e-journal

Class action and financial markets: insights from law and economics

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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.

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

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Informasi Detail

Judul Seri

Journal of Financial Economic Policy

No. Panggil

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Penerbit

: Emerald Group., 2011

Deskripsi Fisik

Journal of Financial Economic Policy Vol. 3 No. 2, 2011 pp. 140-160

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

EKONOMI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

Versi lain/terkait

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