the existing mandatory disclosure system serve? In this Article, I argue that the existing SEC system can be understood as providing issuers with a mechanism for making a credible commitment to high quality, comprehensive disclosure for an indefinite period into the future. This credible commitment device is particularly useful to new domestic issuers and to foreign issuers seeking to tap the U.S. capital markets. This credible commitment justification explains the striking but little discussed practical and formal asymmetry between the ease of entry into the SEC system and the difficulty of exit from it. I then consider the implications of this credible commitment view for the various proposals on securities disclosure in a global capital market, and the tradeoffs between the potential benefits of increasing competition among suppliers of disclosure regulation and the potential loss of the ability of any system to offer credible commitment. INTRODUCTION A miracle of birth occurs when a company goes public. Because it happens all the time, one can take for granted the legal and institutional infrastructure that facilitates the transformation of a closely held enterprise-in which ownership and management overlap and in which participants have continuous access to information-into a firm in which ownership and control are * Saul A. Fox Distinguished Professor of Law and Co-Director, Institute for Law and Economics, University of Pennsylvania Law School. I am grateful to Barry Adler, Omri Ben Shahar, John Coates, Ross Fuerman, Merritt Fox, Peter Huang, Marcel Kahan, Ehud Kamar, Michael Klausner, Don Langevoort, Paul Mahoney, Eric Posner, Michael Simon, David Skeel, and Randall S. Thomas, and workshops at Stanford, Penn, and NYU for helpful comments. I owe a special debt of thanks to Steven Thel for his extremely careful comments which saved me from numerous errors. My research was supported by the University of Pennsylvania's Institute for Law and Economics.

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