In a paper recently published in Stanford Law and Policy Review, I argue that corporate law’s main impact is not in imposing sanctions but rather in producing information. The process of litigation or regulatory investigations produces information on the behavior of defendant companies and businesspeople. This information reaches third parties and affects the way that outside observers treat the parties to the dispute. In other words, litigation affects behavior indirectly, through shaping reputational sanctions.
The Article then explores how exactly information from the courtroom translates into the court of public opinion. By analyzing the content of media coverage of famous corporate law cases, we gain two sets of insights. First, we learn that judicial scolding does not necessarily hurt the misbehaving company’s reputation. The reputational impact of litigation depends on factors such as whom the judge is scolding, what she is scolding them for, and how her scolding compares to the preexisting information environment. Second, we flesh out the ways in which information flows from the courtroom get distorted. Information intermediaries selectively disseminate certain pieces of information and ignore others. And defendant companies produce smokescreens in an attempt to divert the public’s attention.
The Article conclude by sketching policy implications, such as reevaluating the desirability of open-ended standards and liberal pleading mechanisms, or the proper scope of judicial review of the Securities and Exchange Commission’s actions.
The full article is available to download here.
Roy Shapira is a research fellow at Harvard Law School, and a consultant at the Reputation Institute.
— Anastasia Tolu, Corporate Governance Concentration site administrator
April 13, 2015