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Abstract:
This paper examines the relation between two means of information aggregation for corporations - corporate voting and stock market pricing. If the median voter and the price-setting shareholder share similar information sets, then the outcome of close proxy contests should not have a systematic effect on stock prices. The paper shows, however, that close dissident victories are associated with significant positive movements in stock prices, while close management victories are associated with negative stock price effects. The median voter values management control more highly than the price-setting shareholder. This suggests that voting and market pricing aggregate information in very different ways, with important implications for the role of voting and market pricing in corporate law and finance.

corporate governance, shareholder voting, democracy, event study, regression discontinuity

Abstract:
While contract scholars debate the relative merits of specific performance and damages, few studies assess remedies from an empirical perspective. To gain a sense of how market participants view specific performance, this article examines the stock market response to an unusual specific performance award granted to IBP Inc. in Material Adverse Change ("MAC") clause litigation against Tyson, Inc. The combined value of Tyson and IBP rose after specific performance was granted, implying that specific performance created value. This result contrasts with other papers indirectly showing large decreases in combined market value after damage remedies are awarded. These results suggest that, from a post-breach perspective, the common law's preference for damages may be misplaced. The article identifies a number of settings, such as MAC clause controversies, wherein the use of specific performance rather than damages should be encouraged.

Specific Performance, Damages, Event Study, Mergers

Abstract:
While much has been made of “shareholder democracy” as a lever of corporate governance, there is little evidence about the efficacy of voting. This paper empirically examines votes on management-sponsored resolutions and finds widespread irregularities in the distribution of votes received by management. Management is overwhelmingly more likely to win votes by a small margin than lose by a small margin. The results indicate that, at some point in the voting process, management obtains highly accurate information about the likely voting outcome and, based on that information, acts to influence the vote. The precise point at which this occurs is unclear, though it is likely to be near the “poll-closing” time. Whatever the cause of management's advantage, it is clear that shareholder voting does not constitute a “representative” direct democracy.

G34, K22, D72

Abstract:
While much has been made of "shareholder democracy" as a lever of corporate governance, there is little evidence about the efficacy of voting. This paper empirically examines votes on management-sponsored resolutions and finds widespread irregularities in the distribution of votes received by management. Management is overwhelmingly more likely to win votes by a small margin than to lose by a small margin. The results indicate that, at some point in the voting process, management obtains highly accurate information about the likely voting outcome and, based on that information, acts to influence the vote. The precise point at which this occurs is unclear, though it is likely to be near the "poll closing" time. Whatever the cause of management's advantage, it is clear that shareholder voting does not constitute a "representative" direct democracy.

corporate voting, corporate governance, management, fraud

Abstract:
Much of corporate law consists of non-mandatory statutes. While scholars have examined the effect of non-binding corporate law from a theoretical perspective, almost no studies explore the real-world impact of these laws. This paper empirically examines the impact of non-mandatory state antitakeover statutes. Several conclusions emerge. Despite its non-binding nature, corporate law makes an enormous difference in outcomes, contradicting those who claim that corporate law is trivial. Two types of non-mandatory corporate laws have particularly important effects. Corporate default laws that favor management are considerably less likely to be changed by companies than default laws favoring investors, supporting those who believe that corporate default laws can ameliorate asymmetries in incentives or bargaining power between managers and investors. Corporate menu laws - opt-in laws that are drafted by the state but do not apply as default rules - also facilitate the use of some provisions, supporting those who believe that non-mandatory corporate law reduces transaction costs, such as the cost of updating corporate charters to reflect developments in the economy.

Corporate Law, Default Rules, Menus, Empirical, Corporate Governance

Abstract:
Many corporate governance observers believe that enhanced shareholder power is a promising cure for governance ills. This paper empirically examines the impact of differential amounts of shareholder power on governance arrangements. When states enacted statutory antitakeover protections in the 1980s, they allowed companies to opt-out of the provisions through various avenues. The states differed in the power granted to shareholders to opt-out of the antitakeover protections without agreement by the board of directors. Although this appears to be an important difference in shareholder power, the paper demonstrates that varying degrees of power are associated with little if any change in governance arrangements. At a minimum, the results suggest that simply altering shareholder power without changing other governance mechanisms is unlikely to lead to widespread changes in corporate governance.

corporate governance, shareholder power, charter amendments

Abstract:
Empirical studies of corporate governance address potential endogeneity problems, but fail to place endogeneity in the context of a model and ignore the possibility of disparate treatment effects across companies. This paper tackles these defects. The model and analysis in the paper demonstrate that: (1) Valid and positive estimates for the effect of governance can only arise if there is random variation in governance and governance is systematically underproduced, or governance is chosen randomly without bias and the randomness under study concerns a subpopulation with below-average governance. (2) Governance models that correct for endogeneity using subsamples of firms, fixed effects, or instrumental variables estimates focus on subpopulations of companies that may have different responses to a governance treatment than the average firm.

K22, G34

Abstract:
Empirical studies of corporate governance address potential endogeneity problems, but fail to place endogeneity in the context of a model and ignore the possibility of disparate treatment effects across companies. This paper tackles these defects. The model and analysis in the paper demonstrate that: 1. Valid and positive estimates for the effect of governance can only arise if there is random variation in governance and governance is systematically underproduced or governance is chosen randomly without bias and the randomness under study concerns a subpopulation with below average governance. 2. Governance models that correct for endogeneity using subsamples of firms, fixed effects, or instrumental variables estimates focus on subpopulations of companies that may have different responses to a governance treatment than the average firm.

Corporate Governance, Endogeneity, Treatment Effects

Abstract:
While managerial performance always plays a critical role in determining firm performance, a manager's importance assumes a heightened role in bankruptcy. A manager in bankruptcy both runs the firm and helps form a plan of reorganization. In light of this critical role, one would expect that bankruptcy scholarship would place considerable emphasis on the role of CEO compensation in incentivizing managerial performance in bankruptcy. The opposite is true, however. Bankruptcy scholars and practitioners tend to emphasize other levers of corporate governance, such as the role of Debtor-in-Possession financiers, rather than the importance of CEO compensation. This Article seeks to revive CEO compensation as an important governance lever in bankruptcy. First, the Article examines current ideas and practices of managerial compensation in bankruptcy and finds them wanting. The Article next proposes a novel bankruptcy compensation plan - debt compensation - that provides better incentives for managers to perform efficiently. By granting managers a fixed proportion of unsecured debt in the bankrupt firm, debt compensation creates value-enhancing incentives similar to the incentives created by the stock grants and stock options that are heavily employed by solvent firms to compensate managers.

Bankruptcy, Executive Compensation, Capital Structure, Creditors' Committee

Abstract:
Many scholars question the priority enjoyed by secured debt in bankruptcy. They fear that secured debt will be used to inefficiently redistribute value away from pre-existing unprotected creditors of a firm. These scholars advocate a host of legal innovations, such as "superpriority" for tort claimants with respect to other creditors, to mitigate the redistributional problem. Other scholars minimize the redistributional problem, however, and argue that priority for secured credit is efficient. To help resolve this debate, this paper examines the redistributional theory from an empirical perspective. In particular, the paper focuses on secured debt usage by firms facing large tort liabilities ("high-tort" firms). In theory, secured debt should be attractive for high-tort firms because they have a large class of unsecured and uncovenanted creditors (tort claimants) exposed to redistribution in bankruptcy through the use of secured credit. The paper's empirical analysis contradicts the redistributional theory's prediction, however. High-tort firms have unusually low amounts of secured debt. While this result is very difficult to explain under the redistributional theory, it can readily be explained according to other theories of secured debt. Several important policy implications for bankruptcy priorities follow from these findings.

Secured Debt, Bankruptcy, Priority, Redistribution, Torts

Abstract:
Rationalist analysis of policymaking, exemplified in cost-benefit analysis, ignores the variance in outcomes associated with policies and seeks to maximize expected outcomes. Burkeans, by contrast, view policy outcome uncertainty negatively. The Burkean approach is echoed in the precautionary principle, which argues that policies with hard-to-determine or high-variance outcomes should be avoided. Both approaches are the subject of vast literatures. This Article argues that both approaches are wrong. When policies can be reversed in future periods, variation in the outcomes associated with a policy is a good thing. Reversibility means that the downside risk of high-variance policies is limited; policies with unexpectedly bad outcomes can be changed in the next period. The high upside of high-variance policies, by contrast, may last indefinitely, since policies with unexpectedly good outcomes will be retained. Thus, when policies are reversible, policymakers should deliberately choose policies with uncertain outcomes, other things equal.

The Article also examines the assumption of policy reversibility. It shows that the most important source of irreversibility for policy analysis is irretrievable "sunk costs" rather than the potential for catastrophic outcomes or policy inertia. As a result, policies are more reversible than commonly appreciated. The Article then examines optimal policymaking under irreversibility. Under extreme irreversibility, conservatism of a particular sort, called the "real options" approach, constitutes the best policy. More generally, the Article finds that the appropriate attitude toward policy variance depends upon the reversibility of policy. This analysis illuminates many puzzles in constitutional law and institutional design, such as the puzzling difference between entrenched statutes, which are unconstitutional, and sunset clauses, which are permitted. The Article concludes with recommendations to encourage policymakers to use variance more effectively.

Search Theory, Variation, Institutional Design

Abstract:
Because criminals discount the future, the deterrence and retributive value of a given criminal sanction steadily decreases as the lag between crime and punishment lengthens. Discounting thus implies that the same nominal sentence will have disparate discounted values when imposed after different lags. Since lags between crime and punishment are both ubiquitous and widely-varying, pre-conviction delays constitute an important (and hitherto overlooked) source of sentencing disparities. Because the mitigation of sentencing disparities is an important aim of criminal law, this essay proposes maintaining constant discounted sentencing terms by adjusting individual sanctions to account for the lag between crime and punishment. These adjustments may be large since the lag between crime and punishment is often lengthy and criminals may discount the future rapidly. Applying similar reasoning, the essay also proposes that convicted pretrial detainees should receive interest in addition to credit for time served since their sentences begin earlier and have greater discounted values.

Criminal Law, Discounting, Law and Economics, Sentencing Guidelines

Abstract:
Courts seeking the most likely intent of contracting parties should interpret contracts according to Bayes’ Rule. The best interpretation of a contract reflects both the prior likelihood (base rate) of a pair of contracting parties having a given intention as well as the probability that the contract would be written as it is given that intention. If the base rate of the intention associated with the simplest reading of the contract is low, then Bayes’ Rule implies that the simplest reading is not necessarily the interpretation of the contract that most likely captures the parties’ intentions. The Bayesian framework explains when default rules should be more or less “sticky” and helps define the appropriate role of boilerplate language in contractual interpretation.

contract interpretation, default rules, gap filling

Abstract:
This Article demonstrates that tax expenditures are procyclical, exacerbating the business cycle. Tax expenditures amplify the impacts certain activities, such as charitable giving or home purchases. Because these activities vary with the business cycle (e.g., people give more charity in boom times than in busts), the implicit government spending associated with tax expenditures are higher at business cycle peaks than at business cycle troughs. The more a given activity varies with the business cycle, the greater the procyclicality of the tax expenditure. This procyclicality contrasts with ordinary government spending and revenue generation, which are often praised for countercyclicality. As business cycle stabilization assumes an increasingly important role in government tax and spending policy, the desirability of tax expenditures goes down. By contrast, income based phase-outs of tax expenditures are countercyclical. The net cyclical effect of an expenditure combined with a phase-out therefore depends on whether cyclical changes in the activity subject to the expenditure occur primarily in the phase-out range or below the phase-out range.

tax, business cycle, Keynes, fiscal policy

Abstract:
This note examines how the income tax code can be altered to stabilize the economy in the face of fluctuations. First, the note suggests that tax expenditures for goods with high income elasticities should be replaced with government spending, while tax expenditures for inferior goods should be expanded. Second, income tax rates should be indexed to the growth rate of the economy, with marginal rates higher in boom periods and lower in recessions. Finally, implicit tax expenditure subsidies should be decoupled from marginal rates via the use of tax credits. All of these recommendations will enhance the stabilizing effect of the income tax in the current era of economic uncertainty.

Fiscal Policy, Tax Policy, Stabilization, Tax Expenditures

Abstract:
Credit rating agencies (CRAs) serve many roles in maintaining properly functioning debt markets. Their contribution to both Enron-era financial scandals and the 2008-2010 financial crisis, however, has led to many calls for credit rating reform. This Essay proposes an incentive compensation scheme in which CRAs are paid with the debt they rate. If a CRA overrates debt, then the CRA suffers a financial penalty because the debt the CRA receives as compensation is less valuable than the cash compensation that the debt is replacing. We believe that this reform, though imperfect, would be more likely to generate accurate ratings than other credit rating reform proposals. We also discuss extensions of our basic debt compensation proposal that mitigate some of debt compensation’s weaknesses, though at the cost of greater complexity.

credit rating, credit rating agencies, law, law and economics, corporate law, corporate finance, law and finance, securities regulation, bankruptcy, incentive compensation

Abstract:
The limited capacity of lawmakers to intuit the unstated wishes of contracting parties constitutes a daunting obstacle to the formulation of majoritarian default rules. This paper presents a field experiment that prices consumers’ unstated understandings of contractual silence regarding warranty and return policies for a good. Used iPods were sold via auction on eBay.com with randomly varying return policies. Some iPods came with a satisfaction guaranteed policy, others with an explicit warranty that resembled the default warranty of merchantability, and still other iPods were sold “as is.” Finally, a batch of iPods was silent regarding the return policy. Although the estimates are extremely imprecise, consumers appear to pay approximately the same price for iPods with silence regarding the return policy as they do for iPods with the explicit warranty that resembles the UCC default warranty. Silent iPods sell for less than iPods that are satisfaction guaranteed, and considerably more than iPods sold “as is” – though again a lack of precision precludes confident inferences. Consumers interpret silence in accord with silence’s legal meaning; the UCC framer’s “guess” about majoritarian warranty expectations is an empirically reasonable one.

contract law, default rules, warranties, UCC, field experiment

Abstract:
This paper examines the relation between two means of corporate information aggregation--corporate voting and stock market pricing. If the median voter and the price-setting shareholder share similar information, then close proxy contest outcomes should not have systematic effects on stock prices. The paper shows, however, that close dissident victories cause positive movements in stock prices, while close management victories lead to negative price effects. The median voter values management control more than the price-setting shareholder. Voting and market pricing aggregate information in very different ways, with important implications for the role of voting and market pricing in corporate law.

D71, G14, G34, K22, P5

Abstract:
Many firms have filed for bankruptcy to manage liabilities stemming from mass tort claims, most notably asbestos producers. This paper develops a model of an optimal bankruptcy procedure that balances the need to provide liquidity to the present claimants already injured with the need to set aside funds for the uncertain number of future claimants who may develop injury or illness at a later date. We also consider the appropriate division of value and risk between tort claimants and pre-existing contractual creditors of the firm. Our model suggests several significant improvements to current practice. In particular, we find that future claimants should receive greater awards in expectation than present claimants, due to precautionary savings motives. Comparing claimants and creditors, we find that allocating a greater share of the firm's value to contractual creditors makes an earlier bankruptcy filing more likely, which may increase overall welfare. We also find that optimal risk-sharing implies that creditors should receive this value through an equity claim in the trust fund, with tort claimants receiving senior claims resembling debt.

Bankruptcy, mass tort, future claimants, asbestos

Abstract:
Mass tort bankruptcy trust funds generally have failed to attain fair treatment for future claimants - those individuals who have been exposed to a harmful product but have yet to manifest any injuries. This article examines the causes of unfair distributions to future claimants from mass tort trust funds in bankruptcy and other contexts. The article also offers several recommendations for achieving equitable treatment of future claimants in upcoming trust funds, such as the asbestos trust fund proposed by the Fairness in Asbestos Injury Resolution ("FAIR") Act now debated in Congress. First, we argue that future claimants are inadequately represented in mass tort bankruptcy proceedings. We recommend that representatives for future claimants be compensated based on a percentage of the total funds placed in trust for these claimants. This approach motivates representatives to self-interestedly pursue a favorable allocation for future claimants, in contrast to the current system which compensates future claimants' representatives using other methods. We then discuss a hitherto overlooked aspect of inequitable allocations for future claimants - their overexposure to risk relative to present claimants. To guarantee that future claimants are treated fairly, we suggest that future claimants receive a greater average award than present claimants to compensate the future claimants for bearing additional risk. Finally, we examine the allocation of risk between tort claimants and other creditors. Previous mass tort bankruptcy trust funds (as well as the FAIR Act fund) allocated considerable risk to future claimants, who are poor risk bearers. To remedy this deficiency, we recommend that tort claimants be allocated as little risk as possible. In return, tort claimants should receive a lower average payment.

Abstract:
This paper proposes a novel normative economic explanation for statutes of limitations for criminal offenses. Because potential criminals tend to discount the future at higher rates than society, punishing crimes long after they are committed will be inefficient. Punishments after a long lag have only a nominal deterrent effect, while they may cost society substantial sums. The model presented in the paper derives the optimal statute of limitations for a crime by modifying the standard model of public enforcement of law to consider lags between crime and punishment. In addition, numerical simulations of the model suggest that some U.S. statutes of limitations are generally consistent with optimal limitations (probably serendipitously). Finally, the paper employs the model to critique several tenets of the law concerning statutes of limitations.