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Abstract: We report strong OLS and instrumental variable evidence that an overall corporate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate governance index (KCGI, 0~100) for 515 Korean companies based on a 2001 Korea Stock Exchange survey. In OLS, a worst-to-best change in KCGI predicts a 0.47 increase in Tobin's q (about a 160% increase in share price). This effect is statistically strong (t = 6.12) and robust to choice of market value variable (Tobin's q, market/book, and market/sales), specification of the governance index, and inclusion of extensive control variables. We rely on unique features of Korean legal rules to construct an instrument for KCGI. Good instruments are not available in other comparable studies. Two-stage and three-stage least squares coefficients are larger than OLS coefficients and are highly significant. Thus, this article offers evidence consistent with a causal relationship between an overall governance index and higher share prices in emerging markets. We also find that Korean firms with 50% outside directors have 0.13 higher Tobin's q (roughly 40% higher share price), after controlling for the rest of KCGI. This effect, too, is likely causal. Thus, we report the first evidence consistent with greater board independence causally predicting higher share prices in emerging markets.
Abstract: In a companion paper, Bernard Black, Hasung Jang & Woochan Kim, Predicting Firms' Corporate Governance Choices: Evidence from Korea, 12 Journal of Corporate Finance 660-691 (2006), nearly final version at http://ssrn.com/abstract=428662, we examine the factors which predict firms' governance choices.
For our related, subsequent work with panel data on Korean governance, see:
Bernard Black and Woochan Kim, The Effect of Board Structure on Firm Value: A Multiple Identification Strategy Approach Using Korean Data (working paper 2008), http://ssrn.com/abstract=968287 (identification of board structure reforms with an increase in firm market value).
Bernard Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (working paper 2008), http://ssrn.com/abstract=844744 (studying the channels through which governance may affect firm market value).
Korea, corporate governance, corporate governance index, law and finance, firm valuation, board of directors, emerging markets
Abstract: In Russia and elsewhere, proponents of rapid, mass privatization of state-owned enterprises (ourselves among them) hoped that the profit incentives unleashed by privatization would soon revive faltering, centrally planned economies. The revival didn't happen. We offer here some partial explanations. First, rapid mass privatization is likely to lead to massive self-dealing by managers and controlling shareholders unless (implausibly in the initial transition from central planning to markets) a country has a good infrastructure for controlling self-dealing. Russia accelerated the self-dealing process by selling control of its largest enterprises cheaply to crooks, who transferred their skimming talents to the enterprises they acquired, and used their wealth to further corrupt the government and block reforms that might constrain their actions. Second, profit incentives to restructure privatized businesses and create new ones can be swamped by the burden on business imposed by a combination of (among other things) a punitive tax system, official corruption, organized crime, and an unfriendly bureaucracy. Third, while self-dealing will still occur (though perhaps to a lesser extent) if state enterprises aren't privatized, since self-dealing accompanies privatization, it politically discredits privatization as a reform strategy and can undercut longer-term reforms. A principal lesson: developing the institutions to control self-dealing is central to successful privatization of large firms.
Abstract: I survey corporate governance activity by institutional investors in the United States, and the empirical evidence on whether this activity affects firm performance. A small number of American institutional investors, mostly public pension plans, spend a trivial amount of money on overt activism efforts. They don't conduct proxy fights, and don't try to elect their own candidates to the board of directors. Legal rules, agency costs within the institutions, information costs, collective action problems, and limited institutional competence are all plausible partial explanations for this relative lack of activity. The currently available evidence, taken as a whole, is consistent with the proposition that the institutions achieve the effects on firm performance that one might expect from this level of effort -- namely, not much.
Abstract: An important challenge for all economies, at which only a few have succeeded, is creating the preconditions for a strong market for common stocks and other securities. A strong securities market rests on a complex network of legal and market institutions that ensure that minority shareholders (1) receive good information about the value of a company's business and (2) have confidence that a company's managers and controlling shareholders won't cheat them out of most or all of the value of their investment. A country whose laws and related institutions fail on either count cannot develop a strong securities market, forcing firms to rely on internal financing or bank financing - both of which have important shortcomings. In this Article, Professor Bernard Black explains why these two investor protection issues are critical, related, and hard to solve. He discusses which laws and institutions are most important for each, which of these laws and institutions can be borrowed from countries with strong securities markets, and which must be homegrown. A shorter and earlier version of this article was published as "The Core Institutions that Support Strong Securities Markets," Business Lawyer, Vol. 55, pp. 1565-1607, 2000. This earlier article is available at http://ssrn.com/abstract_id=231120
Abstract: The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank- and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.
Abstract: The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. We argue here that this is no accident -- that venture capital can flourish especially -- and perhaps only -- if the venture capitalist can exit from a successful portfolio company through an initial public offering (IPO), which requires an active stock market. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers especially the importance of exit by venture capitalists and the opportunity, present only if IPO exit is possible, for the venture capitalist and the entrepreneur to enter into an implicit contract over control, in which a successful entrepreneur can reacquire control from the venture capitalist by using an IPO as the means of exit. Note: This article is a shortened version of Black and Gilson, "Venture Capital and the Structure of Capital Markets: Banks versus Stock Markets," Journal of Financial Economics, Vol. 47, pp. 243-277, 1998. A nearly final version of the longer article is available on SSRN at http://ssrn.com/abstract=46909
Abstract: The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom. We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board.
Abstract: The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom. We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board. Note: This paper is identical to the article as published in the Journal of Corporation Law. The published article is available, without the Stanford Law and Economics cover page, at http://papers.ssrn.com/abstract=313026
Abstract: We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decrease firm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have "supermajority-independent boards" with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests that it may be useful for firms to have a moderate number of inside directors (say three to five on an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and, often, affiliated) directors, and the value of interaction between different types of directors who bring different strengths to the board.
Abstract: Most U.S. public companies have a single class of voting common shares: voting power is proportional to economic ownership. Linking votes to shares is often thought to be desirable, because, as residual claimants, shareholders have an incentive to exercise voting power well. The linkage also facilitates the market for corporate control. On the other hand, decoupling is efficient in some situations. Equity derivatives and other capital market developments now allow shareholders to readily decouple voting rights from economic ownership of shares, often without public disclosure. Hedge funds are prominent users of decoupling. Sometimes they hold more votes than economic ownership (a situation we term empty voting). Sometimes they hold undisclosed economic ownership without votes, but often with the de facto ability to acquire votes if needed (a situation we term hidden (morphable) ownership). This Article analyzes empty voting and hidden (morphable) ownership, which we term the new vote buying. We offer a framework for unpacking its functional elements and assess its potential benefits and costs. Two companion legal articles (Hu and Black, 2006a, 2006b) provide more details on current disclosure rules and offer a disclosure reform proposal. ** The companion legal articles provide additional details on current disclosure rules, our disclosure proposal, and other possible reforms. For the companion directed at an academic legal audience, see Hu & Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 Southern California Law Review 811-908 (2006), http://ssrn.com/abstract=904004. For the companion directed at legal practitioners and regulators, see Hu & Black, Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, 61 Business Lawyer 1011-1070 (2006), http://ssrn.com/abstract=887183. **
bank regulation, banking, corporate control, corporate governance, derivative, disclosure, dual class stock, equity swap, financial innovation, hedge fund, hedging, insider, Mylan Laboratories, option, Perry, Securities and Exchange Commission, securities regulation, shareholder, takeover, voting
Abstract: Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power well. The coupling of votes and shares makes possible the market for corporate control. The power of economic owners to elect directors is also a core basis for the legitimacy of managerial authority. Both theory and evidence generally support the importance of linking votes to economic interest. Yet the derivatives revolution and other capital markets developments now allow both outside investors and insiders to readily decouple economic ownership of shares from voting rights. This decoupling, which we call the new vote buying, has emerged as a worldwide issue in the past several years. It is largely hidden from public view and mostly untouched by current regulation. Hedge funds have been especially creative in decoupling voting rights from economic ownership. Sometimes they hold more votes than economic ownership - a pattern we call empty voting. In an extreme situation, a vote holder can have a negative economic interest and, thus, an incentive to vote in ways that reduce the company's share price. Sometimes investors hold more economic ownership than votes, though often with morphable voting rights - the de facto ability to acquire the votes if needed. We call this situation hidden (morphable) ownership because the economic ownership and (de facto) voting ownership are often not disclosed. This Article analyzes the new vote buying and its potential benefits and costs. We set out the functional elements of the new vote buying and develop a taxonomy of decoupling strategies. We also propose a near-term disclosure-based response and outline a menu of longer-term regulatory choices. Our disclosure proposal would simplify and partially integrate five existing, inconsistent ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed: we discuss strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies. ** This Article has two shorter companions. One is directed at an academic finance audience and the other is directed at legal practitioners and regulators. For the former, see Henry T.C. Hu & Bernard Black, Hedge Funds, Insiders, and Empty Voting: Decoupling of Economic and Voting Ownership in Public Companies, Journal of Corporate Finance, vol. 13, pp. 343-367 (2007), nearly final version at http://ssrn.com/abstract=874098. For the latter, see Henry T.C. Hu & Bernard Black, Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms, Business Lawyer, vol. 61, pp. 1011-1070 (2006), also available at http://ssrn.com/abstract=887183 **
Bank regulation, banking, corporate governance, derivative, disclosure, equity swap, financial innovation, hedge fund, hedging, insider, Mylan Laboratories, Perry Corp., Securities and Exchange Commission, securities regulation, shareholder, shareholder voting, takeover, vote buying, voting
Abstract: Settlements reached in 2005 in securities litigation involving Enron and WorldCom highlighted the financial risks faced by outside directors of public companies. We argue elsewhere that Enron and WorldCom, as instances where directors made damages payments out of their own pockets, are and likely will remain exceptional in the United States (see Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability, http://ssrn.com/abstract=894921). In this paper, we show that the risk of out-of-pocket payment is likewise very low on a cross-border basis, in both common law and civil law countries. The largest source of risk is efforts by government agencies to make an example of particular directors, even when the cost of doing so likely exceeds the financial recovery. We study Britain and Germany in depth and offer summaries of the position in Australia, Canada, France, and Japan. We find that while specific laws quite often differ, there is substantial functional convergence. In each country we analyze, due to a combination of substantive law, procedural rules, and market forces, the out-of-pocket liability risk faced by outside directors of public companies is similar - present but very small. We draw upon our cross-border analysis to assess the legal risks outside directors can expect to face going forward, both in the United States and elsewhere. We also briefly consider whether the current approach reflects sensible public policy. Earlier pieces of this overall project are: http://ssrn.com/abstract=382422 (a pre-Enron and WorldCom version of "Outside Director Liability") http://ssrn.com/abstract=878135 (policy analysis) http://ssrn.com/abstract=628223 (study of Korea) http://ssrn.com/abstract=682507 (summary article for a finance audience) http://ssrn.com/abstract=800584 (Germany-centered) http://ssrn.com/abstract=800604 (German language version of Germany-paper) http://ssrn.com/abstract=590913 (summary article for a practitioner audience)
outside directors, director liability, corporate law, securities law, indemnification, D&O insurance, derivative suits, securities class actions
Abstract: This article offers my personal, idiosyncratic overview of the principal fiduciary duties of outside directors, from a common law perspective, and what the remedies should be for breach of each of these duties. I discuss the four core fiduciary duties of directors: the duty of loyalty; the duty of care; the duty of disclosure; and the duty of special care when your company is a takeover target.
Abstract: Does a firm's corporate governance behavior affect its market value? In most empirical tests in developed countries, firm-specific corporate governance actions have little or no effect on market value. These weak results could reflect limited variation among firms in governance practices. In contrast, the corporate governance practices of Russian firms vary widely, from quite good to awful. I test whether corporate governance behavior affects the market value of Russian firms using (1) fall 1999 corporate governance rankings developed by a Russian investment bank for sixteen Russian public companies and (2) the "value ratio" of actual market capitalization to potential Western market capitalization for these firms, determined independently at the same time by a second Russian investment bank. The correlation between ln(value ratio) and governance ranking is striking and is statistically strong despite the small sample size: Pearson r = 0.90 (p < .0001). A one-standard-deviation improvement in governance ranking predicts an 8-fold increase in firm value; a worst (51 ranking) to best (7 ranking) governance improvement predicts a 600-fold increase in firm value. My results are tentative, due to the small sample size. But they suggest that a firm's corporate governance behavior can have a huge effect on its market value in a country where other constraints on corporate behavior are weak. For an updated and somewhat more technical version of this Article, using an expanded 21 firm sample, see Bernard Black, "The Corporate Governance Behavior and Market Value of Russian Firms", Emerging Markets Review, Vol. 2, pp. 89-108 (2001), nearly final version available at http://ssrn.com/abstract_id=263014
Abstract: Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' separation of ownership and control suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers not to stray too far from shareholder wealth maximization. The derivatives revolution and other capital market developments threaten this familiar pattern. Both outside investors and insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling - which we call the new vote buying - is often hidden from public view and is largely untouched by current regulation. Hedge funds have been especially creative in decoupling voting rights from economic ownership. Sometimes they hold more votes than economic ownership, a pattern we call empty voting. That is, they may have substantial voting power while having limited, zero - or, indeed, negative - economic ownership. Sometimes they hold undisclosed economic ownership, a pattern we call hidden ownership. Often, the hidden owners also have morphable voting rights - the de facto ability to acquire the votes if needed. Insiders can also use empty voting techniques. This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other shareholder oversight. We also propose a disclosure-based regulatory response. Our disclosure proposal would integrate and simplify five existing, inconsistent share ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, substantive responses to empty voting may be needed; we sketch some possible responses. ** This article has two companion works, one directed at an academic legal audience and the second at a finance audience. For the former, see Hu & Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 Southern California Law Review 811-908 (2006), also available at http://ssrn.com/abstract=904004. For the latter, see Hu & Black, Hedge Funds, Insiders, and Empty Voting: Decoupling of Economic and Voting Ownership in Public Companies, Journal of Corporate Finance, vol. 13, pp. 343-367 (2007), nearly final version available at http://ssrn.com/abstract=874098. **
bank regulation, banking, corporate governance, derivative, disclosure, dual class stock, equity swap, financial innovation, hedge fund, hedging, insider, Mylan Laboratories, Perry Corp., Securities and Exchange Commission, securities regulation, shareholder, takeover, voting
Abstract: This is an EARLY version of our published article, Outside Director Liability, which is also on SSRN at http://ssrn.com/abstract=894921. A companion article, Brian Cheffins & Bernard Black, Outside Director Liability Across Countries, Texas Law Review (forthcoming 2006), http://ssrn.com/abstract=438321), studies six comparison common-law and civil-law countries (Australia, Britain, Canada, France, Germany, and Japan). These two articles are the most fully developed of our articles on outside director liability. This early version was completed before the Enron and WorldCom settlements in 2005. We have left it on SSRN because Parts III and IV were not included in our published work. ABSTRACT FOR THIS PAPER: Outside directors can do a bad job, sometimes spectacularly. Yet outside directors of U.S. public companies who fail to meet what we call their vigilance duties under corporate, securities, environmental, pension, and other laws almost never face actual out-of-pocket liability for good faith conduct. Their nominal liability is almost entirely eliminated by a combination of indemnification, insurance, procedural rules, and the settlement incentives of plaintiffs, defendants, and insurers. The principal risk of actual liability is under securities law, for an insolvent company (which can neither pay damages itself nor indemnify the director) and a seriously rich (hence worth chasing) director, where damages exceed the D&O insurance policy limits and the director does not represent an institution that can indemnify him. The principal sanction against outside directors is harm to reputation, not direct financial loss. Other pieces of our overall research on Outside Director Liability are listed below. http://ssrn.com/abstract=878135 (policy analysis) http://ssrn.com/abstract=628223 (study of Korea) http://ssrn.com/abstract=682507 (summary article for a finance audience) http://ssrn.com/abstract=800584 (Germany-centered) http://ssrn.com/abstract=800604 (German language version of Germany-paper) http://ssrn.com/abstract=590913 (summary for practitioner audience)
directors, corporate goverance, liability, securities law, corporate law
Abstract: I examine the relationship between corporate governance behavior and market value for a sample of 21 Russian firms. I use (1) fall 1999 corporate governance rankings for these firms, developed by a Russian investment bank, and (2) the "value ratio" of actual market capitalization to potential Western market capitalization for these firms, determined independently by a second Russian investment bank. The correlation between ln(value ratio) and governance ranking is striking and statistically strong: Pearson r = 0.90 (t = 8.97). A worst (51 ranking) to best (7 ranking) governance improvement predicts a 700-fold increase in firm value. These results are tentative because of the small sample. But they suggest that corporate governance behavior has a powerful effect on market value in a country where legal and cultural constraints on corporate behavior are weak. This paper is a nearly final version of the published article. An earlier conference version of this article, with a smaller 16-firm sample, was published as Bernard Black, "Does Corporate Governance Matter? A Crude Test Using Russian Data", University of Pennsylvania Law Review vol. 149, pp. 2131-2150 (2001), available at http://ssrn.com/abstract_id=252706 A Russian translation of this paper is available at http://ssrn.com/abstract_id=367141
Abstract: Using a comprehensive database of closed claims maintained by the Texas Department of Insurance since 1988, this study provides evidence on a range of issues involving medical malpractice litigation, including claim frequency, payout amounts, defense costs, and jury verdicts. The data present a picture of stability in most aspects and moderate change in others. We do not find evidence in claim outcomes of the medical malpractice insurance crisis that produced headlines over the last several years and led to legal reform in Texas and other states. Controlling for population growth, the number of large paid claims (over $25,000 in real 1988 dollars) was roughly constant from 1990-2002. The number of smaller paid claims declined. Controlling for inflation, payout per large paid claim increased over 1988-2002 by an estimated 0.1 percent insignificant) - 0.5 percent (marginally significant) per year, depending on the data set, but actual payouts in tried cases showed little or no time trend. Real defense costs per large paid claim rose by 4.2-4.5 percent per year. Real total cost per large paid claim, including defense costs, rose by 0.8-1.2 percent per year. The prior working paper version of this paper is available at http://ssrn.com/abstract=678601. The working paper version contains color figures, which were converted to black and white in the published version.
Abstract: The core of this article is our May 2000 Report to the Ministry of Justice of the Republic of Korea. The Report reviews South Korea's corporate governance system and recommends legal reforms to improve Korean corporate governance and protect against a repeat of Korea's governance-related financial crisis of 1997-1998. The Report's principal recommendations include enhancing the role of public company boards of directors, strengthening independent director and non-interested shareholder review of related party transactions, and requiring cumulative voting and preemptive rights for public companies. The Introduction by Bernard Black that precedes the Report discusses the ongoing transition in Korean corporate governance, and the political and economic forces behind that transition.
Abstract: The core of this article is our May 2000 Report to the Ministry of Justice of the Republic of Korea. The Report reviews South Korea's corporate governance system and recommends legal reforms to improve Korean corporate governance and protect against a repeat of Korea's governance-related financial crisis of 1997-1998. The Report's principal recommendations include enhancing the role of public company boards of directors, strengthening independent director and non-interested shareholder review of related party transactions, and requiring cumulative voting and preemptive rights for public companies. The Introduction by Bernard Black that precedes the Report discusses the ongoing transition in Korean corporate governance, and the political and economic forces behind that transition. Note: This paper is identical to the article as published in the Journal of Corporation Law. The published article is available, without the Stanford Law and Economics cover page, at http://papers.ssrn.com/abstract=279064
Abstract: 1. This document sets forth proposed principles for a legislation on stock companies that are considered to be appropriate for a country making the transition from a centrally planned economy to a market economy. For each, views on the topic are explained and alternative approaches considered. The approaches currently used in three OECD economies - France, Germany, and the United States - are summarised, as well as those existing in the Russian Federation, a transition economy that has recently adopted a modern company law. 2. The focus of this exercise is company law, i.e. legislation that regulates commercial organizations with limited liability and investments represented by shares: corporations in the US, aktiengesellschaften in Germany, societes anonymes in France, joint stock companies in Russia. Although legislation on joint stock companies is the object of primary focus, all countries will need to have legislation providing for other types of business organisations. This will not be discussed here however, except when their provisions are relevant to the assumptions underlying this document. It is nevertheless important to note that the legislation should exhaustively list all available forms of legal entities, and that registration procedures should ensure a clear identification of every registered legal entity. This is mainly because improper formation of a legal entity might have dire consequences for both investors and third parties. 3. The discussion of company law principles in this document is based on an assumption of a civil law environment, i.e. the existence of a general civil code. Excluded from consideration are laws regulating securities exchanges and the rules for the general offering of securities to the public. It should however be noted that sometimes the boundaries between company and securities laws are blurred. Some countries will choose to regulate certain issues related to publicly-quoted companies and their shareholders through securities regulation while others include such provisions in the general company legislation. The principles that are discussed here and address these grey-area issues can be applied in either context. Regulations of the general relationship between stock companies and their employees, and special rules designed to handle the specific issues that arise for financial and industrial groups are also not discussed here. Finally, while the document considers the civil remedies for violation of the company law, it does not address criminal law issues related to stock companies and their behaviour. Published in English and Russian in: 24 Journal of Corporation Law 190-293 (1999); Stanford Law School, John M. Olin Program in Law and Economics Working Paper No. 165; Columbia Law School, Center for Law and Economic Studies Working Paper No. 138 This paper is available in English (below) and Russian at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=127208
Abstract: This paper develops a "self-enforcing" approach to drafting corporate law for emerging capitalist economies, based on a case study: a model statute that we helped to develop for the Russian Federation, which formed the basis for the recently adopted Russian law on joint-stock companies. The paper describes the contextual features of emerging economies that make importing statutes from developed countries inappropriate, including the prevalence of controlled companies and the weakness of institutional, market, cultural, and legal constraints. Against this backdrop, we argue that the best legal strategy for protecting outside investors in emerging economies while simultaneously preserving the discretion of companies to invest is a self-enforcing model of corporate law. The self-enforcing model structures decisionmaking processes to allow large outside shareholders to protect themselves from insider opportunism with minimal resort to legal authority, including the courts. Among the examples of self-regulatory statutory provisions are a mandatory cumulative voting rule for the selection of directors, which assures that minority blockholders in controlled companies have board representation, and dual shareholder- and board-level approval procedures for self-interested transactions. The paper also examines how one can induce voluntary compliance and structure remedies in emerging economies, as well as the implications of the self-enforcing model for the ongoing debate over the efficiency of corporate law in developed economies.
Abstract: This article presents international evidence on takeover activity, and uses that evidence to argue that the current takeover wave can fairly be called the first-ever international merger wave, as much or more than it can be called the fifth U.S. merger wave. I also discuss the factors that contribute to the strength of the current takeover wave and why the takeover boom has engendered so little political concern.
Abstract: We extend here our prior work, which focused on equity decoupling (Hu and Black, 2006, 2007, 2008), by providing a systematic treatment of debt decoupling and an initial exploration of hybrid decoupling. Equity decoupling involves unbundling of economic, voting, and sometimes other rights customarily associated with shares, often in ways that may permit avoidance of disclosure and other obligations. We discuss a new U.S. court decision which will likely curtail the use of equity decoupling strategies to avoid large shareholder disclosure rules. Debt decoupling involving the unbundling of the economic rights, contractual control rights, and legal and other rights normally associated with debt, through credit derivatives and securitization. Corporations can have empty and hidden creditors, just as they can have empty and hidden shareholders. "Hybrid decoupling" across standard equity and debt categories is also possible. All forms of decoupling appear to be increasingly common. Debt decoupling can pose risks at the firm level for what can be termed "debt governance" -- the overall relationship between creditor and debtor, including creditors' exercise of contractual and legal rights with respect to firms and other borrowers. Widespread debt decoupling can also involve externalities and therefore create systemic financial risks; we explore those risks.
For our related work on equity decoupling, see:
Henry T. C. Hu & Bernard Black, Equity and Debt Decoupling and Empty Voting II: Importance and Extensions, 156 University of Pennsylvania Law Review 625-739 (2008), http://ssrn.com/abstract=1030721
Henry T. C. Hu & Bernard Black, Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership, 13 Journal of Corporate Finance 343-367 (2007) (finance version of Hu and Black, 2006) (nearly final version), http://ssrn.com/abstract=874098
Henry T. C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 Southern California Law Review 811-908 (2006), http://ssrn.com/abstract=904004
equity decoupling, debt decoupling, hybrid decoupling, empty voting, hidden ownership, equity swaps, credit default swaps, CDOs, disclosure, Securities and Exchange Commission, securitization, systemic risk
Abstract: A strong securities markets rests on a complex network of supporting institutions that ensure that minority shareholders (i) receive good information about the value of a company's business, and (ii) can have confidence that a company's managers and controlling shareholders won't cheat them out of most or all of the value of their investment. A country whose laws and related institutions fail on either count cannot develop a strong stock market, forcing firms to rely on internal financing or bank financing - both of which have important shortcomings. This article explains why these two investor protection issues are critical, related, and hard to solve, and discusses which laws and institutions are most important for each. This article is an earlier and shorter version of Bernard Black, "The Legal and Institutional Preconditions for Strong Securities Markets," UCLA Law Review, vol. 48, pp. 781-855 (2001), which is available on SSRN at http://ssrn.com/abstract_id=182169
Abstract: This Article analyzes the degree to which outside directors of public companies are exposed to out-of-pocket liability risk - the risk of paying legal expenses or damages pursuant to a judgment or settlement agreement that are not fully paid by the company or another source, or covered by directors' and officers' (D&O) liability insurance. Recent settlements in securities class actions involving WorldCom and Enron, in which lead plaintiffs succeeded in extracting out-of-pocket payments from outside directors, have led to predictions that such payments will become common. We analyze the out-of-pocket liability risk facing outside directors empirically, legally, and conceptually and show that this risk is very low, far lower than many commentators and board members believe, notwithstanding the WorldCom and Enron settlements. Our extensive search for instances in which outside directors of public companies have made out-of-pocket payments turned up thirteen cases in the last twenty-five years. Most involve fact patterns that should not recur today for a company with a state-of-the-art D&O insurance policy. We offer a detailed assessment of the liability risk outside directors face in trials under corporate and securities law, including settlement dynamics. We argue that, going forward, if a company has a D&O policy with appropriate coverage and sensible limits, outside directors will be potentially vulnerable to out-of-pocket liability only when (1) the company is insolvent and the expected damage award exceeds those limits, (2) the case includes a substantial claim under section 11 of the Securities Act or an unusually strong section 10(b) claim, and (3) there is an alignment between outside directors' or other defendants' culpability and their wealth. Absent facts that fit or approach this perfect-storm scenario, directors with state-of-the-art insurance policies face little out-of-pocket liability risk, and even in a perfect storm they may not face out-of-pocket liability. The principal threats to outside directors who perform poorly are the time, aggravation, and potential harm to reputation that a lawsuit can entail, not direct financial loss. A companion article, Brian Cheffins & Bernard Black, Outside Director Liability Across Countries, 84 Texas Law Review 1385-1480 (2006), http://ssrn.com/abstract=438321, studies six comparison common-law and civil-law countries (Australia, Britain, Canada, France, Germany, and Japan). This article and Outside Director Liability Across Countries are the most fully developed of our articles on outside director liability. Earlier pieces of this overall project are listed below. http://ssrn.com/abstract=382422 (a pre-Enron and WorldCom version of this article) http://ssrn.com/abstract=878135 (policy analysis) http://ssrn.com/abstract=628223 (study of Korea) http://ssrn.com/abstract=682507 (summary article for a finance audience) http://ssrn.com/abstract=800584 (Germany-centered) http://ssrn.com/abstract=800604 (German language version of Germany-paper) http://ssrn.com/abstract=590913 (summary for practitioner audience)
outside directors, corporate law, securities law, indemnification, D&O insurance
Abstract: In a companion paper, we report evidence that a broad corporate governance index predicts higher share prices for Korean firms. Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firms' Market Values? Evidence from Korea, 22 Journal of Law, Economics and Organization 366-413 (2006), nearly final version at http://ssrn.com/abstract=311275
Bernard Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (working paper 2008), http://ssrn.com/abstract=844744 (channels through which governance may affect firm value).
Korea, corporate governance, corporate governance index, law and finance
Abstract: Outside directors constitute a key component of most prescriptions for good governance of public companies. Given that outside directors are important corporate governance players, one is led to wonder what will motivate the individuals serving in this capacity to carry out their responsibilities in an effective manner. An obvious possibility is that concerns about being held personally liable will push them to perform effectively. This chapter correspondingly considers the scope of outside director liability in seven countries (Australia, Britain, Canada, France, Germany, Japan and the United States). The chapter indicates that outside directors of public companies are at some risk when litigants are seeking to send a message to those serving in the boardroom of public companies. Generally, however, such individuals only very rarely pay damages or legal expenses out-of-their own pocket. The chapter offers a brief assessment of the costs and benefits of current arrangements and concludes that, consistent with the current cross-border pattern, out-of-pocket liability should remain a rare outcome.
outside directors, corporate governance, Germany, supervisory board, director liability, securities law, corporate law
Abstract: In a companion paper, Bernard Black and Woochan Kim, The Effect of Board Structure on Firm Value: A Multiple Identification Strategy Approach Using Korean Data (working paper 2008), http://ssrn.com/abstract=968287, we seek to identify Korean board structure reforms as likely causing an increase in firm market value. For our earlier cross-sectional research on Korean corporate governance, see Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firms' Market Values? Evidence from Korea,: 22 Journal of Law, Economics and Organization 366-413 (2006), nearly final version at http://ssrn.com/abstract=311275 Bernard Black, Hasung Jang & Woochan Kim, Predicting Firms' Corporate Governance Choices: Evidence from Korea, 12 Journal of Corporate Finance 660-691 (2006), nearly final version at http://ssrn.com/abstract=428662
Abstract: There are several methods for ranking the scholarly performance of law faculties, including reputation surveys (U.S. News, Leiter); publication counts (Lindgren and Seltzer, Leiter); and citation counts (Eisenberg and Wells, Leiter). Each offers a useful but partial picture of faculty performance. We explore here whether the new "beta" SSRN-based measures (number of downloads and number of posted papers) can offer a different, also useful, albeit also partial, picture. Our modest claim is that SSRN-based measures can address some of the deficiencies in these other measures and thus play a valuable role in the rankings tapestry. For example, SSRN offers real-time data covering most American law schools and many foreign law schools, while citation and publication counts appear sporadically and cover a limited number of U.S. schools. The SSRN measures favor work with audiences across disciplines and across countries, while other measures are more law-centric and U.S.-centric. SSRN is relatively new and thus favors younger scholars and improving schools, while other measures favor more established scholars and schools. At the same time, the SSRN measures have important field and other biases, as well as gaming risks. We assess the correlations among the different measures, both on an aggregate and on a per-faculty-member basis. We find that all measures are strongly correlated; that total and per faculty measures are highly correlated; and that SSRN measures based on number of papers are highly correlated with measures based on number of downloads. Among major schools, all measures also correlate with school size. For commentary on this article and the role of SSRN in law faculty rankings, see: Lawrence A. Cunningham, Commentary, Scholarly Profit Margins and the Legal Scholarship Network: Reflections on the Web, 81 IND. L.J. 271 (2006). Theodore Eisenberg, Commentary, Assessing the SSRN-Based Law School Rankings, 81 IND. L.J. 285 (2006).
Law Schools, Legal Education, Rankings, Corporate, Tax
Abstract: A central problem in conducting an event study of the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Share price changes may reflect the reforms, but could also reflect other information. We address this identification issue by studying India's adoption of major governance reforms (Clause 49). Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls. The reforms were sponsored by the Confederation of Indian Industry (an organization of large Indian public firms), applied initially to larger firms, and reached smaller public firms only after a several-year lag. The difference in effective dates offers a natural experiment: Large firms are the treatment group for the reforms. Small firms provide a control group for other news affecting India generally. The May 1999 announcement by Indian securities regulators of plans to adopt what became Clause 49 is accompanied by a 4% increase in the price of large firms over a two-day event window (the announcement date plus the next trading day), relative to smaller public firms; the difference grows to 7% over a five-day event window and 10% over a two-week window. Mid-sized firms had an intermediate reaction. Faster growing firms gained more than other firms, consistent with firms that need external equity capital benefiting more from governance rules. Cross-listed firms gained more than other firms, suggesting that local regulation can sometimes complement, rather than substitute for, the benefits of cross-listing. The positive reaction of large Indian firms contrasts with the mixed reaction to the Sarbanes-Oxley Act (which is similar to Clause 49 in important respects), suggesting that the value of mandatory governance rules may depend on a country's prior institutional environment.
Corporate Law, Securities Law, India, Indian Securities Law, listing standards, corporate governance, Clause 49
Abstract: We extend our prior work on how both supply (including the emergence of OTC equity derivatives and growth in share lending) and demand (including the growth of hedge funds) factors now facilitate the large-scale, low-cost decoupling of shareholder voting rights from shareholder economic interests. Both inside and outside shareholders, as well as corporations themselves, can engage in what we termed empty voting - voting while holding greater voting power than economic ownership. Shareholders can also have hidden (morphable) ownership - economic ownership, ostensibly without voting rights, which remains undisclosed under current disclosure rules, but can quickly morph to include voting ownership as well. These forms of decoupling pose important risks to the one-share-one-vote paradigm that underlies conventional models of corporate governance and shareholder voting. We extend our prior work in five primary ways. First, we treat decoupling of voting rights from economic ownership of shares (empty voting and hidden ownership) as special instances of a more general pattern-investors, and corporations themselves, can unbundle the package of rights and obligations which have traditionally been associated with equity (equity decoupling) as well as debt (debt decoupling). Second, we provide evidence that equity decoupling is an important worldwide phenomenon, which adds urgency to the need for disclosure and perhaps other reforms. Third, we go beyond decoupling by shareholders, and examine decoupling strategies that corporations can use to fend off changes in control. Fourth, we expand our integrated equity ownership disclosure proposal to address corporate decoupling, and propose responses to empty voting which go beyond disclosure, including constrained corporate power to limit the voting rights of empty voters, condensing the period from record date to shareholder meeting date, and encouraging institutional investors to recall and vote lent shares. Fifth, we sketch several extensions of our decoupling framework to (a) the full range of shareholder rights and obligations, (b) debt decoupling, and (c) the possible revival of the street sweep takeover strategy.
bank regulation, bankruptcy, corporate governance, credit default swap, creditor rights and obligations, derivative, disclosure, empty voting, equity swap, financial innovation, hedge fund, housing finance, insider, SEC, securitization, shareholder rights and obligations, takeover, voting
Abstract: A substantial academic and popular literature argues that the performance of American corporations might improve if American corporations had long-term outside investors (relational investors) who would hold large stakes, actively monitor management performance, and engage with management in setting corporate policy. Institutional investors can perhaps play this role. We provide the first large-scale test of the hypothesis that relational investing can affect corporate performance. We consider ownership and performance data for more than 1,500 large U.S. companies over a thirteen-year period (1983-95). Our results provide a mixed answer to the question of whether relational investing affects corporate performance. Our data suggest that there was a period in the late 1980s - a period with a high level of hostile takeover activity - when the presence of a relational investor was associated with higher stock market returns. This cohort of relational investors may have been able to induce corporate restructuring, whose principal effect was to reduce growth rates while improving profitability. But this pattern was not found in the early 1980s, or repeated in the early 1990s.
Abstract: We explore the role that legal restrictions and path dependence play in determining a country's corporate governance and finance through a case study of institutional investors in the United Kingdom. The U.K. has the same array of institutional investors as the U.S., much looser regulation of these investors, and a strong securities market (much like the U.S.). On the whole, British institutional investors are moderately more active than their U.S. counterparts. They intervene in companies to change management a few times per year. But they are still often passive, absent a crisis, and often prefer to sell their shares rather than press for a change in management or company strategy. Non-legal considerations, including fear that their activism may benefit their institutional rivals, inhibit their desire to participate in corporate governance. If Japan and Germany show how American corporate governance might have developed differently under different legal rules, Britain shows how American corporate governance might look rather similar under more limited regulation.
Abstract: A decade of experience with the transition from centrally planned to market economies has taught us that the strength of a country's market-supporting "institutions" powerfully affect transition success. However, the necessary institutions are rarely specified in detail. This Article is an early installment on a larger project that begins the task of providing this missing detail through a case study of Russia. We describe the multiple legal, institutional, and microeconomic reforms that Russia needed to put in place as part of its transition to a market economy. We discuss the important and sometimes nonobvious synergies between different reform elements, and explain why these synergies make controlling corruption a core element of successful transition, which Russia long neglected. Our basic message is to stress the complexity of reform, the interrelatedness of reform elements, and the pervasive effect of corruption in undermining reform effort, and the potential for (mostly) self-enforcing laws to limit bureaucracy and corruption.
Abstract: It is easy sport to criticize the Delaware takeover cases as inconsistent with the empirical evidence, each other, and a sensible allocation of power between managers and shareholders. We in fact believe all of these things. Here, however, we offer a more sympathetic account of the core Delaware takeover cases. We argue that they reflect an often unstated "hidden value" model, in which a firm's true value is visible to corporate directors but not to shareholders or potential acquirers. We explore the assumptions needed to make the hidden value model internally consistent, and contrast those assumptions to those that underlie to a "visible value" model in which shareholders and potential acquirers are well informed about firm value or can be made so through disclosure by the target's board. (One outcome of carefully stating the hidden value model's assumptions is to expose the model's problems.) We also address and reject a "control premium" theory, sometimes invoked by the Delaware courts, in which control is a corporate asset that the law protects by imposing Revlon duties on the target's board. Assuming that the Delaware courts continue to embrace hidden value, we argue that takeover decisions should, at a minimum, be governed by a bilateral decision-making structure, in which a target board's initial decision to approve an acquisition, block a takeover bid, or choose one bidder over another must be approved or rejected by shareholders. Under this approach, target boards could adopt modest deal protections and say "no" to a takeover bid by adopting a poison pill, but could not say "never" by using a staggered board to block a bid after the bidder wins a proxy contest. The courts must also strictly limit efforts by target boards to stuff the ballot box or otherwise alter shareholder vote outcomes.
Abstract: In this Comment, prepared for a Forum on capital formation for small businesses, I express doubts about whether the Internet, as a new communication medium, will significantly reduce the cost of obtaining capital through a public or quasi-public offering. The most important single barrier standing between small companies and capital providers is information asymmetry?potential investors do not know, and cannot easily verify, the quality of the information that a company provides. The internet cannot do much to reduce information asymmetry costs, nor the costs of the reputational intermediaries that emerge in securities markets reduce information asymmetry. On the contrary, the Internet could increase information asymmetry costs by undercutting the effectiveness of the institutions that today provide investors with partial assurance of the quality of the information provided by issuers.
Abstract: Much has been said recently about the risky legal environment in which outside directors of public companies operate, especially in the USA, but increasingly elsewhere as well. Our research on outside director liability suggests, however, that directors' fears are largely unjustified. We examine the law and lawsuit outcomes in four common law countries (Australia, Canada, Britain, and the USA) and three civil law countries (France, Germany, and Japan). The legal terrain and the risk of 'nominal liability' (a court finds liability or the defendants agree to a settlement) differ greatly depending on the jurisdiction. But nominal liability rarely turns into 'out-of-pocket liability,' in which the directors pay personally damages or legal fees. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. The bottom line: outside directors of public companies face a very low risk of out-of-pocket liability. We sketch the political and market forces that produce functional convergence in outcomes across countries, despite large differences in law, and suggest reasons to think that this outcome might reflect sensible policy.
Abstract: Much has been said recently about the risky legal environment in which outside directors of public companies operate, especially in theUSA, but increasingly elsewhere as well. Our research on outside director liability suggests, however, that directors' fears are largely unjustified. We examine the law and lawsuit outcomes in four common law countries (Australia, Canada, Britain, and the USA) and three civil law countries (France, Germany, and Japan). The legal terrain and the risk of 'nominal liability' (a court finds liability or the defendants agree to a settlement) differ greatly depending on the jurisdiction. But nominal liability rarely turns into 'out-of-pocket liability,' in which the directors pay personally damages or legal fees. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. The bottom line: outside directors of public companies face a very low risk of out-of-pocket liability. We sketch the political and market forces that produce functional convergence in outcomes across countries, despite large differences in law, and suggest reasons to think that this outcome might reflect sensible policy. This article is a condensed version, for a finance audience, of Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability, http://ssrn.com/abstract=382422, and Black & Cheffins, Outside Director Liability Across Countries, http://ssrn.com/abstract=438321. For a condensed, practitioner-oriented version of this article, see Black, Cheffins & Klausner, Outside Directors and Lawsuits: What are the Real Risks?, McKinsey Quarterly 70-78 (2004, No. 4), http://ssrn.com/abstract=590913.
corporate governance, outside directors, legal liability, corporate law, securities law
Abstract: We model and test the mechanisms through which securities law affects tunneling and tunneling affects firm valuation. In 2002, Bulgaria adopted securities law changes which limit two forms of equity tunneling - dilutive equity offerings and freezeouts. We document that following the change, minority shareholders participate equally in secondary equity offers, where before they suffered severe dilution; freezeout offer prices quadruple; and Tobin's q values rise sharply for firms at high risk of tunneling. At the same time, return on assets declines for high-equity-tunneling-risk firms, suggesting that controlling shareholders partly substitute for reduced equity tunneling by engaging in more cash-flow tunneling. We thus present evidence on (i) the importance of legal rules in limiting equity tunneling, (ii) the role of equity tunneling risk as an important factor in determining equity prices; and (iii) substitution by controlling shareholders between different forms of tunneling.
equity tunneling, preemptive rights, dilution, freezeout, corporate governance, securities law, emerging markets
Abstract: We provide an overview of the corporate governance practices of Brazilian public companies, based primarily on an extensive 2005 survey of 116 companies. We focus on the 88 responding Brazilian private firms which are not majority owned by the state or a foreign company. We identify areas where Brazilian corporate governance is relatively strong and weak. Board independence is an area of weakness: The boards of most Brazilian private firms are comprised entirely or almost entirely of insiders or representatives of the controlling family or group. Many firms have zero independent directors. At the same time, minority shareholders have legal rights to representation on the boards of many firms, and this representation is reasonably common. Financial disclosure lags behind world standards. Only a minority of firms provide a statement of cash flows or consolidated financial statements. However, many provide English language financial statements, and an English language version of their website. Audit committees are uncommon, but many Brazilian firms use an alternate approach to ensuring financial statement accuracy – establishing a fiscal board. A minority of firms provide takeout rights to minority shareholders on a sale of control. Controlling shareholders often use shareholders agreements to ensure control. A Portuguese language version of this article is available at http://ssrn.com/abstract=1528183 For a less detailed version of this paper, with statistical tests for differences between subsamples intended for an international audience, see Black, de Carvalho and Gorga, Corporate Governance in Brazil, at http://ssrn.com/abstract=1152454
Brazil, corporate governance, boards of directors, minority shareholders
Abstract: We often hear that hardly anyone wants to sit on corporate boards these days, largely because they fear personal liability. Our investigation of seven representative countries (Australia, Britain, Canada, France, Germany, Japan, and the United States) suggests that the liability concern is overdone. Although there are good reasons for outside directors to fulfill their duties diligently, fear of liability should not be one of them. Outside directors face only a tiny risk of paying damages or legal fees out of their own pockets. This article is a revised and condensed version of Bernard Black, Brian Cheffins, and Michael Klausner, Liability Risk for Outside Directors: A Cross-Border Analysis, European Financial Management vol. 10 (forthcoming 2004), available at http://ssrn.com/abstract=557070, which in turn is a summary of two longer papers, Bernard S. Black, Brian R. Cheffins, and Michael Klausner, Outside Director Liability (working paper 2004), available at http://ssrn.com/abstract=382422, and Bernard S. Black and Brian R. Cheffins, Outside Director Liability Across Countries (working paper 2003), available at http://ssrn.com/abstract=438321.
corporate governance, director liability, fiduciary duty, securities law, securities class actions, law and finance, director duties
Abstract: There is increasing evidence that broad measures of firm-level corporate governance predict higher share prices. However, almost all prior work relies on cross-sectional data. This work leaves open the possibility that endogeneity or omitted firm-level variables explain the observed correlations. We address the second possibility by offering time-series evidence from Russia for 1999-present, exploiting a number of available governance indices. We find an economically important and statistically strong correlation between governance and market value both in OLS and in fixed effects regressions with firm-index fixed effects. We also find large differences in coefficients and significance levels, including some sign reversals, between OLS and fixed effects specifications. This suggests that cross-sectional results may be unreliable. We also find significant differences in the predictive power of different indices, and in the components of these indices. How one measures governance matters.
This prepublication version is substantively the same as the published version, except that this version includes results for subindices and results with firm-index random effects, which were omitted from the published version due to space constraints.
A Russian translation of this article is available at http://ssrn.com/abstract=1435838
Russia, corporate governance, corporate governance index, law and finance, firm valuation, disclosure, emerging markets
Abstract: This article presents international evidence on takeover activity, and uses that evidence to argue that the current takeover wave can fairly be called the first-ever international merger wave, as much or more than it can be called the fifth U.S. merger wave. I also discuss the factors that contribute to the strength of the current takeover wave and why the takeover boom has engendered so little political concern. A longer version of this article was published as The First International Merger Wave and the Fifth and Last U.S. Wave, 54 University of Miami Law Review 799-818 (2000), and is available from the Social Science Research Network electronic library at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=231101
Abstract: This article assesses the extent to which the traditional passivity of American shareholders is a result of legal rules and conflicts of interest that discourage shareholder activism, or a result of collective action problems that discourage voting, proxy proposals, and other forms of shareholder activism. I develop a simple model of the decision of a large shareholder whether to vote or launch a proxy campaign. Large shareholders can have significant incentives to vote on an informed basis or launch proxy campaigns, especially for issues that are common across many companies and therefore involve economies of scale. However, they face significant legal impediments to owning large percentage stakes in companies or taking an activist role. These legal obstacles are reinforced by conflicts of interest that affect most major classes of institutional investors.
Abstract: Outside directors of public companies play a central role in overseeing management. Nonetheless, they have rarely incurred personal, out-of-pocket liability for failing to carry out their assigned tasks, either in the litigation-prone United States or other countries. Historically, as threats to this near-zero personal liability regime have appeared, market and political forces have responded to restore the status quo. We suggest here reasons to believe that this arrangement is justifiable from a policy perspective, at least in countries where reputation and other extra-legal mechanisms provide reasonable incentives for outside directors to be vigilant.
outside directors, liability, corporate governance
Abstract: The Russian language version of this report is available at http://ssrn.com/abstract=1001991. This Report was prepared, with support by the World Bank, for the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market (FSFM). We discuss the liability under company law of members of the board of directors, senior managers, and controlling shareholders of public companies in Canada, France, Germany, Korea, the United Kingdom, and the United States (plus a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and apply this comparative analysis to the Russian context. We recommend amendments to the Russian Law on Joint Stock Companies and related legislation. We propose measures to enhance the effectiveness of derivative suits; define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality; extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; protect directors against liability for business decisions adopted without a conflict of interest. We do not recommend the creation of significant administrative or criminal liability, nor expanded duties of directors for a company in financial distress. This document includes a separate Overview of the Report by Professor Black which provides an overview of Russia's progress in creating a modern company law. The Overview and Chapters 1 and 3 will be published separately as Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian Securities Agency), 2007 Columbia Business Law Review 614-799, available at http://ssrn.com/abstract=1010306. Chapters 8-9 and 11-13 will be published separately as Legal Liability of Directors and Company Officials Part 2: Court Procedures, Indemnification and Insurance, and Administrative and Criminal Liability (Report to the Russian Securities Agency), 2008 Columbia Business Law Review (forthcoming), available at http://ssrn.com/abstract=1010307.
Russia, company law, liability of directors and officers
Abstract: An important challenge for all economies, at which only a few have succeeded, is creating the preconditions for a strong market for common stocks and other securities. A strong securities market rests on a complex network of legal and market institutions that ensure that minority shareholders (i) receive good information about the value of a company's business, and (ii) have confidence that a company's managers and controlling shareholders won't cheat them out of most or all of the value of their investment. This short paper summarizes this theory (which I develop in a separate paper on The Legal and Institutional Preconditions for Strong Securities Markets), and discusses the strengths and weaknesses of Brazil's institutions along these two dimensions. My goal is to offer a tentative roadmap for future reform of Brazilian institutions.
Abstract: Recent reforms to Korean corporate and securities law have included two prominent features: a mandate that boards include a minimum number of outside directors and facilitation of shareholder lawsuits against board members for damages. The strategy of imposing liability risk on outside directors appears to follow U.S. practice. In actuality, however, outside directors in the U.S. rarely face out-of-pocket liability unless they engage in self-dealing. Instead, damages and legal fees are paid by the company, directors' and officers' (D&O) insurance, or both. Outside directors in Australia, Canada, Britain, France, Germany, and Japan similarly enjoy near-immunity from out-of-pocket liability due to shareholder lawsuits. Moreover, when events have occurred in these countries that threaten to impose out-of-pocket liability on outside directors, there is a strong tendency for political or market forces to soon reestablish a minimal level of risk for actions that fall short of self-dealing. This experience suggests that if Korea's new lawsuit-facilitating rules turn out to expose outside directors to a significant risk of out-of-pocket liability, Korea may well experience a similar political and market reaction. Thus, Korea will likely need to look elsewhere for sources of incentives for outside directors to be vigilant watchdogs.
Abstract: This short article was initially prepared for a December 2001 conference sponsored by the Korea Stock Exchange (KSE). It reviews the scope of self-regulation by stock exchanges and offers suggestions for the main Korean stock exchanges, the KSE and the KOSDAQ. I argue that self-regulation should be understood broadly to include regulation of listed companies through quality standards, disclosure standards, and governance rules; regulation of broker-dealers; regulation of trading; and, perhaps most basic, regulation of the exchange's organizational structure. The most important elements of self-regulation are regulation of listed companies and the exchange's organizational structure (which impacts its incentives to engage in other forms of self-regulation). To compete for trading in shares of cross-listed Korean companies, Korea will need both legislative change and stronger self-regulation of listed companies. The government should amend the Securities Transaction Law to repeal the securities transaction tax and permit demutualization of the KSE and the KOSDAQ. The government and the stock exchanges must upgrade both the on-the-ground reality (which will lag behind changes in formal rules) and investor perception (which will lag behind the on-the-ground reality) of Korea's disclosure and corporate governance regime. Stronger listing standards can be important components of that investor protection effort.
Abstract: In a companion paper, Bernard Black, Woochan Kim, Hasung Jang and Kyung-Suh Park, How Corporate Governance Affects Firm Value: Evidence on Channels from Korea (working paper 2008), http://ssrn.com/abstract=844744, we provide evidence on the channels through which governance may affect firm value. For our earlier cross-sectional research on Korean corporate governance, see
Bernard Black, Hasung Jang and Woochan Kim, Does Corporate Governance Affect Firms' Market Values? Evidence from Korea,: 22 Journal of Law, Economics and Organization 366-413 (2006), nearly final version at http://ssrn.com/abstract=311275
Bernard Black, Hasung Jang & Woochan Kim, Predicting Firms' Corporate Governance Choices: Evidence from Korea, 12 Journal of Corporate Finance 660-691 (2006), nearly final version at http://ssrn.com/abstract=428662
Korea, outside directors, audit committees, corporate governance, board of directors, emerging markets
Abstract: We provide an overview of Indian corporate governance practices, based primarily on responses to a 2006 survey of 370 Indian public companies. Compliance with legal norms is reasonably high in most areas, but not complete. We identify areas where Indian corporate governance is relatively strong and weak, and areas where regulation might usefully be either relaxed or strengthened. On the whole, Indian corporate governance rules appear appropriate for larger companies, but could use some strengthening in the area of related party transactions, and some relaxation for smaller companies. Executive compensation is low by U.S. standards and is not currently a problem area. We also examine whether there is a cross-sectional relationship between measures of governance and measures of firm performance and find evidence of a positive relationship for an overall governance index and for an index covering shareholder rights. We find an overall association, which is stronger for more profitable firms and firms with stronger growth opportunities. A subindex for shareholder rights is individually significant, but subindices for board structure (board independence and committee structure), disclosure, board procedure, and related party transactions are not significant. The non-results for board structure contrast to other recent studies, and suggest that India's legal requirements are sufficiently strict so that overcompliance does not produce valuation gains.
India, securities law, corporate governance, Clause 49
Abstract: On its face, state corporate law contains a mix of mandatory and default rules. I develop the "triviality hypothesis" that the appearance of a mandatory core to state corporate law is a mirage, and that state corporate law is trivial, in the sense that it lets companies -- managers and investors together -- establish any set of governance rules they would reasonably want. Rules that appear mandatory may be trivial for four reasons. First, some mandatory rules would be universally adopted if people thought about them ("market mimicking" rules). Second, some rules can be avoided by advance planning, including choice of capital structure and state of incorporation. Third, some mandatory rules are unimportant -- they cover situations that occur rarely or matter little. Finally, as circumstances change, some rules that used to be market mimicking, avoidable, or unimportant may matter, but precisely because these rules matter, they will soon be changed. The political forces that led to the trivialization of corporate law will see to that. Many apparently mandatory corporate law rules are trivial in one of these senses. Moreover, proving that nontrivial rules exist is hard. It is not trivial to disprove the extreme null hypothesis that all of state corporate law is trivial.
Abstract: IIt is often assumed that strong securities markets require good legal protection of minority shareholders. This implies both "good" law -- principally corporate and securities law -- and enforcement, yet there has been little empirical analysis of enforcement. We study private enforcement of corporate law in two common law jurisdictions with highly developed stock markets, the United Kingdom and the United States, examining how often directors of publicly traded companies are sued, and the nature and outcomes of those suits.
We find, based a comprehensive search for filings over 2004-2006, that lawsuits against directors of public companies alleging breach of duty are nearly nonexistent in the UK. The US is more litigious, but we still find, based on a nationwide search of decisions between 2000-2007, that only a small percentage of public companies face a lawsuit against directors alleging a breach of duty that is sufficiently contentious to result in a reported judicial opinion, and a substantial fraction of these cases are dismissed.
We examine possible substitutes in the UK for formal private enforcement of corporate law and find some evidence of substitutes, especially for takeover litigation. Nonetheless, our results suggest that formal private enforcement of corporate law is less central to strong securities markets than might be anticipated.
Private enforcement, corporate law, derivative actions, public enforcement, comparative corporate law
Abstract: This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book (click on the download document button below), or one or more of its parts. It contains three parts: (1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263141 (2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263142 (3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263143 Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037
Abstract: 1. This document sets forth proposed principles for a legislation on stock companies that are considered to be appropriate for a country making the transition from a centrally planned economy to a market economy. For each, views on the topic are explained and alternative approaches considered. The approaches currently used in three OECD economies - France, Germany, and the United States - are summarised, as well as those existing in the Russian Federation, a transition economy that has recently adopted a modern company law. 2. The focus of this exercise is company law, i.e. legislation that regulates commercial organizations with limited liability and investments represented by shares: corporations in the US, aktiengesellschaften in Germany, societes anonymes in France, joint stock companies in Russia. Although legislation on joint stock companies is the object of primary focus, all countries will need to have legislation providing for other types of business organisations. This will not be discussed here however, except when their provisions are relevant to the assumptions underlying this document. It is nevertheless important to note that the legislation should exhaustively list all available forms of legal entities, and that registration procedures should ensure a clear identification of every registered legal entity. This is mainly because improper formation of a legal entity might have dire consequences for both investors and third parties. 3. The discussion of company law principles in this document is based on an assumption of a civil law environment, i.e. the existence of a general civil code. Excluded from consideration are laws regulating securities exchanges and the rules for the general offering of securities to the public. It should however be noted that sometimes the boundaries between company and securities laws are blurred. Some countries will choose to regulate certain issues related to publicly-quoted companies and their shareholders through securities regulation while others include such provisions in the general company legislation. The principles that are discussed here and address these grey-area issues can be applied in either context. Regulations of the general relationship between stock companies and their employees, and special rules designed to handle the specific issues that arise for financial and industrial groups are also not discussed here. Finally, while the document considers the civil remedies for violation of the company law, it does not address criminal law issues related to stock companies and their behaviour. Published in English and Russian in: 24 Journal of Corporation Law 190-293 (1999); Stanford Law School, John M. Olin Program in Law and Economics Working Paper No. 165; Columbia Law School, Center for Law and Economic Studies Working Paper No. 138 This paper is available in Russian (below) and in English at: http://papers.ssrn.com/sol3/papers.cfm?abstract_ID=126539
Abstract: We study defense costs for commercially insured personal injury tort claims in Texas over 1988-2004, and insurer reserves for those costs. We rely on detailed case-level data on defense legal fees and expenses, and Texas state bar data on lawyers’ hourly rates. We study medical malpractice (“med mal”) cases in detail, and other types of cases in less detail. Controlling for payouts, real defense costs in med mal cases rise by 4.6 percent per year, roughly doubling over this period. The rate of increase is similar for legal fees and for other expenses. Real hourly rates for personal injury defense counsel are flat. Defense costs in med mal cases correlate strongly with payouts, both in ordinary least squares (OLS) and in an instrumental variable analysis. They also correlate with the stage at which a case is resolved, and case duration. Mean duration declined over time. Med mal insurers predominantly use outside counsel. Case-level variation in initial expense reserves predicts a small fraction of actual defense costs. In other areas of tort litigation (auto, general commercial, multi-peril, and other professional liability), defense costs rose by 2.2 percent per year. Defense costs in these cases are predicted by the same factors as in med mal cases, plus the presence of multiple defendants. Insurer reserving practices raise some puzzles. Med mal insurers did not react to the sustained rise in defense costs by adjusting their expense reserves, either in real dollars or relative to reserves for payouts. Thus, expense reserves declined substantially relative to defense costs. In other litigation areas, expense reserves rose along with defense costs.
K13, K32, K41
Abstract: We study defense costs for commercially insured personal injury tort claims in Texas over 1988-2004, and insurer reserves for those costs. We rely on detailed case-level data on defense legal fees and expenses, and Texas state bar data on lawyers' hourly rates. We study medical malpractice ("med mal") cases in detail, and other types of cases in less detail. Controlling for payouts, real defense costs in med mal cases rise by 4.6% per year, roughly doubling over this period. The rate of increase is similar for legal fees and for other expenses. Real hourly rates for personal injury defense counsel are flat.
Defense costs in med mal cases correlate strongly with payouts, both in OLS and in an instrumental variable analysis. They also correlate with the stage at which a case is resolved, and case duration. Mean duration declined over time. Med mal insurers predominantly use outside counsel. Case-level variation in initial expense reserves predicts a small fraction of actual defense costs. In other areas of tort litigation (auto, general commercial, multi-peril, and other professional liability), defense costs rose by 2.2% per year. Defense costs in these cases are predicted by the same factors as in med mal cases, plus the presence of multiple defendants.
Insurer reserving practices raise some puzzles. Med mal insurers did not react to the sustained rise in defense costs by adjusting their expense reserves, either in real dollars or relative to reserves for payouts. Thus, expense reserves declined substantially relative to defense costs. In other litigation areas, expense reserves rose along with defense costs.
defense costs, litigation, torts, medical malpractice, insurance
Abstract: Managers and controlling shareholders can extract wealth from firms in many different ways. We develop here a framework for analyzing different types of "tunneling" transactions. We divide tunneling into three broad groups: cash flow, asset, and equity tunneling. We model each type of tunneling as decomposable into a probability of tunneling and a magnitude. We present a simple model of how each type of tunneling affects share prices and financial metrics and provide two detailed case studies -- Gazprom in Russia and Coca-Cola in the United States -- to illustrate how these types of tunneling can occur in both emerging and developed markets. Finally, we explore a number of uses of our decomposition approach -- for empirical research into the nature and extent of tunneling; for asset pricing, especially in high-tunneling-risk environments; for legal regulation of tunneling; and for accounting rules.
tunneling, dilution, freezeout, transfer pricing, shareholder protection
Abstract: Using claim-level data, we estimate the effect of Texas's 2003 cap on non-economic damages on jury verdicts, post-verdict payouts, and settlements in medical malpractice cases closed during 1988-2004. For pro-plaintiff jury verdicts, the cap affects 47 percent of verdicts, and reduces mean allowed non-economic damages, mean allowed verdict, and mean total payout by 73 percent, 38 percent, and 27 percent, respectively. In total, the non-econ cap reduces adjusted verdicts by $156M, but predicted payouts by only $60M. The impact on payouts is smaller because a substantial portion of the above-cap damage awards were not being paid to begin with. In cases settled without trial, the non-econ cap affects 18 percent of cases and reduces predicted mean total payout) by 18 percent. The non-econ cap has a smaller impact on settled cases than tried cases because settled cases tend to involve smaller payouts. The impact of the non-econ cap varies across plaintiff categories. Deceased, unemployed, and (likely) elderly plaintiffs suffer a larger percentage reduction in payouts than living, employed, and non-elderly plaintiffs. We also simulate the effects of different caps, and find substantial differences in cap stringency across states. Different caps reduce aggregate payouts in tried cases (all cases) by between 16 percent and 65 percent (7 percent and 42 percent). Caps on total damages have especially large effects.
damages caps, medical malpractice, texas, settlements
Abstract: This Article contains chapters 8-9, 11-13, and the Conclusion of a World Bank-sponsored Report, prepared in December 2006, to the Russian Federal Service on the Securities Market. We discuss the liability under company law of directors, senior company officials, and controlling shareholders of public companies in Canada, France, Germany, Korea, Russia, the United Kingdom, and the United States (with a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and recommend amendments to Russian Company Law. We propose measures to define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality, extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; and protect directors against liability for business decisions adopted without a conflict of interest.
A related article includes chapters 1 and 3 of the Report, and an introduction to the overall project by Prof. Black. These chapters address the substantive bases for liability of directors and company officials for breach of duty. See Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian Securities Agency), 2007 Columbia Business Law Review, pages 614-799, available at http://ssrn.com/abstract=1010306.
The full Report is available at http://ssrn.com/abstract=1001990 (English version) and http://ssrn.com/abstract=1001991 (Russian version). It also addresses duties of directors for a company in financial distress, duties of a managing organization, the role of labor law in governing the relationship between a company and its directors and officials, whether this relationship is contractual or legal in nature, and differences between public and nonpublic companies.
Russia, company law, liability of directors and officers, indemnification, insurance, derivative suits
Abstract: Physicians' insuring practices influence their incentives to take care when treating patients, their risk of making out-of-pocket payments in malpractice cases, and the adequacy of compensation available to injured patients. Yet, these practices and their effects have rarely been studied. Using Texas Department of Insurance data on 9,525 paid malpractice claims against physicians that closed 1990-2003, we provide the first systematic evidence on levels of coverage purchased by physicians with paid liability claims and how those levels affect out-of-pocket payments and patient compensation. We find that these physicians carried much less insurance than is conventionally believed, that their real primary limits declined steadily over time, that policy limits often act as effective caps on recovery, and that personal contributions by physicians to close claims were rare. Our findings call into question a number of common assumptions about the relationship between physician insuring practices and the medical malpractice liability system. For a shorter, summary version of this research, see Charles Silver, Kathryn Zeiler, Bernard Black, David Hyman & William Sage, Malpractice Payouts and Malpractice Insurance: Evidence from Texas Closed Claims, 1990-2003, Geneva Papers on Risk and Insurance yyy-zzz (forthcoming 2008), available at http://ssrn.com/abstract=983199.
medical malpractice, insurance, liability
Abstract: This Article is an excerpt from a World Bank-sponsored Report, prepared in December 2006, to the Russian Federal Service on the Securities Market. We discuss the liability under company law of directors, senior company officials, and controlling shareholders of public companies in Canada, France, Germany, Korea, Russia, the United Kingdom, and the United States (with a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and recommend amendments to Russian Company Law. We propose measures to define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality, extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; and protect directors against liability for business decisions adopted without a conflict of interest. It includes an Introduction by Prof. Black which provides an overview of Russia's progress in creating a modern company law.
A related Article, also excerpted from this Report, addresses procedural rules for shareholder lawsuits and administrative and criminal liability of directors and company officials. See Legal Liability of Directors and Company Officials Part 2: Court Procedures, Indemnification and Insurance, and Administrative and Criminal Liability (Report to the Russian Securities Agency), COLUM. BUS. L. REV. (forthcoming 2008), available at http://ssrn.com/abstract=1010307.
Abstract: Legal scholars, legislators, policy advocates, and the news media frequently use jury verdicts to draw conclusions about the performance of the tort system. However actual payouts can differ greatly from verdicts. We report evidence on post-verdict payouts from the most comprehensive longitudinal study of matched jury verdicts and payouts. Using data on all insured medical malpractice claims in Texas from 1988-2003 in which the plaintiff received at least $25,000 (in 1988 dollars) following a jury trial, we find that most jury awards received "haircuts." Seventy-five percent of plaintiffs received a payout less than the adjusted verdict (jury verdict plus pre-judgment and post-judgment interest), 20 percent received the adjusted verdict (within + 2 percent), and 5 percent received more than the adjusted verdict. Overall, plaintiffs received a mean (median) per-case haircut of 29 percent (19 percent), and an aggregate haircut of 56 percent, relative to the adjusted verdict. The larger the verdict, the more likely and larger the haircut. For cases with a positive adjusted verdict under $100,000, 47 percent of plaintiffs received a haircut, with a mean (median) per-case haircut of 8 percent (2 percent). For cases with an adjusted verdict larger than $2.5 million, 98 percent of plaintiffs received a haircut with a mean (median) per-case haircut of 56 percent (61 percent). Insurance policy limits are the most important factor explaining haircuts. Caps on damages in death cases and caps on punitive damages are also important, but defendants often paid substantially less than the adjusted allowed verdict. Remittitur accounts for a small percentage of the haircuts. Punitive damage awards have only a small effect on payouts. Out-of-pocket payments by physicians are rare, never large, and usually unrelated to punitive damage awards. Most cases settle, presumably in the shadow of the outcome if the case were to be tried. That outcome is not the jury award, but the actual post-verdict payout. Because defendants rarely pay what juries award, jury verdicts alone do not provide a sufficient basis for claims about the performance of the tort system.
Jury verdict, malpractice, payout, haircut
Abstract: This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 or one or more of its parts. It contains three parts: (1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from the download button below. (2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263142 (3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263143 Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037
Abstract: This is a summary, practitioner-oriented article which summarizes our research on debt and hybrid decoupling. Equity decoupling refers to the unbundling of the rights and obligations normally associated with shares. Debt decoupling refers to the unbundling of the economic and governance rights normally associated with debt, often through credit derivatives or securitization. Hybrid decoupling involves combined debt and equity positions. All forms appear to be growing in importance. Debt and hybrid decoupling pose risks for debt governance - the relationship between creditors and debtors, including creditors' exercise of their contractual and legal governance rights. Widespread debt decoupling can also involve externalities and contribute to systemic financial risks. The full academic version of this Article is Debt, Equity, and Hybrid Decoupling, European Financial Management, vol. 14, forthcoming 2008, available at http://ssrn.com/abstract=1084075 For an earlier, finance-oriented academic article on equity decoupling, see: Hedge Funds, Insiders, and the Decoupling of Economic and Voting Ownership: Empty Voting and Hidden (Morphable) Ownership, , Journal of Corporate Finance, Vol. 13, 2007, pp. 343-367, nearly final version available at http://ssrn.com/abstract=874098 For our principal law-oriented academic articles on equity and debt decoupling, see: Equity and Debt Decoupling and Empty Voting II: Importance and Extensions, University of Pennsylvania Law Review, Vol. 156, 2008, pp. 625-739, available at http://ssrn.com/abstract=1030721 The New Vote Buying: Empty Voting and Hidden Ownership, Southern California Law Review, Vol. 79, 2006, pp. 811-908, available at http://ssrn.com/abstract=904004
corporate governance, derivatives, equity swaps, hedge funds, shareholder voting, vote buying
Abstract: We review here the evidence, principally from the United States, on the relationship between board independence and firm behavior and performance. Board composition affects board behavior on a number of discrete board tasks. However, there is no strong evidence that higher board independence predicts better firm performance. For a longer, somewhat updated survey of the evidence on board independence, see Sanjai Bhagat & Bernard Black, Is There a Relationship Between Board Composition and Firm Performance?, 54 Business Lawyer 921-963 (1999), available at http://ssrn.com/abstract=11417. For the published version of Bhagat and Black (working paper 1997), cited in this review, see Sanjai Bhagat & Bernard Black, The Non-Correlation Between Board Independence and Long-Term Firm Performance, 27 Journal of Corporation Law 231-274 (2002), available at http://ssrn.com/abstract=133808.
boards of directors, independent directors
Abstract: I examine the relationship between corporate governance behavior and market value for a sample of 21 Russian firms. I use (1) fall 1999 corporate governance rankings for these firms, developed by a Russian investment bank, and (2) the "value ratio" of actual market capitalization to potential Western market capitalization for these firms, determined independently by a second Russian investment bank. The correlation between ln(value ratio) and governance ranking is striking and statistically strong: Pearson r = 0.90 (t = 8.97). A worst (51 ranking) to best (7 ranking) governance improvement predicts a 700-fold increase in firm value. These results are tentative because of the small sample. But they suggest that corporate governance behavior has a powerful effect on market value in a country where legal and cultural constraints on corporate behavior are weak. The Russian version of this paper is available below. The English version is available at: http://ssrn.com/abstract_id=263014
Abstract: This article discusses the potential promise and limits of oversight of corporate managers by major institutional investors. I discuss the reasons to believe that, at least for systemic issues that arise at many firms, there can be value is assigning one set of loosely watched agents (institutional money managers) to watch another set (corporate managers). This is partly because, as long as it takes a number of institutions to strongly influence corporate actions, the institutions can also watch each other, thus reducing the risk that any one of them will extract private benefits from the firm. The case for shared institutional voice (with six or ten institutions, often different types of institutions, exercising joint influence) is stronger than the case for direct institutional control of a firm by a particular institution. In a companion paper, The Value of Institutional Investor Monitoring: The Empirical Evidence, UCLA Law Review, Vol. 39, pp. 895-939 (1992), http://ssrn.com/abstract=1132063, I survey the empirical evidence on the value of large shareholder oversight of managers.
Abstract: This short op-ed-length article discusses one instance, characteristic of Russia's stock markets in the 1990s, in which an oligarch engaged in extensive self-dealing with a controlled company, to the severe detriment of minority shareholders, ignoring both the Russian company law and the company's own charter. Shareholder attempts to seek redress in the Russian courts were dismissed on such odd grounds that corruption is the only plausible explanation. I have updated the original article slightly to reflect facts not available at the time.
Abstract: This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 or one or more of its parts. It contains three parts: (1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263141 (2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from the download button below. (3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263143 Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037
Abstract: This book is the Russian language version of our treatise on the Russian Law on Joint Stock Companies, which we participated in drafting. You can download either the entire book at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=246670 or one or more of its parts. It contains three parts: (1) a general overview of the theory (a "self enforcing model of corporate law") behind the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263141 (2) a detailed section-by-section analysis and critique of the law. You can download this part of the book from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=263142 (3) appendices containing the text of the law, a model Russian joint stock company law drafted by Bernard Black and Anna Tarassova, relevant excerpts from the Russian civil Code, and an important judicial interpretation of the law. You can download this part of the book at the download button below. Please note: The downloadable book is written in Russian. The English language version is available from Kluwer Law International. Contact sales@kluwerlaw.com The concept of a self-enforcing corporate law is developed in Bernard Black & Reinier Kraakman, A Self-Enforcing Model of Corporate Law, Harvard Law Review, vol. 109, pp. 1911-1982, 1996, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=10037
Abstract: Background. This study is the first to quantify physicians' malpractice insurance limits. It also examines the connection between policy size and payments on claims, including the frequency of settlement at the policy limits and the frequency of out-of-pocket payments. Methods. Statistical analyses using data collected by the Texas Department of Insurance (TDI) covering all insured medical malpractice claims against physicians closed between 1990 and 2003 with payment of $25,000 or more (measured in 1988 dollars). Results. Contrary to conventional wisdom, per-occurrence limits of $500,000 or less were as common as $1 million limits. Nominal policy size was stable over time, but real policy size declined. Settlements at limits were common, and above-limits payments were rare, suggesting policy limits cap recoveries. Physicians infrequently made out-of-pocket payments regardless of policy size, but the frequency declined as policy size increased. Results are presented separately for "perinatal physicians." Conclusions. The reported findings are contrary to common claims in policy debates and in the health policy literature. Policy limits appear to act as de facto caps on recoveries. Further research is needed to determine how the relationship between policy limits and recoveries affects malpractice claim outcomes and physician insuring practices. For a fuller exploration of physician policy limits and out of pocket payments, see Kathryn Zeiler, Charles Silver, Bernard Black, David Hyman & William Sage, Physicians' Insurance Limits and Malpractice Payments: Evidence from Texas Closed Claims, 1990-2003, Journal of Legal Studies (forthcoming 2007), available at http://ssrn.com/abstract=981192.
liability insurance, claims analysis, medical malpractice, insurance policy limits
Abstract: This Article collects the available evidence as of 1992 on the potential value of institutional investor monitoring of large U.S. public companies. The evidence is suggestive rather than conclusive. There are a number of systematic shortfalls in the functioning of large public firms. Institutions could potentially address some of these shortfalls. The institutions are best able to address issues that are common to a number of companies, and less able to respond to company specific failures. Large institutions do little monitoring, but there is some evidence that other large outside shareholders can engage in valuable monitoring, and little evidence that greater shareholder oversight is harmful. Monitoring by financial institutions in Germany, Japan, and Great Britain appears to have significant benefits. In a companion paper, Agents Watching Agents: The Promise of Institutional Investor Voice, UCLA Law Review, vol. 39, pp. 811-893 (1992), http://ssrn.com/abstract=1132082, I survey the empirical evidence on the value of large shareholder oversight of managers.
Abstract: A central issue in corporate governance research is the extent to which “good” governance practices are universal (one size mostly fits all) or whether they depend on country and firm characteristics. We report evidence here, from a case study of Brazil, supporting the second view. We use a survey of Brazilian firms’ governance practices at year-end 2004 to construct a corporate governance index, and show that the overall index and subindices for ownership, board procedure, and minority shareholder rights predict higher lagged Tobin’s q. A disclosure subindex is important by itself, but loses significance when it must compete with other subindices in the same regression. In contrast to studies in other countries, we find a negative association between board independence and Tobin’s q. Firm characteristics also matter: governance is associated with market value for manufacturing (but not nonmanufacturing) firms, large (but not small) firms, and high-growth (but not low-growth) firms. Our results suggest that country characteristics importantly influence which aspects of governance are associated with firm market value, and at which firms that association is found. They support a flexible approach to governance, which leaves ample room for firm choice, rather than a more regulatory approach.
Abstract: If firm level corporate governance affects firm market value (the price of minority shares) or overall firm value, what are the channels through which it does so? Prior work in emerging markets provides evidence of an association between corporate governance and firm market value, more limited evidence of a causal relationship, but very little evidence on the channels through which governance may affect value, and whether the effect is only on share price, or on overall firm value. We first confirm the association between governance and value using panel data on Korean public companies over 1998-2004. Firms with higher scores on an overall Korean corporate governance index (KCGI) have higher Tobin's q; this result is driven by the board structure subindex of KCGI and, less strongly, by ownership parity and disclosure subindices. Shareholder rights and board procedure subindices are not significant. We then provide evidence supporting two broad channels: Reduced insider self-dealing, and hence wealth transfer from controllers to outside shareholders; and improved firm performance, and hence higher overall firm value. For selfdealing, we find that for better-governed firms, related party transactions are less adverse to firm value and firm profitability is more sensitive to shocks to industry profitability. For overall firm value; we find that for better- governed firms (i) capital expenditures and sales growth are lower, but investment is more sensitive to profitability and growth opportunities; (ii) profitability is more sensitive to growth opportunities; (iii) dividends are higher, controlling for profits, and are more sensitive to profits. In addition, lagged board structure is associated with higher firm profitability. Board structure subindex is associated with all results except those for dividends. A 2SLS analysis (using 1999 legal rules which apply only to large firms to instrument for board structure) offers evidence that the link between board structure and these channels is likely to be causal.
Korea, corporate governance, corporate governance index, law and finance, firm valuation, emerging markets
Abstract: In 2003, Texas adopted House Bill 4 ("HB 4") which capped non-economic damages in medical malpractice cases and included several other smaller reforms. To proponents, HB 4 is a silver bullet, encouraging physicians to move to Texas by reducing frivolous lawsuits, preventing excessive damage awards by run-away juries, and reducing malpractice insurance premiums. To critics, it is ineffective (because it will neither materially increase the number of physicians, lower malpractice premiums, nor reduce health care costs) and unfair (because it forces injured patients to accept inadequate compensation and hits plaintiffs who are severely injured, women, children, or elderly especially hard). In this short paper, prepared for a special issue on the effects of HB 4, we present new evidence of its effect on the number of physicians in Texas. There is, as yet, no evidence that HB 4 increased the number of physicians involved in direct patient care, but some evidence consistent with a delayed effect. There may have been a modest increase in the number of specialists engaged in direct patient care, in line with population growth. We also summarize our findings from a previous article on how the damages cap will affect payouts. We estimate that, if the same cases were brought, the cap would result in an18-25% drop in per-case payouts in settled cases, and a 27% drop in tried cases. We also find that a cap on non-economic damages will have different effects on different groups of plaintiffs, with larger effects on the unemployed and deceased, and likely on the elderly as well. Because one would expect the cap to dissuade some plaintiffs from suing at all, especially those in the more severely affected groups, the cap's effect on insurers' costs -- and thus its long-run effect on malpractice insurance premiums -- will likely exceed our per-case estimates.
medical malpractice, tort reform, physician supply, damage caps
Abstract: All insurance has coverage limits, and insurers usually control whether a case is settled or tried. If the insurer rejects a within-limits settlement offer, the risk of an above-limits verdict is borne by the insured. In response, virtually every state has enacted a “duty to settle,” which creates incentives for plaintiffs to make at-limits offers and for insurers to accept those offers where expected damages exceed limits. We study how the duty to settle affects claim duration and defense costs using detailed closed claims data from Texas for 1988-2005. We find that medical malpractice cases against physicians that settle at limits close about five months faster than similar below-limits cases - a 20% reduction in time from suit filing to settlement, controlling for payout, type of harm, and other observable factors. At-limits cases also have substantially lower defense costs, controlling for case duration and complexity. It is difficult to obtain an at-limits payout without a lawyer. When there is an above-limits payout, it is primarily paid by the insurer. We find consistent results for other types of personal injury cases.
at-limits offer, medical malpractice settlement, tort reform, bad faith
Abstract: We examine the corporate governance practices of Brazilian public companies. We identify areas where their governance is relatively strong and weak. Many firms have small boards, comprised entirely or almost entirely of insiders or representatives of the controlling family or group. Even some very large firms have no independent directors. Formal board processes are limited. Audit committees are uncommon, but many firms use a substitute body – the fiscal board – which does not require that the firm have independent directors to staff the audit committee. Financial disclosure is mixed. Some firms voluntarily provide English language disclosure, but many do not provide cash flow statements or consolidated quarterly financial statements. Brazilian corporate law often provides limited protection to minority shareholders, but the Brazilian stock exchange, Bovespa, provides optional governance rules which go beyond the legal minimums. These optional rules have become increasingly popular with Brazilian firms. For a more detailed study, see Black, de Carvalho and Gorga, The Corporate Governance of Privately Controlled Brazilian Firms, Revista Brasileira de Finanças vol. 7 (2009), at http://ssrn.com/abstract=1003059 (Portuguese version at http://ssrn.com/abstract=1528183
Abstract: This is a partial draft of a long-delayed project. I posted it because of continued interest in the draft, and still hope to complete it.
The conventional contractarian explanation for why only common shareholders have voting rights is that they are the firm's principal residual claimants, and therefore have an incentive to maximize firm value. This explanation doesn't fit the facts. Other claimants, including employees, creditors, preferred shareholders, option holders, suppliers, customers, and the government (as tax collector), also generally gain when a firm does well and suffer when the firm does badly.
I argue that instead of asking why only common shareholder vote, we should be asking why, in a world where common shareholders, employees, creditors, preferred shareholders, and others are all important residual claimants, are control rights (of which voting rights are only one flavor) divided as they are? To answer this question, we must explain both why common shareholders receive control rights and why other residual claimants often do not. Why don't employees, suppliers, customers, and the government receive formal control rights, unless they also own common shares? Why do preferred shareholders receive voting rights that are almost uselessly weak? Why do banks receive covenant-based contractual control rights, while trade creditors receive only nonpayment-based rights, even though trade creditors have lower-priority, hence less-fixed claims.
This article seeks more to raise questions than to answer them, but I sketch some tentative answers. In my view, multiple factors affect which claimant classes have control rights, including: the transferability of a class's residual interests; the homogeneity of interests within a claimant class; bargaining costs if different claimants receive overlapping control rights; a claimant class's access to (and incentives to obtain) the information needed to use control rights effectively; whether two claimant classes have similar incentives, so that one can monitor on behalf of the other; and whether informal control rights can substitute for formal rights.
Abstract: Medical malpractice litigation is costly and time-consuming. Professor Jeffrey O'Connell, with various coauthors, has long advocated 'early offer' rules that would encourage defendants to offer to settle for economic damages plus attorney fees, and punish plaintiffs who refuse such offers. Using detailed closed claims data from Texas for 1988-2005, we simulate the effects of these 'early offers.'
We find that defendants will normally not make early offers in cases with large economic damages (over $500,000 in 1988 dollars) because doing so will increase payouts. Early offers will normally reduce payouts, and hence will be made, in cases with small economic damages (under $100,000 in 1988 dollars). Defendants may also make offers in cases with moderate ($100,000-500,000) economic damages, depending on case characteristics and the plaintiff’s chances of prevailing.
An early offer program will (i) sharply reduce payouts in cases with small economic damages; (ii) will not materially affect predicted payouts in other cases; (iii) will have very different effects on different types of plaintiffs, with large payout reductions for elderly and deceased plaintiffs and much smaller effects for newborns and employed adult plaintiffs; and (iv) will overlap substantially in its effects with statutory caps on non-economic damages, and hence have a smaller effect in states with these caps.
Our mixed results contrast sharply with dramatic claims by O’Connell and co-authors, who predict 70% reductions in payouts and defense costs. Their estimates reflect the compound effects of a series of unreasonable assumptions.
This article, in part, responds to Hersh, O’Connell and Viscusi, An Empirical Assessment of Early Offer Reform for Medical Malpractice, 36 Journal of Legal Studies s231-s259 (2007).
Hersch, O’Connell and Viscusi reply to this article in Reply to the Effects of 'Early Offers' in Medical Malpractice Cases: Evidence from Texas, 7 Journal of Empirical Legal Studies (forthcoming 2010), working paper version available at http://ssrn.com/abstract=1487681
We extend our analysis and respond to Hersch, O’Connell and Viscusi in Black, Hyman, and Silver, O’Connell Early Settlement Offers: Toward Realistic Numbers and Two-Sided Offers, 7 Journal of Empirical Legal Studies (forthcoming 2010), available at http://ssrn.com/abstract=1503125
litigation, settlement, early offers, medical malpractice, torts
Abstract: We compare Russian company law with company laws in other countries (Canada, France, Germany, Italy, Korea, UK and USA), assess how the reasonableness and good faith conduct of directors and officers is determined, and propose changes to Russian law. This article is a revised, updated, and shortened version of Chapters 1.2 and 1.3 of the Report to Russian Center for Capital Market Development: Comparative Analysis on Legal Regulation of the Liability of Members of the Executive Organs of Companies, http://ssrn.com/abstract=1001990 (Russian version at http://ssrn.com/abstract=1001991). Краткое описание. В настоящей статье авторы попытались проанализировать законодательсво различных зарубежных стран (Канада, Франция, Германия, Италия, Корея, Великобритания и США) на предмет определения понятий добросовестности и разумности членов органов управления акционерных обществ. Особое внимание уделено анализу практического опыта применения этих норм корпоративного права судами в указанных странах и тому, что из международного опыта могла бы использовать Россия в своем корпоративном законодательстве. Настоящая статья является сокращенной и обновленной версией глав 1.2 и 1.3 Отчета «О результатах сравнительного анализа правового регулирования ответственности членов органов управления хозяйственных обществ» http://ssrn.com/abstract=1001991.
Abstract: We provide an overview of the corporate governance practices of Brazilian public companies, based primarily on an extensive 2005 survey of 116 companies. We focus on the 88 responding Brazilian private firms which are not majority owned by the state or a foreign company. We identify areas where Brazilian corporate governance is relatively strong and weak. Board independence is an area of weakness: The boards of most Brazilian private firms are comprised entirely or almost entirely of insiders or representatives of the controlling family or group. Many firms have zero independent directors. At the same time, minority shareholders have legal rights to representation on the boards of many firms, and this representation is reasonably common. Financial disclosure lags behind world standards. Only a minority of firms provide a statement of cash flows or consolidated financial statements. However, many provide English language financial statements, and an English language version of their website. Audit committees are uncommon, but many Brazilian firms use an alternate approach to ensuring financial statement accuracy – establishing a fiscal board. A minority of firms provide takeout rights to minority shareholders on a sale of control. Controlling shareholders often use shareholders agreements to ensure control. Este artigo apresenta um panorama das práticas de governança corporativa no Brasil, baseado em um extenso levantamento feito no ano de 2005 com 88 empresas com controle privado nacional. Identificamos áreas onde a governança corporativa no Brasil é relativamente forte ou fraca. Os conselhos de administração da maioria das empresas privadas brasileiras são compostos totalmente ou quase totalmente por membros ou representantes da família ou grupo controlador. Muitas empresas não têm nenhum conselheiro independente. Ao mesmo tempo, acionistas minoritários têm direitos legais de representação no conselho de administração de muitas empresas e tal representação é razoavelmente comum. Divulgações de informações financeiras estão aquém dos padrões internacionais. Apenas algumas empresas fornecem informações sobre os fluxos de caixa ou demonstrações financeiras consolidadas. Entretanto, muitas empresas fornecem suas demonstrações financeiras em inglês em suas páginas de internet. Comitês de auditoria não são comuns, porém muitas empresas brasileiras buscam uma alternativa para assegurar a precisão das demonstrações financeiras, por meio da criação de um conselho fiscal. Uma pequena parte fornece direitos de proteção para os acionistas minoritários em uma venda de controle da empresa. Os acionistas que detém o controle da empresa costumam utilizar os acordos de acionistas para garantir o controle. This document is in Portuguese. The English language version is available at http://ssrn.com/abstract=1003059 For a shorter English version, intended for a non-Brazilian audience, see Black, de Carvalho and Gorga, Corporate Governance in Brazil, Emerging Markets Review, vol. 10, (2009) (nearly final version available at http://ssrn.com/abstract=1152454)
Abstract: This is a translation into Russian of an English language article. The English language version is available at http://ssrn.com/abstract=866988.
Краткое описание. В настоящее время растет количество доказательств того, что широкие меры в сфере корпоративного управления на уровне отдельно взятой фирмы приводят к увеличению стоимости акций. Однако все прежние работы по данной проблеме полагались на результаты межсекционного подхода. Настоящая работа оставляет открытым вопрос о возможности того, что однородные или неиспользованные переменные на уровне отдельных компаний могут объяснить наблюдаемые корреляции. Мы обращаемся ко второму вопросу, предлагая основанные на временных исследованиях доказательства, взятые из изучения российского опыта с 1999 г. по настоящее время, с привлечением множества доступных временных рядов данных качества управления. Мы полагаем экономически важным и статистически доказанным соотношение между качеством управления и рыночной стоимостью как в УЛП (упорядоченном линейном пространстве), так и в регрессиях устойчивых эффектов с индексом устойчивых эффектов на уровне отдельных компаний. Все вышесказанное предполагает, что результаты межсекционного подхода могут оказаться недостоверными и не заслуживающими доверия. Мы также установили существенные различия в том, насколько различные временные ряды данных могут оказывать влияние. Также заслуживает внимания вопрос о том, как измеряется качество управления.
English abstract: There is increasing evidence that broad measures of firm-level corporate governance predict higher share prices. However, almost all prior work relies on cross-sectional data. This work leaves open the possibility that endogeneity or omitted firm-level variables explain the observed correlations. We address the second possibility by offering time-series evidence from Russia for 1999-present, exploiting a number of available governance indices. We find an economically important and statistically strong correlation between governance and market value both in OLS and in fixed effects regressions with firm-index fixed effects. We also find large differences in coefficients and significance levels, including some sign reversals, between OLS and fixed effects specifications. This suggests that cross-sectional results may be unreliable. We also find significant differences in the predictive power of different indices, and in the components of these indices. How one measures governance matters.
Abstract: We examine the practical experience of other countries (Canada, France, Germany, Italy, Korea, UK and USA), with regard to imposing liability of directors for breach of fiduciary duty, and compare this international practice to Russian experience.
This article is a revised, updated, and shortened version of Chapter 11 of the Report to Russian Center for Capital Market Development: Comparative Analysis on Legal Regulation of the Liability of Members of the Executive Organs of Companies.
Краткое описание.
Настоящая статья продолжает серию публикаций на актуальные темы корпоративного права, основой для которых послужил отчет «О результатах сравнительного анализа правового регулирования ответственности членов органов управления хозяйственных обществ» (далее - отчет), подготовленный в декабре 2006 года группой международных экспертов в области права.
В настоящей статье авторы анализируют законодательство различных зарубежных стран (Канада, Франция, Германия, Италия, Корея, Великобритания и США) на предмет их практихеского опыта по привлечению к ответственности членов совета директоров акционерных обществ. В итоге авторы делают обобщающие выводы и проводят краткое сравнение мирового опыта с практикой привлечения директоров к ответственности в России. Данная статья является сокращенной и обновленной версией главы 11 Отчета «О результатах сравнительного анализа правового регулирования ответственности членов органов управления хозяйственных обществ.
Abstract: In this article we research and compare the law and practice of the number of foreign countries (Canada, France, Germany, Italy, Korea, UK and USA) with regard to the amount of damages for which the members of a company’s management organs are liable. The article focuses on the definition of “damages” to the company and judicial application and interpretation of this definition. This article is a revised, updated, and shortened version of Chapter 1.7 of the Report to Russian Center for Capital Market Development: Comparative Analysis on Legal Regulation of the Liability of Members of the Executive Organs of Companies, http://ssrn.com/abstract=1001990 (Russian version at http://ssrn.com/abstract=1001991). Краткое описание. В настоящей статье авторы попытались проанализировать законодательство и опыт различных зарубежных стран (Канада, Франция, Германия, Италия, Корея, Великобритания и США), касающийся определения размера ответственности членов органов управления акционерных обществ. Особое внимание уделено раскрытию значимых критериев, принимаемых во внимание судами, и понятия «убытков, подлежащих возмещению». Настоящая статья является сокращенной и обновленной версией главы 1.7 Отчета «О результатах сравнительного анализа правового регулирования ответственности членов органов управления хозяйственных обществ», http://ssrn.com/abstract=1001991.
Abstract: We compare Russian company law with company laws in other countries (Canada, France, Germany, Italy, Korea, UK and USA), with regard to the liability of directors for actions that affect subsidiary and dependent companies, and propose changes to Russian law.
This article is a revised, updated, and shortened version of Chapter 7 of the Report to Russian Center for Capital Market Development: Comparative Analysis on Legal Regulation of the Liability of Members of the Executive Organs of Companies, http://ssrn.com/abstract=1001990, http://ssrn.com/abstract=1001990, (Russian version at http://ssrn.com/abstract=1001991, http://ssrn.com/abstract=1001991). A similar, shortened and updated version of Chapters 1.2 and 1.3 of this Report can be found at http://ssrn.com/abstract=1412818, http://ssrn.com/abstract=1412818 (Краткое описание. Настоящая статья продолжает серию публикаций на актуальные темы корпоративного права, основой для которых послужил отчет «О результатах сравнительного анализа правового регулирования ответственности членов органов управления хозяйственных обществ (далее - отчет), подготовленный в декабре 2006 года группой международных экспертов в области права. В настоящей статье авторы попытались проанализировать законодательство различных зарубежных стран (Канада, Франция, Германия, Италия, Корея, Великобритания и США) на предмет определения методов привлечения и определения размера ответственности членов органов управления акционерных обществ за действия в отношении дочерних и зависимых обществ. Особое внимание уделено анализу практического опыта применения корпоративного права судами в указанных странах и тому, что из международного опыта могла бы использовать Россия в своем корпоративном законодательстве. Настоящая статья является сокращенной и обновленной версией главы 7 Отчета «О результатах сравнительного анализа правового регулирования ответственности членов органов управления хозяйственных обществ, http://ssrn.comabstract=1001991, http://ssrn.com/abstract=1001991. Подобная, сокращенная и обновленная версия глав 1.2 и 1.3 этого Отчета находится в http://ssrn.com/abstract=1412818, http://ssrn.com/abstract=1412818.)
Abstract: This document is the powerpoint slides for a introductory talk on interpreting difference-in-differences and instrumental variable estimates, presented at the 2009 Conference on Empirical Legal Studies. The slides provide examples of what can and cannot infer from a well-designed DiD or instrumental variable based study.
Abstract: This is the expert report that I submitted on behalf of the shareholder plaintiffs in the main Enron securities class action suit, In re Enron Corp. Securities Litigation. It discusses the true nature of Enron's business and profitability, and compares what Enron told investors to what it might truthfully have said.
Abstract: This document is the PowerPoint slides for a introductory talk on instrumental variables, presented at the 2007 Conference on Empirical Legal Studies. The slides provide examples of good and not so good uses of instrumental variables in empirical legal research.
Abstract: In a prior article in this journal, we estimated the effect of an “O’Connell” early settlement offer program on payouts in medical malpractice litigation. Using Texas data and a base set of assumptions, we predicted that early offers would result in a 16% (20%) decline in payouts in currently tried (settled) cases. The overall decline came almost entirely from a sharp drop in payouts in cases with small economic damages. We compared our results with the estimate by Hersch, O’Connell, and Viscusi (2007) (HOV) of a 70% reduction in payouts, reconciled the two estimates, and explained why HOV’s estimate reflected the compound effects of a series of unreasonable assumptions.
In a reply in this journal, Hersch, O’Connell, and Viscusi (2010) (HOV-2) complain that we misunderstand both the early offer proposal and their analysis. Remarkably, they do not dispute our estimates, given our assumptions. In this rebuttal, we defend our assumptions and provide an alternate analysis of settled cases based on insurer allocations, which also produces an estimated 20% payout decline. We also develop further our proposal for two-sided early offers. This proposal would reduce the predicted payout decline to 14% (18%) in tried (settled) cases. We also explain in greater detail the problems with HOV’s analysis. If we correct an error they made in understanding the Texas data set, and leave their other assumptions unchanged, their payout decline estimate drops to 30%, not far from ours.
Our initial article, Black, Hyman and Silver, The Effects of “Early Offers” on Settlement: Evidence From Texas Medical Malpractice Cases, 6 Journal of Empirical Legal Studies 723-767 (2009), is available at http://ssrn.com/abstract=1112135.
The working paper version of the reply by Hersh, O’Connell and Viscusi, Reply to the Effects of 'Early Offers' in Medical Malpractice Cases: Evidence from Texas, 7 Journal of Empirical Legal Studies (forthcoming 2010), is available at http://ssrn.com/abstract=1487681.
The initial article by Hersh, O’Connell and Viscusi, An Empirical Assessment of Early Offer Reform for Medical Malpractice, is published at 36 Journal of Legal Studies s231-s259 (2007).
early offer, medical malpractice, settlement, tort reform
Abstract: This report assesses the extent of Russian judicial corruption, and concludes that a plaintiff, not itself an oligarch-controlled company, cannot expect to receive a fair hearing in a suit against an oligarch-controlled Russian company.
Abstract: English Abstract. This book is a revised version of a Report to the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market (FSFM) in December 2006. The English version of the Report is available at http://ssrn.com/abstract=1001990. We compare legal regulation of the liability of directors, senior executives, and controlling shareholders of public companies under company law in both common law countries (Canada, United Kingdom, and United States) and civil law countries (principally France, Germany, Korea) to Russian law and practical experience.
Краткое описание. В основу данной книги положен «Отчет о результатах сравнительного анализа правового регулирования ответственности ченов оганов управления хозяйственных обществ», который был представлен в декабре 2006 года Федеральной службе по финансовым рынкам РФ. Книга содержит сравнительный анализ российского корпоративного законодательства и законов стран, где преобладает общее (прецедентное) право (Канада, Великобритания, США) и некоторых стран, придерживающихся континентальной системы права (в частности Франция, Германия, Корея). Авторы книги обобщают аспекты ответственности членов совета директоров, старших менеджеров и владельцев контрольных пакетов акций публичных компаний в этих странах и полученные результаты применяют к российской действительности.
Первоначалная версия Отчета доступна http://ssrn.com/abstract=1001991)
Note: Book is in Russian.
Abstract: Explores the strong link between the venture capital (VC) market and the stock market-centered capital market. Contrasts this with the bank centered capital markets of such countries as Germany and Japan, which allot more firm control to banks. The United States has a strong venture capital industry focused on early-stage financing of high-technology companies while in Germany, e.g., the venture capital industry is almost nonexistent, and exit strategies for venture capitalists differ in that country, with its lesser emphasis on the stock market. In the United States, VC fund managers have developed strategies in which they efficiently exit their investments, and the analysis herein considers the initial public offering (IPO) to be the point at which venture capitalists will exit. It is assumed that the entrepreneur places strong importance on control of his or her company. Often though, this control cannot be retained at the time of financing by an inexperienced entrepreneur. These entrepreneurs can regain control if the company is successful through an IPO exit of the venture capitalists. Regaining control is usually through an implicit contract over control between the entrepreneur and the venture capitalist that results from the entrepreneur's success. The implication of this framework is that the success of early stage venture capital financing is linked to the availability of VC exit and return of control to the entrepreneur. The venture capital market will be impaired in countries where the only option for exit is by acquisition, thus leaving the entrepreneur without the preferred control. Analyses of the VC markets in Japan, the United Kingdom, Canada, and Israel are also presented, with explanations for venture capital market variations by country. (SRD)
Banks, Stock markets, Firm governance, Initial public offerings (IPO), Firm control, Early stage financing, Exit strategies, Early stage capital, Venture capital, Financial markets
Abstract: We extend here our prior work, which focused on equity decoupling (Hu and Black, 2006, 2007, 2008), by providing a systematic treatment of debt decoupling and an initial exploration of hybrid decoupling. Equity decoupling involves unbundling of economic, voting, and sometimes other rights customarily associated with shares, often in ways that may permit avoidance of disclosure and other obligations. We discuss a new U.S. court decision which will likely curtail the use of equity decoupling strategies to avoid large shareholder disclosure rules. Debt decoupling involving the unbundling of the economic rights, contractual control rights, and legal and other rights normally associated with debt, through credit derivatives and securitisation. Corporations can have empty and hidden creditors, just as they can have empty and hidden shareholders. Hybrid decoupling across standard equity and debt categories is also possible. All forms of decoupling appear to be increasingly common. Debt decoupling can pose risks at the firm level for what can be termed debt governance the overall relationship between creditor and debtor, including creditors' exercise of contractual and legal rights with respect to firms and other borrowers. Widespread debt decoupling can also involve externalities and therefore create systemic financial risks; we explore those risks.
Abstract: This is the Russian language version of the Report. The English version is available at http://ssrn.com/abstract=1001990
This Report was prepared, with support by the World Bank, for the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market. We discuss the liability under company law of members of the board of directors, senior managers, and controlling shareholders of public companies in Canada, France, Germany, Korea, the United Kingdom, and the United States (plus a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and apply this comparative analysis to the Russian context. We recommend amendments to the Russian Law on Joint Stock Companies and related legislation. We propose measures to enhance the effectiveness of derivative suits; define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality, extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; protect directors against liability for business decisions adopted without a conflict of interest. We do not recommend the creation of significant administrative or criminal liability, nor expanded duties of directors for a company in financial distress.
A revised and updated version of this Report was published as Правовое регулирование ответственности членов органов управления: анализ мировой практики (Альпина Паблишерз, 2010). This book is available at http://ssrn.com/abstract=1528182)
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