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Abstract:
Recent finance scholarship finds that countries with legal systems based on the common law provide better investor protections and have more developed financial markets than civil law countries. These findings echo Hayek's claims of the superiority of English to French legal institutions. In this paper, I present evidence that common law countries experienced faster economic growth than civil law countries during the period 1960-1992. I suggest that the difference reflects the common law's greater orientation toward private economic activity and the civil law's greater orientation toward government intervention.

Abstract:
Recent finance scholarship finds that countries with legal systems based on the common law provide better investor protections and have more developed financial markets than civil law countries. These findings echo Hayek's claims of the superiority of English to French legal institutions. In this paper, I present evidence that common law countries experienced faster economic growth than civil law countries during the period 1960-1992. I suggest that the difference reflects the common law's greater orientation toward private economic activity and the civil law's greater orientation toward government intervention.

Abstract:
Overview

This course is intended to provide a capstone experience in corporate finance for second-year MBA students, and for upper-level law students. Nicknamed "Doing Deals" by the students, the course consists of a series of simulations in which teams of students attempt to consummate corporate financial transactions such as a friendly bilateral merger, a reorganization in bankruptcy, and a hostile takeover. Grades are based on written documents and oral presentations prepared for the transactions, and on peer reviews and faculty observations of student contributions during negotiations. The interdisciplinary combination of law and business students on transaction teams emulates the real world, and challenges students in both schools to reach beyond their narrow disciplines to contribute effectively to the deal-doing process. Lawyers must focus on the needs of the clients. Business students must engage legal expertise to structure and consummate value creating transactions. Though challenging and time-intensive for the students, this course has been among the highest rated offerings at both schools since its inception.

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Abstract:
Half of all of U.S. households own shares in one or more mutual funds, either directly or through personal or employer-sponsored retirement accounts. This article describes the structure and regulation of mutual funds and the resulting incentives facing those who make decisions for the funds. After providing some basic institutional details, it focuses on the cash flows from mutual fund investors to fund managers, brokers, and other third parties and the associated conflicts of interest. The article concludes with a summary of recent legal proceedings against mutual fund managers and brokers based on improper trading practices and regulatory proposals to curb those practices.

mutual funds, agency costs

Abstract:
Using a hand collected new data set, this paper examines in detail a classic account of stock market manipulation⬠the â¬Sstock poolsâ¬? of the 1920s, which prompted the current anti-manipulation rules in the United States. We examine abnormal turnover and returns and the relationship between them, as well as the long-term performance of the selected stocks. We conclude that the evidence suggests informed trading rather than manipulation. Our findings have implications for regulatory policy as well as the investigation and prosecution of manipulation cases.

Manipulation, Market regulation, Politics of finance

Abstract:
Using a hand collected new data set, this paper examines in detail a classic account of stock market manipulation - the stock pools of the 1920s, which prompted the current anti-manipulation rules in the United States. We find abnormal trading volume during pools, consistent with market manipulation, but this trading led to only modest average price increases in the short run and no abnormal performance in the long run. Thus, there is no evidence that the stock pools harmed small investors. Given investigators' efforts to find cases of manipulation on the New York Stock Exchange during the 1920s, these findings suggest that manipulation was not a substantial problem.

Manipulation, market regulation, politics of finance

Abstract:
Using a hand collected new data set, this paper examines in detail a classic account of stock market manipulation - the "stock pools" of the 1920s, which prompted the current anti-manipulation rules in the United States. We find abnormal trading volume during pools, consistent with market manipulation, but this trading led to only modest average price increases in the short run and no abnormal performance in the long run. Thus, there is no evidence that the stock pools harmed small investors. Given investigators' efforts to find cases of manipulation on the New York Stock Exchange during the 1920s, these findings suggest that manipulation was not a substantial problem.

Manipulation, market regulation, politics of finance

Abstract:
An influential theme in recent legal scholarship is that law is not as important as it appears. Social control, many scholars have noted, is often achieved through social norms - informal, decentralized systems of consensus and cooperation - rather than through law. This literature also displays a guarded optimism that social evolutionary processes will tend to favor the adoption of efficient norms. Using concepts from evolutionary game theory, we demonstrate that efficient norms will prevail only in certain settings and not in others: survival of the fittest does not imply survival of the efficient. In particular, we show that in many games of interest to legal scholars - games describing fundamental interactions in property, tort, and contract - evolutionary forces lead away from efficiency. We describe how law rights this trend.

Abstract:
An influential theme in recent legal scholarship is that law is not as important as it appears. Social control, many scholars have noted, is often achieved through social norms - informal, decentralized systems of consensus and cooperation - rather than through law. This literature also displays a guarded optimism that social evolutionary processes will tend to favor the adoption of efficient norms. Using concepts from evolutionary game theory, we demonstrate that efficient norms will prevail only in certain settings and not in others: survival of the fittest does not imply survival of the efficient. In particular, we show that in many games of interest to legal scholars - games describing fundamental interactions in property, tort, and contract - evolutionary forces lead away from efficiency. We also describe how law rights the trend.

Abstract:
The appraisal remedy affords a shareholder the option redeem her shares for cash in the event of certain corporate actions, such as mergers. While appraisal appears to have been developed to protect shareholders who might oppose a corporate action yet be unable to sell their shares for fair value in a liquid market, the value of appraisal to shareholders of publicly traded firms is questionable. This is especially true when we realize that shareholder class actions for breach of fiduciary duty provide an alternative avenue of recovery and are easier to initiate. In this paper we present the first large-scale empirical study of the effect of access to appraisal on target shareholder gains from acquisitions. We examine 1,350 mergers involving publicly held firms. In some of these mergers dissenting shareholders could seek an appraisal and in others appraisal was not available. We find some evidence that appraisal offers dissenting shareholders hold-up power that reduces average shareholder gains in certain transactions. However, for the entire sample, we find no evidence that appraisal has any effect, positive or negative, on target shareholder gains from takeovers.

Abstract:
This paper assesses the impact of changes in judicial independence on equity markets. North and Weingast (1989) argue that judicial independence and other institutional changes inaugurated by the Glorious Revolution of 1688-89 improved public and private finance in England by putting restraints on the government. We calculate abnormal equity returns at critical points in the passage of statutes giving judges greater security of tenure and higher salaries. Early eighteenth-century legislation granting tenure during good behavior is associated with large and statistically significant positive abnormal returns. Other statutes had positive but generally insignificant effects.

Judicial independence, Glorious Revolution, law and finance

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This paper assesses the impact of judicial independence on equity markets. North and Weingast (1989) argue that judicial independence and other institutional changes inaugurated by the Glorious Revolution of 1688-89 allowed the English government credibly to commit to repay sovereign debt and more generally to protect contractual and property rights. Although they provide some supporting empirical evidence, they do not investigate the effect of judicial independence separately from that of other institutional innovations. This paper is the first to attempt to do so. We look at share price movements at critical points in the passage of the 1701 Act of Settlement and other events which gave judges greater security of tenure and higher salaries. Our results suggest that giving judges tenure during good behavior had a large and statistically significant positive impact on share prices, while salary increases and other improvements to judicial independence had impacts which were consistently positive, but not individually statistically significant.

Judicial independence, Glorious Revolution, law and finance

Abstract:
The Securities Act of 1933 is typically described as a "full disclosure" statute, yet many of its detailed provisions forbid disclosure about pending offerings during specified periods or using specified media. These features provided governmental enforcement of retail selling restrictions that were widely used by managing underwriters but that became difficult to enforce contractually during the late 1920s. The net effect was to reduce competition among investment banks. In particular, the act protected separate wholesale and retail investment banks from competition by integrated firms.

Abstract:
The Securities Act of 1933 is typically described as a "full disclosure" statute, yet many of its detailed provisions forbid disclosure about pending offerings during specified periods or using specified media. These features provided governmental enforcement of retail selling restrictions that were widely used by managing underwriters but that became difficult to enforce contractually during the late 1920s. The net effect was to protect separate wholesale and retail investment banks from competition by integrated firms. A likely reason is that Congress relied principally on wholesale investment banks for information about "unsound" investment banking practices.

Abstract:
One of the major developments in legal scholarship over the last decade has been a shift of attention away from formal legal rules toward informal, decentralized methods of social control, or social norms. Many scholars suggest that social norms, not legal rules, are the mainstay of social control. Such a view requires a theory of why individuals would follow norms against their immediate self-interest without threat of formal legal sanction. In seeking an explanation, the norms literature draws heavily on the game theoretic idea that individuals follow norms because of the possibility of community retaliation. Norms scholars express concern, however, that such threats are not credible because there is a free rider problem in inducing community members to engage in costly enforcement. We demonstrate that this "third-party enforcement problem" is, in fact, illusory. Yet there are other important reasons for skepticism about game theoretic approaches to social control that norms scholars have not recognized. We highlight the "counterfactual problem": the fact that the game theory of norm enforcement requires individuals to continue to believe that their community has adopted the norm even in the face of proof that this belief is false. The counterfactual problem opens up avenues for law that the literature has not yet identified. We contend that law does not enter simply to help players arrive at a normative equilibrium, but is required to sustain that equilibrium. This observation has the virtue of consistency with actual patterns of law enforcement.

social norms, game theory, repeated games, counterfactual problem, third-party enforcement problem, subgame perfection, tit-for-tat, def-for-dev, grim strategy

Abstract:
In drawing on the theory of repeated games, norms scholars have devoted much attention to the so-called third-party enforcement problem: the seemingly inevitable reluctance of members of a community to carry out their implicit threat to punish deviators. We argue that the third-party enforcement problem - as currently represented in the literature - is illusory. To be sure, third party enforcement is always a problem for tit-for-tat, the norms literature's canonical example of a cooperation-sustaining strategy. The problem is not, however, endemic to strategies that support cooperation. Thus, we propose re-focusing on an alternative strategy, which we call def-for-dev (defect-for-deviate). Under def-for-dev third parties find it in their interest to punish deviators lest they themselves be labeled as deviators in future rounds.

Although the third-party enforcement problem as conceived of in the literature is illusory, there is still reason for skepticism about the application of mainstream repeated game theory to law and norms. We highlight the counterfactual problem: the fact that the theory of games requires that players continue to believe that other players have adopted a particular equilibrium strategy even off the equilibrium path, when it is evident that this belief is false. The counterfactual problem opens up avenues for law that the literature has not yet identified. We contend, for example, that law does not enter simply to help players arrive at the cooperative equilibrium, but is required to sustain that equilibrium. This observation has the virtue of consistency with actual patterns of law enforcement.

Abstract:
Between 1911 and 1931, 47 of the 48 states adopted state securities, or "blue sky," laws. This paper employs an event history analysis to analyze public interest, public choice, and ideological explanations for the enactment of blue sky laws. The data suggest that the decision to adopt a blue sky law was heavily influenced by the strength of progressive lobbies. However, the type of law adopted was more strongly influenced by the prevalence of small banks which faced competition for depositors' funds from securities salesmen. I also provide evidence that more stringent blue sky laws increased small bank profits.

Blue sky laws, political choice, event history

Abstract:
Recent empirical work shows that countries whose legal systems are based on English common law differ systematically from those whose legal systems are based on French civil law. Glaeser and Shleifer (2002) trace this divergence to England's adoption of the jury system and France's adoption of Romano-canonical procedure in the twelfth and thirteenth centuries. They argue that these choices implied greater centralization of justice in France than in England. We examine the historical evidence in detail and find that there was no attempt to decentralize litigation in medieval England, and in fact, prior to the French Revolution, justice was more centralized in England and than in France. The different trial procedures, moreover, did not put the two countries' legal systems on sharply different paths. Rather, the systems diverged as the result of political choices made in the mid-seventeenth through early nineteenth centuries.

Abstract:
Legal rules may be general (that is, applicable to a broad range of situations) or specific. Adopting a custom-tailored rule for a specific activity permits the regulator to make efficient use of information about the social costs and benefits of that activity. However, the rule maker typically relies on the regulated parties for such information. The regulated parties may attempt to influence the rule maker, producing rules that reflect their private interests. We show that in some cases limiting the rule maker to a single rule for multiple activities will moderate this influence and maximize welfare.

legal rules, general versus specific rules, lobbying, rules versus standards, simple versus complex rules

Abstract:
This paper studies mandatory disclosure documents filed during the period 1933-35 in response to the Securities Act of 1933 and the Securities Exchange Act of 1934. Our sample companies are all listed on the New York Stock Exchange (NYSE) and therefore subject to the NYSE's disclosure requirements at the time of the regulatory filings. We ask whether the additional disclosures contained in the filed documents constitute information. Using newly-available daily price, volume, and bid and ask quotation data, we test whether the filings are associated with changes in bid-ask spreads, return autocovariance, turnover, volatility, or no-trade days. We find almost no evidence that the new disclosures required by the securities laws - principally having to do with management compensation and large shareholdings - reduced informational asymmetry. We also find no evidence that earnings reports were more informative after enactment of the securities laws.

Mandatory disclosure, securities laws

Abstract:
This essay discusses Eric Posner's book Law and Social Norms, focusing on Posner's theory of norm adherence as a costly signal of an individual's discount rate. The attention to discount rates and a broad set of social dilemmas makes the book a welcome addition to the law and economics literature on social norms. The essay, however, questions whether costly signaling solves social dilemmas as frequently as Posner contends and identifies several empirical puzzles with which the theory must contend. One is that ethnic discrimination, adherence to traditional gender roles, and participation in demonstrations and other mass actions, each of which the theory suggests is used to signal a low discount rate, appear to be more prevalent among individuals with relatively high discount rates. Other puzzles are developed in a discussion of shaming punishments, one of the examples Posner uses to illustrate the signaling theory.

Abstract:

Abstract:
The majority shareholder in a closely held corporation may use its control of the corporate machinery to appropriate wealth from the minority, and it is difficult for the majority to make a binding commitment not to do so. This paper models the interaction between majority and minority shareholders as a trust game in which the majority is constrained by the possibility of non-legal sanctions, including family or social disapproval and loss of reputation. The paper applies the analysis to the longstanding debate over appropriate exit rules for close corporation shareholders. Where the parties are well-informed and rational and judicial valuations are unbiased, giving the minority the unconditional right to e cashed out should reduce majority opportunism without producing opportunistic behavior by the minority. The paper suggests that the apparent failure of close corporation shareholders to bargain for such a right reflects the courts' success in using dissolution and fiduciary duty actions to deter majority misbehavior.

Abstract:
Given the existence of contract, property, fraud, and company law, what is the purpose of securities laws? Broadly speaking, they can serve either of two functions, or some mix of both. The first is to facilitate contracting among entrepreneurs, managers, shareholders, and financial intermediaries by providing a standardized set of rights and obligations (La Porta et al. 2005). Such laws are motivated by the desire to reduce transaction costs where contracting parties are widely dispersed and both writing complete contracts ex ante and renegotiating ex post are difficult. A second possible function is to restrict contracting by limiting the set of legally available terms. Such laws reflect the view that securities markets are beset by market failures stemming from externalities or investor irrationality (Coffee 1984; Fox 1999; Langevoort 2002). For the sake of simplicity, we can call the first a “contracting” paradigm and the second a “regulatory” paradigm.

Abstract:
The main rationale that Congress provided for the Securities Exchange Act of 1934 was to eliminate manipulation, and the primary evidence of manipulation was the existence of "pools". Pools were concerted purchases and sales of a particular stock by a group of financiers who shared in the resulting gains or losses. Congress and most subsequent commentators have described the pools as efforts to manipulate the prices of the target stocks. This paper seeks to reevaluate the evidence relating to the pools. It argues that there is little or no evidence that they used such classically manipulative devices as wash sales or false publicity. The paper then uses event study methodology to analyze the price behavior of stocks that were the subject of pools. It finds that a sample of pool stocks earned abnormally high returns at the beginning of a pool, but that those abnormally high returns were not followed by abnormally low returns. That pattern is inconsistent with manipulation, although consistent with informed trading. The paper concludes that the evidence does not support either the notion that pools were a form of trade based manipulation or that they were a form of fraud.

Abstract:
A common debate among securities lawyers, regulators and professionals is whether and to what extent the internationalization of securities markets makes it difficult for state or national regulators to regulate effectively. This paper argues that an appropriate response to internationalization would be to devolve more regulatory authority to the exchanges themselves. It first notes that competing exchanges should have strong incentives to provide disclosure, antimanipulation and other investor protection rules that investors value. Policymakers in the 1930's rejected that view in favor of a belief that exchanges pursue exchange members' interests at the expense of investors' interests. The paper argues, however, that the evidence on which such beliefs were based is seriously deficient. The paper then considers the extent to which exchanges compete with one another and the extent to which their rules seek to curtail competition among their members. It argues that many facially anticompetitive exchange rules may represent attempts to prevent free riding on the exchange's prices and other assets by nonmembers. Moreover, it notes that governmental regulators have not instituted systematically more competitive rules than have exchanges. On balance, the paper argues, exchanges likely were -- and would again be -- superior markets regulators compared to governmental agencies.

Abstract:
This paper argues that the implications of information technology for the regulation of securities are more limited than has often been claimed. It examines two areas (mandatory disclosure and market structure) in which commentators have contended that regulatory change is needed to accommodate technological change. The cost of transmitting, storing and manipulating data, however, is a relatively minor component of the costs associated with corporate disclosure and as a result the optimal level of disclosure is not very sensitive to changes in technology. Similarly, decisions about market structure are attempts to economize on a large set of transaction costs, including credit risks, default risks, and information risks, which are only weakly related to the cost of communicating between buyers and sellers. The paper then observes that a more subtle shift in regulatory philosophy is occurring in response to technology and internationalization. The shift is away from a consumer protection model of securities regulation and toward a model in which the principal task of the regulatory system is to specify and enforce property rights in information.

Abstract:
This paper surveys and analyzes the substantial literature on optimal remedies for contract breach in a variety of settings. It begins with a standard analysis of the behavioral effects of expectation and reliance damages, then discusses the application of these damage measures in a world where courts are not perfectly informed about the parties' valuations of the contract. When valuation problems are extreme, courts may turn to alternative remedies such as specific performance, or parties may attempt to solve the problem themselves through liquidated damages clauses. The paper considers whether these solutions to the valuation problem alleviate or exacerbate opportunistic behavior by the parties. It also highlights the recent contributions that game theory and options theory have made to the understanding or remedial choices.