Valuation Treadmill

Public companies now face constant pressure to meet investor expectations. A company must continually deliver strong short-term performance every quarter to maintain its stock price. This valuation treadmill creates incentives for corporations to deceive investors. Published more than twenty years after the passage of Sarbanes-Oxley, which requires all public companies to invest in measures to ensure the accuracy of their disclosures, The Valuation Treadmill shows how securities fraud became a major regulatory concern. Drawing on case studies of paradigmatic securities enforcement actions involving Xerox, Penn Central, Apple, Enron, Citigroup, and General Electric, the book argues that corporate securities fraud emerged as investors increasingly valued companies based on their future performance. Corporations now have an incentive to issue unrealistically optimistic disclosure to convince markets that their success will continue. Securities regulation must do more to protect the integrity of public companies from the pressure of the valuation treadmill.

'The Valuation Treadmill traces the history of securities fraud regulation in a novel way, with valuation as a conceptual through-thread. Professor Park builds from six examples of major securities frauds to buttress his proposals to modernize securities fraud regulation, focusing on financial market projections and earnings management. He presents a forceful, and often persuasively skeptical, argument that modern valuation methodologies are being abused, so much so that securities fraud threatens the integrity of public markets.' Frank Partnoy, Professor of Law, University of California Berkeley School of Law, 'James Park in his book, The Valuation Treadmill, makes a significant contribution to corporate and securities law by focusing on a pivotal aspect of management-shareholder relations, how corporations are valued. With illuminating examples, he not only explains why this is critical, but notably what should be done.' Joel Seligman, President Emeritus, University of Rochester, Professor of Law, Washington University School of Law, 'In The Valuation Treadmill, James Park gives us a highly readable tour through the contested history of securities fraud litigation against publicly traded companies. His intriguing thesis-that the rise of those cases is inextricably linked to changes in how corporations are valued-provides an important new perspective on that history. He supplements that analysis with a nuanced set of policy prescriptions. Rather than adhering to the conventional wisdom, which typically tries to raise higher barriers to shareholder litigation, Professor Park aims at one of the main drivers of corporate fraud, the ceaseless need for managers to meet market expectations. All of that makes The Valuation Treadmill a must-read for securities regulation scholars, regulators, and policymakers.' Michael A. Perino, author of The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash Forever Changed American Finance, 'Despite decades of regulation and enforcement, markets and investors are still plagued by securities fraud. Scholar James Park offers the best-yet diagnosis of the problem: we vigorously regulate false statements about the past when most fraud is generated by 'the valuation treadmill,' the endless, ever increasing pressure to meet expectations about the future. Park proposes more vigorous regulation of projections, where companies are most likely to cheat and investors most likely to be harmed. This highly-persuasive book is critically important reading for everyone interested in securities fraud and financial regulation more generally.' David H. Webber, author of The Rise of the Working-Class Shareholder: Labor's Last Best Weapon, 'The Valuation Treadmill is extremely well written, and will be in invaluable aid to young lawyers, not to mention more experienced attorneys, who may otherwise have difficulty understanding the concepts of public company valuation fraud. This book fills an important niche and is one every lawyer interested in securities fraud should read.' Harvey Pitt, CEO of Kalorama Partners, LLC

James J. Park is Professor of Law at UCLA School of Law. He writes and teaches in the areas of securities regulation and corporate law. He was an editor of Can Delaware Be Dethroned? Evaluating Delaware's Dominance of Corporate Law (with Iman Anabtawi, Stephen Bainbridge, & Sung Hui Kim, 2018).