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1992 U. Ill. L. Rev. 691 (1992)
Vicarious Liability for Fraud on Securities Markets: Theory and Evidence

handle is hein.journals/unilllr1992 and id is 701 raw text is: VICARIOUS LIABILITY FOR FRAUD
ON SECURITIES MARKETS:
THEORY AND EVIDENCE
Jennifer H. Arlen*
William J. Carney**
This article examines the efficiency of vicarious liability for
Fraud on the Market. Standard analysis of vicarious liability argues
that this rule is efficient. Professors Arlen and Carney argue, how-
ever, that in Fraud on the Market cases vicarious liability does not
serve the goals of optimal deterrence or optimal risk spreading, nor
does it promote optimal loss spreading.
Breaking with traditional vicarious liability literature, the au-
thors examine monitoring costs in detail, and posit a model that
predicts that Fraud on the Market generally occurs when agents fear
themselves to be in their last period of employment. An empirical
study of Fraud on the Market cases demonstrates that these frauds
generally are the product of last period agency costs.
The article also shows who pays for securities fraud under a rule
of vicarious liability. The empirical study shows that an issuer's po-
tential liability for the fraud of its agents is enormous, representing a
substantial share of the equity of the firm. Imposing liability on the
firm results in a large wealth transfer from one group of innocent
investors to another similar group. Because this transfer neither de-
ters fraud nor spreads losses, it performs no useful social function.
The authors conclude that a rule of agent liability, supplemented with
criminal enforcement, is preferable.
* Associate Professor of Law, Emory University. BA. 1982, Harvard University; J.D. 1986,
Ph.D. (Economics) 1992 New York University. This author would like to acknowledge the financial
assistance of the John M. Olin Program at the University of California at Berkeley School of Law.
**  Charles Howard Candler Professor of Law, Emory University. BA. 1959, LL.B. 1962, Yale
University.
The authors wish to acknowledge the helpful comments of Barry Adler Ian Ayres, Theodor
Baums, Bernard Black, Richard Craswell, David Haddock Andrew Kull, Fred McChesney, Geoffrey
Miller, Roberto Pardolesi, Manuel Utset, Frank Vandall, and participants at faculty workshops at
Boston University School of Law, Emory University School of Law, Georgetown Law Center, and
Northwestern University School of Law, as well as at the Second Annual Meeting of the American Law
and Economics Association and the Eighth Annual Conference of the European Association of Law
and Economics. In addition, we would like to acknowledge the helpful and resourceful research assist-
ance of Cherie King, Leah McCarty, and Susan Dignan.

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