Signaling Social Responsibility

Abstract

One of the oldest bits of legal folk wisdom is that environmental, health and safety laws are only as strong as their enforcement by public regulators and private citizen suit litigants. In this article, I argue that this piece of folk wisdom is false. The everyday world of market transactions - purchases and sales of stock and other corporate assets by investors, as well as consumer transactions - significantly enhances the incentives created by regulatory and legal enforcement. Regulatory compliance costs and potential regulatory sanctions for non- compliance are felt in virtually every transaction involving the purchase, sale or restructuring of a company or its assets. Whether deals occur at all, and the price negotiated in such deals, is very often a direct function of the underlying regulatory regime within which firms operate.