The Issuer Choice Debate

65 Pages Posted: 1 Oct 2001

See all articles by Merritt B. Fox

Merritt B. Fox

Columbia University - Law School


This paper responds to Professor Romano's paper "The Need for Competition in Interactive Securities Regulation." It concerns our ongoing debate with regard to the desirability of permitting issuers to choose the securities regulation regime by which they are bound. Romano favors issuer choice, arguing that it would result in jurisdictional competition to offer issuers share value maximizing regulations. I, in contrast, believe that abandoning the current mandatory system of federal securities disclosure would likely lower, not increase, U.S. welfare. Each issuer, I argue, would select a regime requiring a level of disclosure less than is socially optimal because its private costs of disclosure would be greater than the social costs of such disclosure.

Professor Romano and I agree on most of the basic analytic building blocks for deciding whether issuer choice is a desirable reform; belief in analyzing the problem in terms of the broadly accepted principles of modern, financial economics; recognition that disclosure has costs as well as benefits; and acknowledgment that incentives exist for issuers to provide at least some disclosure. We nevertheless reach the opposite conclusion on the desirability of issuer choice. To start, Romano believes that issuers' private costs of disclosure will not generally be greater than the social costs of such disclosure, whereas I show they will be. Romano argues as well that this is a special case in which any divergence of private and social costs that does exist will not lead to a market failure, at least one possibly correctable by public regulation. I show her argument to be unpersuasive. Finally, Romano interprets the existing empirical evidence as proving mandatory disclosure's lack of social value, while I show that the evidence in fact does not point in either direction.

Where, as here, the theoretical case for the existence of a market failure is strong and the current program for dealing with it is widely admired, the advocate of change should have the burden of proof.

Suggested Citation

Fox, Merritt B., The Issuer Choice Debate. Available at SSRN: or

Merritt B. Fox (Contact Author)

Columbia University - Law School ( email )

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