Issuer Liability: Ownership Structure and the Circularity Debate

In many countries worldwide, publicly traded companies can be held liable by investors for misstatements. In most cases, this is despite the beneficiary of misstatements being managers rather than the firm itself. The economic burden of liability falls on the issuer and its stockholders. Because of this “circularity” problem, compensation does not provide a strong policy rationale for issuer liability. Collective action problems among shareholders undermine deterrence. This chapter argues that this critique, which arose against the backdrop of US corporate governance, is less persuasive in corporate governance systems with concentrated ownership. It suggests that more effective issuer liability could have beneficial effects in many countries where concentrated ownership prevails. However, concentrated ownership’s effect of creating a powerful interest group explains why issuer liability is not strongly enforced in many countries.