Our discussion thus far implies that management and stockholders are the only parties with an interest in the firm’s decisions. This is an oversimplification, of course. Employees, customers, suppliers, and even the government all have a financial interest in the firm. Taken together, these various groups are called stakeholders in the firm. In general, a stakeholder is someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. Such groups will also attempt to exert control over the firm, perhaps to the detriment of the owners. 1.6 Regulation Until now, we have talked mostly about the actions that shareholders and boards of directors can take to reduce the conflicts of interest between themselves and management. We have not talked about regulation. 3 Until recently the main thrust of federal regulation has been to require that companies disclose all relevant information to investors and potential investors. Disclosure of relevant information by corporations is intended to put all investors on a level information playing field and, thereby to reduce conflicts of interest. Of course, regulation imposes costs on corporations and any analysis of regulation must include both benefits and costs. The Securities Act of 1933 (the 1933 Act) and the Securities Exchange Act of 1934 (the 1934 Act) provide the basic regulatory framework in the United States for the public trading of securities. The 1933 Act focuses on the issuing of new securities. Basically, the 1933 Act requires a corporation
to file a registration statement with the Securities and Exchange Commission (SEC) that must be made available to every buyer of a new security. The intent of the registration statement is to provide potential stockholders with all the necessary information to make a reasonable decision. The 1934 Act extends the disclosure requirements of the 1933 Act to securities trading in markets after they have been issued. The 1934 Act establishes the SEC and covers a large number of issues including corporate reporting, tender offers, and insider trading. The 1934 Act requires corporations to file reports to the SEC on an annual basis (Form 10K), on a quarterly basis (Form 10Q), and on a monthly basis (Form 8K). As mentioned, the 1934 Act deals with the important issue of insider trading. Illegal insider trading occurs when any person who has acquired nonpublic, special information (i.e., inside information) buys or sells securities based upon that information. One section of the 1934 Act deals with insiders such as directors, officers, and large shareholders, while another deals with any person who has acquired inside information. The intent of these sections of the 1934 Act is to prevent insiders or persons with inside information from taking unfair advantage of this information when trading with outsiders.
- Spring '16
- Corporation, Types of business entity