How Markets Discipline Companies

I don’t know whether or not Perot Systems actually did share confidential information about the structure and design of the California electricity market, but as this Financial Times article indicates, what matters is what investors believe, and how they act on those beliefs. As the article says, investors are not convinced by the arguments that Perot Systems has put forth to this point, and they respond by selling in anticipation of some future bad thing happening that would affect the value of the stock. It’s those expectations and those actions that discipline companies, and deter them from behaving badly. Prices communicate valuable private knowledge (like how much a given investor believes their arguments) to a wider audience, and induce companies to take those beliefs into account. That’s what I call effective regulation.