Lloyd's Maritime and Commercial Law Quarterly
LEGAL ORIGINS AND SECURITIES FRAUD—A COMMENT
John Armour *
It is a great honour to be asked to comment on Judge Easterbrook’s lecture1 in this prestigious and thought-provoking series. It is no understatement to say that when, as a graduate student, I first read his book, The Economic Structure of Corporate Law,2 it transformed the way I thought about the subject, as indeed it did for a whole generation of students of corporate law. I have likewise enjoyed reading many of his illuminating judicial opinions over the years.
Tonight’s talk was delivered with his characteristic combination of eloquence and incisiveness that have made his writings—both academic and judicial—so filled with impact.
The main thrust of his lecture has been an insightful analysis of the judicial role in securities fraud litigation in the US, presented as a case study of the way in which judges in a common law system can and do develop the law in incremental ways that enhance its functionality. Specifically, he argues that the six doctrinal developments he describes have the collective consequence of lowering the costs of fraud litigation.
My comment centres on the following question: what exactly is significant—in the sense of having potentially causal relevance for financial development—about the judicial role in this case study?
In his overview of the claims of the economic literature on “law and finance”,3 Judge Easterbrook hits the nail squarely on the head when he says that the papers do not explain the cause of their reported association between financial development and legal origin. This is the central weakness of the literature: the papers report an empirical association but present no well-developed theory for why this should be so. Hence the open question of what exactly is significant about the judicial role.
Let me acknowledge, but put to one side for today’s discussion, the claims of those such as Dan Klerman and his co-authors, who suggest that there is in fact no causal link at all.4 In their analysis, the correlation between legal origin and financial development is a jointly determined artefact of colonial history. They argue that which colonial empire a
* Professor of Law and Finance, University of Oxford.
1. Frank H Easterbrook, “Legal Origins and Securities Fraud” [2019] LMCLQ 619.
2. FH Easterbrook and DR Fischel, The Economic Structure of Corporate Law (Harvard University Press, Cambridge, Mass, 1991).
3. The two seminal papers were R La Porta, F Lopez-de-Silanes, A Shleifer and RW Vishny, “Legal Determinants of External Finance” (1997) 52 Journal of Finance 1131 and R La Porta, F Lopez-de-Silanes, A Shleifer and RW Vishny, “Law and Finance” (1998) 106 Journal of Political Economy 1113. These contributions and others were synthesised a decade later in R La Porta, F Lopez-de-Silanes and A Shleifer, “The Economic Consequences of Legal Origins” (2008) 46 Journal of Economic Literature 285.
4. DM Klerman, PG Mahoney, H Spamann and MI Weinstein, “Legal Origin or Colonial History” (2011) 3 Journal of Legal Analysis 379. One of these authors, Holger Spamann, also famously found that, when all the errors in the original coding of the La Porta et al “antidirector rights” index were corrected, there was no longer a statistically significant relationship between it and financial development: H Spamann, “The ‘Antidirector Rights Index’ Revisited” (2010) 23 Review of Financial Studies 467. However, the relationships between legal origins and financial development do survive, even using indices of legal variables that are responsive to the weaknesses of the original “antidirector rights” approach: J Armour, S Deakin, M Siems and A Singh, “Shareholder Protection and Stock Market Development: An Empirical Test of the Legal Origins Hypothesis” (2009) 6 Journal of Empirical Legal Studies 343.
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