Coase and the Reform of Securities Markets

Do legal rules matter for economic outcomes? Can changing the details of specific laws affect overall institutions in a way that will have a significant short-term impact? Is it particularly effective to change securities law and regulation? For all three questions, a common answer in both economics and law is “no.” The intellectual underpinning for this position is influential work by Ronald Coase, a Nobel prize winner (Coase 1960). Coase explained the consequences of individuals and private firms being able to enter into contracts as they please. As long as the enforcement costs of these contracts are low, private parties can find ways to contract around the law. Today, three main Coasian positions deny the importance of changing the law underpinning commercial and securities transactions. Easterbrook and Fischel (1991) argue that firms can commit themselves to treat investors properly through a variety of mechanisms. Law may make things more complicated, but firms and investors can always reach efficient arrangements. As a consequence, all countries should be able to achieve similar and efficient financial arrangements for firms, so the details of the law do not matter. Also in the Coasian spirit, Berglof and von Thadden (1999) argue that continental European countries have developed institutions that allow companies to find ways to enter enforceable contracts with investors. The law may have shortcomings, but the political process and firm-specific actions can generate other ways of providing effective guarantees to investors – for example, by mandating certain forms of government