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Abstract:
This paper ranks the high courts of the fifty states, based on their performance during the years 1998-2000, along three dimensions: opinion quality (or influence as measured by out-of-state citations), independence (or non-partisanship), and productivity (opinions written). We also discuss ways of aggregating these measures. California and Delaware had the most influential courts; Georgia and Mississippi had the most productive courts; and Rhode Island and New York had the most independent courts. If equal weight is given to each measure, then the top five states were: California, Arkansas, North Dakota, Montana, and Ohio. We compare our approach and results with those of other scholars and the U.S. Chamber of Commerce, whose influential rankings are based on surveys of lawyers at big corporations.

state courts, high courts, court performance

Abstract:
Although federal judges are appointed with life tenure, most state judges are elected for short terms. Conventional wisdom holds that appointed judges are superior to elected judges because appointed judges are less vulnerable to political pressure. However, there is little empirical evidence for this view. Using a dataset of state high court opinions, we construct objective measures for three aspects of judicial performance: effort, skill and independence. The measures permit a test of the relationship between performance and the four primary methods of state high court judge selection: partisan election, non-partisan election, merit plan, and appointment. The empirical results do not show appointed judges performing at a higher level than their elected counterparts. Appointed judges write higher quality opinions than elected judges do, but elected judges write many more opinions, and the evidence suggests that the large quantity difference makes up for the small quality difference. In addition, elected judges do not appear less independent than appointed judges. The results suggest that elected judges are more focused on providing service to the voters (that is, they behave like politicians), whereas appointed judges are more focused on their long-term legacy as creators of precedent (that is, they behave like professionals).

judiciary, elected judges, appointed judges

Abstract:
The judicial appointments process has grown increasingly frustrating in recent years. Both sides claim that their candidates are the "most meritorious" and yet there is seldom any discussion of what constitutes merit. Instead, the discussion moves immediately to the candidates' likely positions on hot-button political issues like abortion, gun control, and the death penalty. One side (these days, the Republicans) claims that it is proposing certain candidates based on merit, while the other (the Democrats) claims that the real reason for pushing those candidates is their ideology and, in particular, their likely votes on certain key hot-button issues. With one side arguing merit and the other side arguing ideology, the two sides talk past each other and the end result is often an impasse. To get past the impasse, we propose placing judges in a tournament based on relatively objective measures of judicial merit and productivity. A tournament allows the public to test the politicians' claims of merit. Being able to test those claims helps make transparent the occasions on which the real debate is over ideology. It is harder to disguise a purely ideological candidate as the best from a "merit" standpoint when the candidate performs poorly relative to many other judges based on objective factors. Once merit-based arguments have been isolated (or at least reduced in scope) to factors related to the tournament, it should be possible to have a transparent and meaningful debate over ideology.

The Article runs such a tournament using data on opinions authored by active federal circuit court judges from one common time period: the beginning of 1998 to the end of 2000. The focus on a common time period helps put judges in the tournament on a level playing field. We then generate a series of measures of merit focusing on (a) productivity, (b) opinion quality, and (c) judicial independence. While not perfect, our measures interject a greater focus on merit in the current nomination process (thereby flushing out previously non-transparent motives based on ideology). With our data, we are able to test the claims of merit that the next President will inevitably make when he announces one or the other of his favorite circuit court judges as the nominee for the Supreme Court.

supreme court; judges; tournament

Abstract:
We suggest a Tournament of Judges where the reward to the winner is elevation to the Supreme Court. Politics (and ideology) surely has a role to play in the selection of justices. However, the present level of partisan bickering has resulted in delays in judicial appointments as well as undermined the public's confidence in the objectivity of justices selected through such a partisan process. More significantly, much of the politicking is not transparent, often obscured with statements on a particular candidate's "merit" - casting a taint on all those who make their way through the judicial nomination process. We argue that the benefits from introducing more (and objective) competition among judges are potentially significant and the likely damage to judicial independence negligible. Among the criteria that could be used are opinion publication rates, citations of opinions by other courts, citations by the Supreme Court, citations by academics, dissent rates, speed of disposition of cases, reversal rates by en banc panels and the Court, and so on. Where political motivations drive the selection of an alternative candidate, our proposed system of objective criteria will make it more likely that such motivations are made transparent to the public. Just as important, a judicial tournament for selection to the Supreme Court will serve not only to select effective justices, but also to provide incentives to existing judges to exert effort.

judges, federal court system, judicial nomination process

Abstract:
Common wisdom holds that many federal judges do not write their own opinions. While their degree of input into opinion writing varies, almost all rely to some extent on law clerks, typically recent law school graduates, to research and draft substantial sections of the opinion. Why should we care which judges write their opinions? We posit that determining the actual input of federal judges into the authorship of opinions provides useful information in a number of contexts, including judicial promotion decisions, the allocation of scarce judicial resources, and the judicial clerkship market for law students. We start with generic tests of authorship obtained from computational linguistics. To assess the effectiveness of these tests in the judicial context, we identify (based on an informal survey of several sitting federal judges), three judges reputed to write their own opinions. We then use a randomly selected set of opinions for active circuit judges from 1998 to 2000 to examine whether the generic tests succeed in ranking these three judges high in terms of authorship. The generic tests failed to distinguish authorship due in part to the subject matter specific nature of opinions. Whether an opinion is a criminal, administrative, or commercial law opinion matters. Comparing two judges based on their criminal law opinions may provide different results than comparing the same judges based on the criminal law opinions of one judge against the administrative law opinions of the other judge. Our generic tests did not control for subject matter of opinions. We provide a number of more customized tests for the judicial context that attempt to control for subject matter. Using these customized tests, we are able to distinguish the three test judges based on authorship.

judges, authorship, judicial performance, rankings, tournament

Abstract:
Investors face myriad investment alternatives and seemingly limitless information concerning those alternatives. Not surprisingly, many commentators contend that investors frequently fall short of the ideal investor posited by the rational actor model. Investors are plagued with a variety of behavioral biases (such as, among others, the hindsight bias, the availability bias, loss aversion, and overconfidence). Even securities market institutions and intermediaries may suffer from biases, led astray by groupthink and overconfidence.

The question remains whether regulators should focus on such biases in formulating policy. An omnipotent regulatory decisionmaker would certainly improve on flawed investor decisionmaking. The alternative we face, however, is a behaviorally-flawed regulator, the Securities and Exchange Commission (SEC). Several behavioral biases may plague SEC regulators including overconfidence, the confirmation bias, framing effects, and groupthink. While structural solutions are possible to reduce biases within the agency, we argue that such solutions are only partially effective in correcting these biases.

Instead of attempting to determine when the behavioral biases of regulators outweigh those within the market, we take a different tactic. Because behaviorally flawed (and possibly self-interested) regulators themselves will decide whether market-based biases outweigh regulatory biases, we propose a framework for assessing such regulatory intervention. Our framework varies along two dimensions. The more monopolistic the regulator (such as the SEC), the greater is the presumption against intervention to correct for biases in the market. Monopolistic regulatory agencies provide a fertile environment for behavioral biases to flourish. Second, the more regulations supplant market decisionmaking, the greater is the presumption against such regulations. Market supplanting regulations are particularly prone to entrenchment, making reversal difficult once such regulations have become part of the status quo.

behavioral economics, securities regulation

Abstract:
Investors face myriad investment alternatives and seemingly limitless information concerning those alternatives. Not surprisingly, many commentators contend that investors frequently fall short of the ideal investor posited by the rational actor model. Investors are plagued with a variety of behavioral biases (such as, among others, the hindsight bias, the availability bias, loss aversion, and overconfidence). Even securities market institutions and intermediaries may suffer from biases, led astray by groupthink and overconfidence.

The question remains whether regulators should focus on such biases in formulating policy. An omnipotent regulatory decisionmaker would certainly improve on flawed investor decisionmaking. The alternative we face, however, is a behaviorally-flawed regulator, the Securities and Exchange Commission (SEC). Several behavioral biases may plague SEC regulators including overconfidence, the confirmation bias, framing effects, and groupthink. While structural solutions are possible to reduce biases within the agency, we argue that such solutions are only partially effective in correcting these biases.

Instead of attempting to determine when the behavioral biases of regulators outweigh those within the market, we take a different tactic. Because behaviorally flawed (and possibly self-interested) regulators themselves will decide whether market-based biases outweigh regulatory biases, we propose a framework for assessing such regulatory intervention. Our framework varies along two dimensions. The more monopolistic the regulator (such as the SEC), the greater is the presumption against intervention to correct for biases in the market. Monopolistic regulatory agencies provide a fertile environment for behavioral biases to flourish. Second, the more regulations supplant market decisionmaking, the greater is the presumption against such regulations. Market supplanting regulations are particularly prone to entrenchment, making reversal difficult once such regulations have become part of the status quo.

Abstract:
The Article surveys the growing law and finance literature providing evidence that legal protections for minority investors (and accompanying private and public institutions) correlate with various indices of financial development. Evidence in particular exists that countries with a common law origin enjoy both strong levels of investor protection as well as superior financial performance compared with civil law origin countries. Correlation does not mean causation, however. The Article examines the evidence related to whether the legal regime in fact causes financial development. Even if the legal regime does in fact cause such development, a question remains: How to generate investor-friendly legal regimes. Evidence on the efficacy of top-down reforms, including the transplant of laws from one regime to another, is examined. As an alternative, the Article puts forth the hypothesis that increased competition (whether product market, capital market, or regulatory competition) may have a greater ability to generate lasting changes in a country's legal environment to the benefit of investors and overall welfare.

Abstract:
This article examines the theoretical issues and surveys the evidence on the desirability of securities class actions. Class actions offer the promise of energizing private enforcement of the securities laws, including in particular antifraud liability. For shareholders of large, publicly-held corporations, the individual benefits of pursuing a fraud action are often outweighed by the considerable costs of litigation. Without a class action, many potential fraud lawsuits may simply not get litigated. Nonetheless, the article explores three related problems with class actions: (a) the problem of frivolous suits (and the need to allow meritorious suits); (b) the lack of incentives on the part of plaintiffs' attorneys to focus on smaller companies; and (c) the agency problem between plaintiffs' attorneys and the plaintiff class. The article then assesses the existing evidence from the United States (in particular on the impact of the Private Securities Litigation Reform Act of 1995) in addressing these problems and proposes future avenues for research. Understanding the impact of class actions is important not only for the U.S. but also for countries considering the adoption of a U.S.-style securities class action system. As an example, the article discusses whether securities class actions would be beneficial in South Korea, a country with a smaller capital market and fewer large companies compared with the United States.

securities, litigation, class actions, korea

Abstract:
This study provides evidence on the impact of the Private Securities Litigation Reform Act (PSLRA) of 1995. Others have furnished evidence that the PSLRA increased the significance of merit-related factors in determining the incidence and outcomes of securities fraud class actions. This increase is consistent with two hypotheses. First, the PSLRA may have reduced solely the incidence of nuisance litigation. Second, the PSLRA may have also reduced meritorious claims where the additional costs imposed by the PSLRA made such claims unprofitable from the perspective of plaintiffs' attorneys. The study provides evidence that pre-PSLRA nonnuisance claims lacking obvious hard evidence indicia of fraud (an accounting restatement or Securities and Exchange Commission action) would have faced (1) a lower probability of suit in the post-PSLRA period and (2) a greater likelihood of receiving a dismissal or low-value settlement in the post-PSLRA period.

Abstract:
This essay provides evidence on the impact of the Private Securities Litigation Reform Act of 1995 (PSLRA) by examining all initial public offerings (IPO) from 1990 to 1999 and IPO-related securities class action litigation involving a mix of Section 11 and Rule 10b-5 antifraud claims. Others have provided evidence that the PSLRA increased the significance of certain merit-related factors, such as the presence of an accounting restatement, in determining the incidence and outcomes of securities fraud class actions. The increase in the importance of merit-related factors, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of nuisance litigation. Second, the PSLRA may have reduced the incidence of both nuisance litigation as well as a subset of the pre-PSLRA meritorious claims where the additional costs imposed by the PSLRA made such claims unprofitable from the perspective of plaintiffs' attorneys. This essay uses pre-PSLRA claims that resulted in non-nuisance outcomes to test between these hypotheses. The essay provides evidence that the pre-PSLRA non-nuisance claims lacking obvious "hard evidence" indicia of fraud (an accounting restatement or SEC action) would have faced (a) a lower probability of suit in the post-PSLRA period and (b) a greater likelihood of receiving a dismissal or low-value settlement in the post-PSLRA period. In determining the welfare implications of blocking frivolous suits, policymakers should therefore consider the negative impact of the PSLRA in also discouraging a significant fraction of non-nuisance litigation.

Securities litigation, class actions, litigation risk, accounting fraud

Abstract:
This Essay examines the role of private institutions in promoting strong securities markets. Recent scandals in the United States highlight both the importance and the fallibility of the securities market intermediary institutions to which investors typically turn for protection, such as auditors, analysts, and proxy advisory firms. From the perspective of investor welfare, this Essay discusses the various forms of institution failure and the efficacy of recently promulgated reforms. First, the paper provides a taxonomy of the various forms of securities market intermediary institution failure. Second, the essay compares the failings of the market against the fallibility of regulators. Not all regulations are the same - a series of possible interventions into the securities market exists ranging from merit regulation at one extreme to the provision of optional investor education materials at the other. Some forms of market failures require less intervention (with a corresponding reduced cost of regulatory error and capture). Lawmakers often regulate first and ask questions later, ignoring both the potential downsides of regulation as well as the possibility of market-based alternative solutions to market failures. The presence of market-based solutions allows regulators to intervene less stringently into markets, leaving the market with some degree of choice in how to address particular intermediary defects.

securities regulation, gatekeepers, fraud

Abstract:
Judge Richard Posner dominates on several easy-to-observe measures of judicial performance including citation counts and number of opinions published per year. Such easy-to-observe measures offer a useful first step in measuring the overall merit of a particular judge, particularly in the context of determining who would be the best candidate for nomination to the Supreme Court. We have argued elsewhere that even if one disagrees with the value of such easy-to-observe measures, they are still valuable in engendering a second step, more in-depth analysis behind the numbers. Why exactly does Posner receive more citations than others? Is Posner's tremendous productivity simply a product of existing norms on the Seventh Circuit, or is Posner himself related to a shift in the norm toward higher productivity on the Circuit? We provide such an analysis in this essay. Perhaps more important than our own unpacking of the statistics, placing Posner at the top of an objective judicial ranking gives other judges (and their advocates) incentives to reveal otherwise hidden information on exactly why their judges should be placed ahead of Posner for the next opening on the Supreme Court.

supreme court, judges, tournament

Abstract:
The present securities regulatory regime in the United State focuses on the protection of investors. Investor protection, in turn, leads to a robust capital market. The federal government accomplishes its goal of investor protection through the registration and direct regulatory control of issuers, intermediaries, and self-regulatory organizations in the securities markets. The Article contends that regulators should instead regulate investors. Although against current wisdom, a securities regime that regulated investors would allow regulators to take a more market-driven approach toward investor protection, resulting in a less paternalistic regime. For those investors with good information on issuers in the market, for example, no mandatory regulations are necessary. Rather investors will contract for desired protections; those market participants failing to provide valued protections will receive less of for their securities or services. As a result, market participants will voluntarily provide desired protections. The Article, therefore, proposes to classify investors based on their informational resources. Such classification frees those investors able to protect themselves to engage in a wide variety of investments while allowing regulators to focus their resources on investors less well-equipped.

Abstract:
The present securities regulatory regime in the United State focuses on the protection of investors. Investor protection, in turn, leads to a robust capital market. The federal government accomplishes its goal of investor protection through the registration and direct regulatory control of issuers, intermediaries, and self-regulatory organizations in the securities markets. The Article contends that regulators should instead regulate investors. Although against current wisdom, a securities regime that regulated investors would allow regulators to take a more market-driven approach toward investor protection, resulting in a less paternalistic regime. For those investors with good information on issuers in the market, for example, no mandatory regulations are necessary. Rather investors will contract for desired protections; those market participants failing to provide valued protections will receive less of for their securities or services. As a result, market participants will voluntarily provide desired protections. The Article, therefore, proposes to classify investors based on their informational resources. Such classification frees those investors able to protect themselves to engage in a wide variety of investments while allowing regulators to focus their resources on investors less well-equipped.

Abstract:
Publicly-traded corporations contain a wealth of non-public material information. Insider trading prohibitions limit the ability of corporate insiders to profit from this information advantage through trades in their own corporations' securities. Some may view the SEC's recently promulgated Regulation FD as complementary to restrictions on insider trading, limiting the ability of firms to confer on outsiders a similar inside information advantage through selective disclosures. The employment of selective disclosures to favor outside investors and analysts, nonetheless, may provide a number of benefits to all shareholders of a corporation. Selective disclosures, for example, may help subsidize the formation of blocks of shares that help monitor managers for agency problems. Selective disclosures also may provide firms a low-cost and flexible means of conveying even confidential information indirectly into the capital markets. The Article contends that the real risk of selective disclosures lies with the potential for managers to co-opt such disclosures for their own opportunistic endeavors. Regulation FD, however, represents an untailored and overly broad response to the risk of opportunism. Instead, the Article sets forth a number of more tailored regulatory responses that allow firms to provide selective disclosures in situations where overall shareholder welfare is enhanced while curtailing more opportunistic uses. Prepared for the Dykstra Corporate Governance Symposium at the University of California, Davis School of Law (2001).

Abstract:
The law takes a laissez faire approach toward the efforts of most investors in the securities markets to obtain an information advantage and trade based on this advantage. Indeed, the misappropriation theory of insider trading liability has the effect of assigning trading rights in the securities of a firm (the "traded firm") to the source of material, non-public information. When the source of the information is outside the traded firm?say, a stock analyst or an industry rival?trading on such information is clearly legal if the source consents. The outside trader, however, is often not well placed to decide whether such trading is socially beneficial, internalizing most of the benefits of such trading but not most of its costs. Coasean bargaining is not likely to solve the problem because the traded firm (whose shareholders' predominantly bear the costs of such trading) faces large transaction costs of identifying and bargaining with the undefined and potentially replenishing class of such outside traders. Our thesis is that it is more efficient to allow the traded firm to control whether particular types of informed trading takes place. Under our proposed regime, firms would have the right to impose ex ante restrictions against outsider trading on their stock on the basis of material, non-public information. Reassigning to the traded firm the right to control whether informed outsider trading occurs gives the initial trading decision to a party that internalizes much more of the costs of such trading and therefore is more likely to filter out socially inefficient trades. Reassigning the outsider trading right is also more likely to facilitate Coasean bargaining, because it is easier for potential outside traders to identify the traded firm than it is for the traded firm to identify the potential outside traders. Finally, reassigning the outsider trading right to the traded firm is more consistent with property-rights based notions of just deserts. The outside trader may have a Lockean ownership right in the deliberately acquired non-public information, but such ownership does not necessarily entitle her to trade on another firm's stock. The Lockean creators of the traded firm in initially issuing its stock should also have a right to put outside traders on notice that trading on the basis of non-public information is prohibited (or restricted in pre-specified ways).

Abstract:
This paper considers the efficiency implications of managerial "favoritism" towards block shareholders of public corporations. While favoritism can take any number of forms (including the payment of green-mail, diversion of opportunities, selective information disclosure, and the like), each may have the effect (if not the intent) of securing a block shareholder's loyalty in order to entrench management. Accordingly, the practice of making side payments is commonly perceived to be contrary to other shareholders' interests and, more generally, inefficient. In contrast to this received wisdom, we argue that when viewed ex ante, permissible acts of patronage toward block shareholders may play an important efficiency role that benefits all shareholders alike. We demonstrate that the prospect of having to share rents with a third party may itself have a deterrent effect on managerial self-dealing - an off-equilibrium benefit that would not be readily apparent if one looked only at instances where favoritism actually occurs in practice.

Abstract:
Nearly everyone thinks that judges are underpaid, but theory and evidence provide little support for this view. Theory suggests that increasing judicial salaries will improve judicial performance only if judges can be sanctioned for performing inadequately or if the appointments process reliably screens out low-ability candidates. However, federal judges and many state judges cannot be sanctioned, and the reliability of screening processes is open to question. An empirical study of the high court judges of the 50 states provides little evidence that raising salaries would improve judicial performance. The case for a pay raise has not been made.

Abstract:
Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA or the Act) to address problems plaguing securities class action litigation. This Article surveys the empirical evidence on the impact of the PSLRA, examining the specific categories of reforms introduced by the Act. We look at the existing evidence relating to: substantive changes in the definition of fraud necessary to bring a securities class action; the Congressional efforts to empower lead plaintiffs relative to the plaintiffs' attorney bar; and the direct sanctioning of lawyers authorized in the Act. Given the PSLRA's focus on changing the incentives and behavior of plaintiff lawyers, we also provide preliminary data on the role of the lead plaintiff law firm. We report that while the market concentration of plaintiff law firms based on settlement amounts did not change appreciably after the enactment of the PSLRA, the tendency of top tier law firms to associate with lower tier firms did increase significantly in the post-PSLRA period. We also report that institutional investors taking on the role of lead plaintiffs in the post-PSLRA period tended to develop repeat relationships with select top tier law firms. Our survey of the existing evidence and study of new evidence relating to the role of plaintiff law firms leads us to raise several questions for possible new lines of research into the effectiveness of the PSLRA.

lawyers, plaintiffs attorneys, securities class actions, litigation, private securities litigation reform act

Abstract:
Formalists contend that courts should apply strict textual analysis in interpreting contracts between sophisticated commercial parties. Sophisticated parties have the expertise and means to record their intentions in writing, reducing the litigation and uncertainty costs surrounding incomplete contracts. Moreover, to the extent courts misinterpret contracts, sophisticated parties may simply rewrite their contracts to clarify their true intent. We argue that the formalist approach imposes large costs on even sophisticated parties in the context of boilerplate contracts. Where courts make errors in interpreting boilerplate terms, parties face large collective action problems in rewriting existing boilerplate provisions. Any single party that attempts to change a boilerplate term will face a large market discount for deviating from the market standard. In such situations, a court erroneous interpretation that reduces overall contracting surplus may persist in an industry. We also contend that taking a more contextual approach, including evidence on course of conduct and industry custom, to contract interpretation will not ameliorate the difficulties inherent in the interpretation of boilerplate terms. The specific parties to a boilerplate contract often have no understanding of what the disputed boilerplate clause means. Where such parties attempt to supply their own ex post understandings, they may not represent the interests of the entire industry that relies on the particular boilerplate clause. We provide a new approach to the interpretation of boilerplate terms between sophisticated contracting parties. Courts should bypass an inquiry into the understanding of the parties to the current contract and instead go back to the point in the past when the disputed clause first became part of the boilerplate. Much like the enacting legislative body for a statute, the original drafting parties provide the best source of information on the original meaning of boilerplate contract terms. The original drafting parties will have spent the most time and resources in negotiating the contract term (and thus represent a true "meeting of the minds"). In a market populated with sophisticated parties on all sides, the drafting parties necessarily must balance the interests of all sides for a contract term to gain at least initial widespread acceptance in the industry. The drafters will also enjoy an expertise advantage over any court attempting to interpret a term. Taking a historical approach to the interpretation of boilerplate terms will create an incentive for standard setters to arise in industries comprised of sophisticated contracting parties to supply boilerplate terms and a detailed historical record of the meaning of the terms.

contract interpretation, formalism, contextualism, boilerplate, form contracts

Abstract:
Under Section 11 of the Securities Act of 1933, firms making public offerings of securities are strictly liable to investors for any material misstatements in the registration statements that accompany those offers. This strict liability regime is premised on the notion that issuers are best placed to avoid misstatements in the registration statement. Section 11 gives other potential defendants a "due diligence" defense to reflect their lesser ability to ensure the accuracy of the registration statement. The recent spate of "laddering" lawsuits alleging manipulation of the aftermarket for certain stocks issued in "hot" initial public offerings (IPOs) presents a role-reversal in that underwriters, rather than issuers, are alleged to be the principal wrongdoers. This paper compares a randomly selected sample of the defendant-issuers in the IPO laddering lawsuits with a matched sample of IPO firms not included in the laddering litigation. We find few differences between the sued firms and the match firms that would suggest that the issuers are culpable for laddering schemes. These findings call into question - at least under some circumstances - the deterrent value of the strict liability regime of Section 11 for corporate issuers. We propose a due diligence defense for issuers for statements in the registration statement relating to situations in which the primary wrongdoer is not the issuer.

Abstract:
Using fund flow data from 1994 to 2004, we examine the market response to mutual fund scandals. During the 12 month period beginning with the first report of a scandal in the Wall Street Journal, scandal funds experience an economically and statistically significant outflow of assets. The outflow is greater for funds that experience a more severe scandal and for funds where the scandal results in an increased risk of future harm to fund investors. Who initially discovers the scandal is an important determinant of the amount of outflows: scandals first discovered by the SEC (as opposed to a non-governmental source or another governmental body) experience no significant outflows. Funds in the same family as the scandal fund also experience statistically significant outflows, though at lower scale than the corresponding outflows of scandal funds. Outflows for scandal family funds are greater where the scandal fund accounted for a larger share of the assets of the fund family, where the scandal was more severe, and where the scandal increased the risk of future harm to investors.

mutual funds, regulation, investor protection

Abstract:
Securities market intermediaries operate in a number of areas in the capital markets reducing the collective action problem facing investors. Analysts provide securities research. Proxy advisory firms assist investors in determining how to vote their shares. And even shareholders bringing proxy contests can be viewed as providing a collective benefit to the extent the contests are motivated out of a desire to increase share value. Despite the service they provide investors, many intermediaries face financing problems due to pervasive free riding on the part of dispersed shareholders. In some areas, the law provides for mandatory financing of intermediaries (including the independent audit requirement for most public firms). Regulators are poorly suited, however, to make decisions on precisely how to distribute subsidies to intermediaries. Much of the current level of subsidization therefore is left to firms (and their managers) to provide voluntarily. Firms may subsidize analysts, for example, through elevated investment banking fees to a financial brokerage firm. Managers, however, may then use firm financing of intermediaries to corrupt the intermediaries in favor of the managers.

Understanding the problem of intermediary corruption as an outgrowth of the financing problem facing intermediaries cautions against simply imposing regulatory prohibitions on voluntary firm subsidies. Instead, we propose to separate the decision of how much to subsidize intermediaries from the decision on who should get the subsidies through voucher financing. Under our proposal, regulators determine a subsidy amount funded through levies on public firms (roughly equal to the present amount of subsidies which flow from firms to intermediaries). Shareholders are then given the ability to direct (using vouchers) to which intermediaries their subsidy dollars should go in proportion to their shares. Voucher financing provides a market-based mechanism to finance intermediaries, resulting in greater flexibility and responsiveness in the provision of intermediary financing. With vouchers, shareholders may mass vouchers from several firms in their portfolios and direct them across time (saving them for the future) and across different intermediaries to their highest value use. Shareholders, of course, may lack full information on the value of different intermediaries. Shareholders may also fail to coordinate in the distribution of vouchers. We think, nonetheless, that solutions exist for such problems. Moreover, voucher financing represents a superior alternative compared with error-prone mandatory regulatory attempts at providing financing for intermediaries as well as conflict-of-interest prone voluntary firm financing.

securities market research, analysts, voucher financing, securities market intermediaries

Abstract:
Global capital markets are becoming more integrated. With the free flow of capital has come increased competition between different financial centers. For those in favor of increased regulatory competition, the growing integration of world financial markets is generally viewed as a positive occurrence. Nevertheless, this essay casts some doubt as to the value of regulatory competition along dimensions other than the supply of investor protection. Regulators may compete not over the types and quality of investor protection but rather over jurisdictional boundaries and the extraterritorial application of law. This, of course, does not mean that regulatory competition lacks merit. Indeed, those that take the view that regulatory competition will lead to a race to the bottom must contend with the reality that a degree of competition is already with us. The essay concludes that investor welfare may be improved if we move more to a fully competitive system under which regulators could only compete along one dimension -- the provision of investor protection.

regulatory competition, securities regulation, globalization

Abstract:
When Congress enacted the Private Securities Litigation Reform Act in 1995, the Act's "lead plaintiff" provision was the centerpiece of its efforts to increase investor control over securities fraud class actions. The lead plaintiff provision alters the balance of power between investors and class counsel by creating a presumption that the investor with the largest financial stake in the case will serve as lead plaintiff. The lead plaintiff then chooses class counsel and, at least in theory, negotiates the terms of counsel's compensation. Congress' stated purpose in enacting the lead plaintiff provision was to encourage institutional investors - pension funds, mutual funds, hedge funds, etc. - to come forward to serve as lead plaintiff. The theory was that an institutional investor with a substantial damages claim would have the incentive to bargain hard with class counsel on behalf of the class, reducing the percentage of the recovery awarded to class counsel. Congress also expected institutions to play an oversight role, monitoring to make sure that class counsel was vigorously pursuing claims on behalf of the class and not settling claims on the cheap.

Our study offers evidence on the extent to which the lead plaintiff provision furthers these goals. We have collected two samples of securities class actions - one from 1991 to 1995 (pre-PSLRA), and one from 1996-2000 (post-PSLRA). We compare the class representatives from the two periods to determine if institutional investors are stepping forward in significantly greater numbers. We also sort the institutional investors - distinguishing public from private - to see what types of investors have stepped forward to serve as lead plaintiff. Consistent with other research, we find a significant difference only in the number of public institutions serving as lead plaintiff.

Our sample also allows us to analyze the impact of the lead plaintiff provision. Does the presence of an institutional investor increase the likelihood of a high value settlement? Despite the visible participation of institutions in several high-profile cases, we find no systematic evidence that private institutional lead plaintiffs are associated with larger class recoveries. Public pension funds, on the other hand, are correlated with higher class recoveries as a fraction of the potential damage award in the post-PSLRA period. Our results are, however, consistent with the possibility that public pensions "cherry pick" the actions in which they seek to become lead plaintiff, selecting only the cases with the largest potential damages and the strongest evidence of fraud. Further analysis is necessary to evaluate this possibility.

We also evaluate the effect of lead plaintiffs on the selection of attorneys and attorneys' fees. We find that, for the time period of our study, institutional investors tended to avoid the Milberg Weiss plaintiffs' attorney firm. On the more fundamental issue of whether the presence of an institutional investor as a lead plaintiff reduces the fees paid to the lawyers, after controlling for the size of the case, we find no systematic evidence that institutional involvement correlates with lower fee awards.

securities regulations, class actions, procedure, lead plaintiff, pslra

Abstract:
Network externalities may lead contracting parties to stay with a standardized term despite preferences for another term. Using a dataset of sovereign bond offerings from 1995 to early 2004, we test the importance of standardization for the modification provisions relating to payment terms. We provide evidence that (a) standardization may lead parties to adopt provisions not necessarily out of preference and (b) standards, nonetheless, may change. The process of change, however, is not necessarily quick or straightforward. In the sovereign bond context, change came by way of an interpretive shock. Contracts with modification provisions requiring the unanimous consent of bondholders (UACs) suddenly became vulnerable to change with less than unanimous approval through the unexpected use of exit consents. After the shock, sovereigns and investors did not initially react with a significant shift in contract terms. However, we provide evidence that after this initial lull (once investors and sovereign gained experience on the value of allowing modification of payment terms with less than unanimous consent), large shifts in contract terms followed, moving sovereign bond contracts even further away from UACs toward collective action clauses (CACs). We also report evidence that issuer's attorneys dealing with a high volume of sovereign offerings were the driving factor behind this delayed large shift in contract terms.

Abstract:
Judge Sonia Sotomayor’s assertion that female judges might be “better” than male judges has generated accusations of sexism and potential bias. An equally controversial claim is that male judges are better than female judges because the latter have benefited from affirmative action. These claims are susceptible to empirical analysis. Primarily using a dataset of all the state high court judges in 1998-2000, we estimate three measures of judicial output: opinion production, outside state citations, and co-partisan disagreements. We find that the male and female judges perform at about the same level. Roughly similar findings show up in data from the U.S. Court of Appeals and the federal district courts.

judicial performance, gender, citations, judges

Abstract:
In many job settings, there will be some promotion criteria that are less amenable to measurement than others. Often, what is difficult to measure is more important. For example, possessing "good judgment" under pressure may be a better predictor of success as a law firm partner than the ability to bill a vast amount of hours. The first puzzle that this essay explores is why, in some promotion settings, organizations appear to focus on less important, but measurable, criteria such as hours billed. The answer lies in the relationship between the objectively measurable criteria, on the one hand, and the subjective and less visible (but more important) attributes on the other hand. Under certain circumstances, a competition over the measurable criteria, such as hours billed or number of deals accomplished, can force the revelation of information on hard-to-measure subjective attributes of the candidate such as judgment or collegiality. For example, it is easier to evaluate the judgment of an associate who has amassed a number of deals than one who has not. Some information about the associate's good and bad judgment is likely to be generated from the deals. So, while it makes little sense to promote associates based solely on billable hours, making billable hours the goal of the first round of a tournament, where the winners are awarded eligibility for consideration for partnership, can generate information more relevant to the second round partner selection decision.

Explaining the first puzzle leads to a second puzzle. If promotion tournaments over measurable criteria can be effectively utilized in the private sector to force information about candidate traits, why do we not see revelation tournaments elsewhere, where competition may generate information useful in evaluating candidates for promotion? The answer, we suggest, has to do at least in part with agency problems. Promotion tournaments based on measurable criteria limit the discretion of agents making the promotion decisions. When decision-makers have less discretion, the return to currying favor with those decision-makers falls. As a result, decision-makers with less discretion earn less "rent." Decision-makers acting as agents also enjoy a reduced ability to make promotion decisions according to their own preferences separate from the goals of their principals.

Information forcing, law firms, tenure, judicial tournaments, US news, rankings, promotion

Abstract:
We survey public pension funds and report on their litigation and non-litigation activism. We report that activity levels vary, dramatically. Although some funds engage in a substantial amount of governance activity, a significant number do little or nothing. Public pension funds engage in a very limited spectrum of non-litigation activities, involving primarily low visibility activities such as participation in corporate governance organizations or withholding votes from a management nominee. Funds with more assets under management are far more active in non-litigation activism. Similarly, funds that devote more resources generally to in-house activities are also more active in non-litigation activism. A marked difference exists for litigation activism. Public pension fund participate much more extensively in shareholder litigation than in other governance activities. Despite the importance of asset size for participation levels, we also find that for litigation-related activism, smaller funds participate with equal frequency.

institutional investors, pension funds, shareholder activism, corporate governance

Abstract:
This article assesses the impact of the 1992 SEC reforms that enhanced the ability of share-holders to communicate during a proxy contest. Utilizing a sample of 361 shareholder-sponsored corporate governance issue proposals from 1991 to 1995, the article finds that the mean percentage of total outstanding votes cast in favor of an issue proposal declined sig-nificantly post-reform. As explanation, the article furnishes evidence that certain sponsors interested in their own private agenda rather than general shareholder welfare exploited more fully the proxy mechanism post-reform; controlling for the composition of sponsors, the proxy reforms generated no significant change in the for-vote outcome of issue proposals. The article concludes instead that the reforms resulted in a shift in the composition of issue proposals targets toward companies relatively less vulnerable to such proposals pre-reform.

Abstract:
This Article tests for the presence of bias in judicial citations within federal circuit court opinions. Our findings suggest bias along three dimensions. First, judges base outside circuit citation decisions in part on the political party of the cited judge. Judges tend to cite judges of the opposite political party less compared with the fraction of the total pool of opinions attributable to the opposite political party judges. Second, judges are more likely to engage in biased citation practices in certain high stakes situations. These high stakes situations include opinions dealing with certain subject matters (such as individual rights and campaign finance) as well as opinions in which another judge is in active opposition. Third, judges cite more to those judges that cite back to them frequently, suggesting the presence of "mutual" citation clubs.

Judges, judicial administration, judicial bias, empirical study of courts

Abstract:
Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at S&P 1500 companies, we examine how advisors make their recommendations and how these recommendations and other factors affect the shareholder vote. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance, Glass Lewis, and Egan Jones, ISS is widely regarded as the most influential and its recommendation is claimed to sway 20-30% of the vote. We find that the four proxy advisory firms differ systematically from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation.

We further find that all the proxy advisors, but particularly ISS, base their recommendations largely on factors that shareholders take into account (independent of the recommendation) in casting their vote. Once these factors are controlled for, overall voting outcomes are substantially similar whether or not a proxy advisor has issued a recommendation. Our analysis demonstrates that the reported influence of ISS is substantially overstated. Our evidence is consistent with the view that proxy advisors act primarily as agents or intermediaries which aggregate information that investors find important in determining how to vote in director elections rather than as independent power centers.

proxy advisors, corporate governance, shareholder voting, ISS, institutional investors

Abstract:
Many scholars agree that a robust market for corporate control provides a critical check on managerial opportunism within public corporations. Even prior to a tender offer, the specter of a takeover provides a powerful mechanism for aligning the incentives of managers and shareholders. Conventional wisdom, therefore, views with suspicion any practice that retards the takeover threat looming over managers who perform poorly. One such practice that has garnered particular attention of late is managerial "favoritism" towards influential block shareholders. Favoritism can take any number of forms, ranging from preferential stock subscriptions, to selective information disclosure, to outright cash payments. But regardless of its form, the argument goes, favoritism is potentially harmful to firm value, as it co-opts one of the most plausible monitors of management. Thus, many argue that corporate law should proscribe (or at least discourage) all forms of favoritism towards block shareholders. In this Article, we question whether the case for prohibiting favoritism is as compelling as conventional wisdom suggests. Our arguments are both practical and conceptual. From a practical standpoint, we raise doubts as to whether piecemeal regulation is even capable of curtailing favoritism writ large, rather than simply relocating it to less verifiable (and less efficient) domains. From a conceptual standpoint, we argue that permitting favoritism would likely enhance outsiders incentives to form a large block in order to extract patronage. Predicting this enhanced incentive, a rational manager would have to choose ex ante between (1) acquiescing to a division of her control benefits with outsiders; or (2) imposing significant constraints on her own self-dealing so as to deter the initial formation of any block. Using a game-theoretic model, we demonstrate that under many plausible circumstances, managers would prefer the latter option to the former. Consequently, playing favorites with block shareholders may, ironically, be in all shareholders interests.

Abstract:
We propose introducing more competition into the design and implementation of investor protection in Korea. Our proposal in Korea is to start small. We focus on the possibility of giving firms in Korea greater choice within the existing regulatory regime. As an initial (and obtainable) goal we propose taking an approach similar to that pursued by the Brazilian Stock Exchange (Bovespa) to establish a new voluntary section for firms satisfying global corporate governance standards on the Korean Stock Exchange (KSE). Another option would be to go the seemingly opposite direction and allow some firms to opt out of any domestic regulation and instead to follow the regulatory regime of a foreign country (putting these firms in their own section of the stock market and enhancing the level of enforcement of foreign regulators through the assistance of Korean regulators). Such an approach would allow firms the ability to choose for themselves - within limits - the level of investor protections they desire (through a listing on a foreign exchange). Firms already with large and entrenched controlling shareholders or managers and a dispersed pool of minority investors will probably not take advantage of the ability to opt into a higher level of corporate governance. Instead, our suggested reforms will assist primarily newer companies seeking to raise funds from the public capital markets for the first time. Also, even among more established firms, a small, yet growing, number of firms under professional management may be interested in moving into a more advanced section of the KSE. Indirectly, we predict that feedback effects through the creation of a new investor-protection environment (with accompanying norms and institutions) will affect the rest of Korea's capital markets.

Abstract:
The SEC adopted new rules in 2005 governing registered public offerings in the United States. Few, if any, of the rules make sense if we start from a presumption that investors are rational and are able to discount properly for any information they receive during the public offering process. In this Article, I examine the new rules and assess the implicit behavioral assumptions about investors contained in the rules. I also provide an assessment of the behavioral biases that may affect regulators at the SEC. Regulator biases may lead the SEC to take an ad hoc evaluative process often ending with a reference to investor confidence in justifying new regulations. As a minimal solution, I propose that the SEC bear the burden of specifying its assumptions behind investor behavior explicitly together with how regulations will benefit investors suffering from such biases (as well as how other investors are affected by the regulations). Taking such an approach will lead to a more consistent approach in how the SEC deals with investor biases and reduce unnecessary regulation (as opposed to the SEC's present ad hoc approach as typified in the public offering rules). To the extent other more public choice factors motivate regulation and references to investor confidence are merely a pretext, my proposal would help bring transparency to these other factors by focusing attention on whether the investor confidence rationale in fact is justified.

public offerings, gun-jumping, registration statement, prospectus

Abstract:
This paper examines the factors that affect the decision of U.S. companies to issue securities off-shore compared with inside the United States. Utilizing a data set of 1,444 domestic private placements and offshore offerings from 1993 to 1997, the paper reports that firms that experienced a private securities fraud lawsuit in the past resort to foreign sources of capital more frequently. Similarly, companies in standard industrial classification groups that are targeted more often with private securities fraud litigation are also more likely to issue securities offshore than to conduct domestic private placements. Not all issuers, however, choose to exit the U.S. regime. The paper employs past experience with a SEC investigation as a proxy for the amount of risk that the issuer may pose to investors. Issuers with private securities fraud litigation experience that also encountered a past SEC investigation are more likely to raise capital through a domestic offering, consistent with the hypothesis that some issuers choose to raise capital in the United States when the bonding and signaling value of the U.S. legal liability regime outweighs the costs associated with antifraud liability.

securities regulation, corporate finance, private placements, offshore offerings

Abstract:
We study the role of attorneys as arbitrators in securities arbitration, using a dataset of 422 randomly selected arbitrators and their 6724 arbitration awards from 1992 to 2006. We find that arbitrators who also represent brokerage firms or brokers in other arbitrations award significantly less compensation to investor-claimants than other arbitrators. This relation between representing brokerage firms and arbitration awards remains significant even when we control for political outlook. We find no significant effect for attorney-arbitrators who represent investors or both investors and brokerage firms. We report that ideology also correlates significantly with arbitration awards - arbitrators who donate money to Democratic political candidates award greater compensation than arbitrators who donate to Republican candidates.

Because the arbitration award is the product of the panel, not a single arbitrator, we also study the dynamics of panel interaction. We find that the position of chair is an important factor in assessing the arbitrator's influence (although the financial conflicts of other arbitrators may also affect arbitration awards). Coalitions among the other arbitrators are also important. If the chair and another panelist possess a common attribute, the effect on the arbitration award increases.

Finally, we provide evidence that the 1998 NASD reforms to the arbitration process - which introduced party control over the composition of panels - ameliorated, but did not eliminate, the effect that attorneys who represent brokers have on outcomes. We find no significant effect from the NASD's 2004 reforms.

attorneys, procedure, litigation, arbitration, securities regulation, investors, brokers, brokerage firms

Abstract:
Prior research shows that the PSLRA increased the significance of merit-related factors, such as the presence of an accounting restatement or insider selling, in determining the incidence and outcomes of securities fraud class actions. (Johnson, Nelson, and Pritchard, 2007). This result, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of non-meritorious litigation. Second, the PSLRA may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. This paper tests these alternative hypotheses. We find that pre-PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. We also find, however, that pre-PSLRA non-nuisance claims would be less likely to be filed post-PSLRA period. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking obvious hard evidence indicia of fraud (an accounting restatement or an SEC investigation). This screening effect is stronger if the claims also lacked evidence of abnormal insider trading. By contrast, we find that pre-PSLRA claims with hard evidence or abnormal insider trading would be no less likely to be filed in the post-PSLRA period. We also examine the likelihood of settlement for pre-PSRLA claims if they had been filed in the post-PSLRA period, and find a similar screening effect for case outcomes. We conclude that Congress effectively changed the definition of merit in adopting the PSLRA, discouraging suits that would have produced a non-nuisance outcome prior to the law's enactment.

Stockholder litigation, accounting restatements, earnings forecasts, insider trading

Abstract:
Courts apply a number of doctrines, including the conduct and effects test, in determining how far to extend jurisdiction in securities class actions involving transnational securities fraud. Courts often focus on whether foreign jurisdictions will recognize a U.S. class action judgment and the presence of alternative remedies abroad in determining both jurisdiction and the propriety of a class action. We focus our analysis on the present extraterritorial regime as applied to securities class actions involving foreign issuers and, at least in part, foreign investors transacting abroad (often referred to as "f-cubed" litigation). We argue that the conduct and effects test, as well as court inquiries into whether foreign jurisdictions will recognize U.S. judgments and the presence of alternative remedies abroad, are uncertain in their application and as a result unpredictable. We propose instead that courts adopt a uniform, bright-line exchange-based presumptive rule in determining the applicable class in a Rule 10b-5 class action. Courts should presume jurisdiction over all investors trading in a company's securities within the United States and presume no jurisdiction for Rule 10b-5 suits for foreign investors trading outside the United States. Focusing on U.S. investors in a class action results in an equivalent level of incentive for private plaintiffs' attorneys to file a class action under Rule 10b-5 compared with domestic issuers with a similar level of U.S. investor ownership and trading volume and thus an equal level of private deterrence against the negative effects to the U.S. markets of fraud.

extraterritoriality, conduct and effects test, securities class actions, f-cubed litigation, jurisdiction

Abstract:
Using a dataset of sovereign bond offering documents and underlying bond contracts for ten sovereign issuers from 1985 to 2005, we examine the securities disclosure practices of issuers and attorneys. The sovereign bond market is comprised of sophisticated issuers with highly paid attorney law firms. If anyone complies fully with federal securities disclosure requirements, we expect sovereign issuers and their attorneys to do so. On the other hand, network effects that determine what information issuers choose to disclose as well as the high cost of determining what information is required for disclosure may lead issuers to fail to meet their disclosure duties. We provide evidence that sovereign issuers in fact may not fully meet their disclosure duties in one context. Where shocks occur to how courts interpret language in existing boilerplate bond contracts, leading to material and idiosyncratic changes in the underlying allocation of substantive rights for the different issuers, we find zero disclosure to investors. Conversely, we find that where there is less of a legal requirement for disclosure, such as when the entire market shifts publicly to using explicit collective action clauses in the bond contracts, there is a high level of disclosure. Over time, long after such terms have become the market standard and thus part of the total mix of information, this heightened level of disclosure continues. In sum, we find heightened disclosure in the place where the legal obligations (and investor need) for disclosure are less significant and no disclosure in the place where legal obligations (and investor need) for disclosure are more significant.

Abstract:
Scholarship on the subject of innovation in financial products is sparse. And research on innovation by lawyers writing financial contracts, particularly the boilerplate contracts that dominate many markets, is sparser still. The central theoretical debate in the literature on boilerplate contracts is over whether contract language responds immediately and effectively to external changes or whether nonlinearities in the form of network effects prevent these efficient transitions. Depending on the view one takes, there is a different role for official sector involvement. This debate over the responsiveness of contract language has taken center stage in recent discussions in the sovereign debt area. Recent occurrences in the world of sovereign debt contracts provide a ripe data set for the examination of the contract responsiveness question. Prior to 2000, all the N.Y. issued sovereign bond contracts were viewed as functionally identical in terms of being restructuring proof. Then, in 2000, Ecuador used an ambiguity in the contract language to argue that its contracts are indeed susceptible to restructuring. After Ecuador's successful restructuring, contracts that earlier looked to be homogenous, now differed in significant ways. Small differences in contract language that were previously viewed as unimportant, after Ecuador's restructuring, impacted the ease with which the Ecuador style restructuring technique can be used. So, all of a sudden, Argentina might find itself with contracts that are hard to restructure and Belize might have contracts that are easy to restructure. In February 2003, following the lead of Mexico, the contracts in this market begin to move to a new (and, once again, relatively homogenous) restructuring friendly standard. Our article examines what happened in between 1996 and 2004, with respect to the heterogeneity that the Ecuador shock in 2000 created. Did the sovereign issuers converge to a single new intermediate standard? Or did they move back to the old restructuring proof standard? Or did they do nothing? The answers to these questions shed light on the above mentioned debate over the ability of markets for boilerplate contracts to effectively respond to changes in their environment.

boilerplate terms, contract theory, sovereign debt

Abstract:
This article tests the hypothesis that U.S. issuers may use offshore securities offerings to sell overvalued securities indirectly into the United States securities markets. The article?s data sample consists of 701 offshore offerings conducted under Regulation S of the Securities Act from 1993 to 1997. Evidence from an event study performed on the offerings indicate that the U.S. secondary market reacts on average with a statistically significant negative return to a Regulation S offering. Foreign investors that resell into the United States ahead of the secondary market reaction, therefore, may act as conduits for issuers attempting to sell overvalued securities to U.S. purchasers. On the other hand, foreign investors that resell into the United States only after the secondary market reaction receive the same negative return as U.S. investors. To test whether U.S. issuers are able to use Regulation S to sell overvalued securities into the U.S. market through foreign investors acting as conduits, the article focuses on reforms the SEC undertook in 1996 that greatly decreased the ability of foreign investors to resell into the United States prior to the U.S. secondary market reaction to news of the offering. The article argues that managers, to the extent they seek to benefit pre-offering shareholders, will negotiate to give foreign investors as small an offering discount as possible. Thus, where foreign investors are acting as conduits for the U.S. issuer, they will receive only a fraction of the overvaluation amount in the form of an offering discount from the U.S. secondary market price at the time of the offering. In contrast, where foreign investors are unable to resell prior to the secondary market negative reaction to news of the offering, foreign investors will demand a greater discount in compensation for the entire expected market reaction, leading to a larger offering discount. Prior to the 1996 reforms, therefore, foreign investors should have received a reduced offering discount, all other things being equal, to the extent they were acting as conduits for U.S. issuers selling overvalued securities into the United States. Controlling for other factors that may affect the offering discount, the article furnishes evidence on the offering discount consistent with the hypothesis that foreign investors were in fact unable to engage in resales ahead of the U.S. secondary market reaction to a Regulation S offering even prior to the 1996 reforms.

Abstract:
Examining a sample of 701 offshore securities offerings under Regulation S of the Securities Act from 1993 to 1997, the article tests whether foreign investors expect to resell Regulation S securities into the United States ahead of the U.S. secondary market reaction to news of the offering. The article provides evidence from an event study that the secondary market reaction to a Regulation S offering is negative and statistically significant. Foreign investors able to resell into the United States ahead of the secondary market reaction, therefore, may act as conduits for issuers attempting to sell overvalued securities into the United States to the detriment of U.S. investors. To the extent managers seek to benefit pre-offering shareholders, they will negotiate to give foreign investors as small an offering discount as possible. In contrast, where foreign investors are unable to resell prior to the secondary market negative reaction to news of the offering, foreign investors will demand a greater discount in compensation for the entire expected market reaction. Without such a discount, Regulation S offerings result in a transfer in value from foreign investors to U.S. investors; rational foreign investors will choose not to participate in such offerings. Controlling for other factors that may affect the offering discount, the article furnishes evidence on the offering discount consistent with the hypothesis that foreign investors were in fact unable to engage in resales ahead of the U.S. secondary market reaction to a Regulation S offering.

Abstract:
Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at S&P 1500 companies, we examine how advisors make their recommendations. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance (PGI), Glass Lewis (GL), and Egan Jones (EJ), ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation.

It is not clear that these differences, or the bases for the recommendations, are transparent to the institutions that purchase proxy advisory services. If the differences are not apparent, investors may not accurately perceive the information content associated with a withhold recommendation, and investors may rely on those recommendations based on an erroneous understanding of the basis for that recommendation. To the extent that proxy advisors aggregate information for the purpose of facilitating an informed shareholder vote, these limitations may impair the effectiveness of the shareholder franchise. If the differences are apparent, our results show that investors, though selecting a proxy advisor, can indirectly choose the bases for their vote on directors. To that extent, it is likely that proxy advisory firms will retain more investor clients if their recommendations are based on factors that their clients consider relevant.

corporations, securities law, shareholder voting, proxy recommendations, proxy advisory services, election of directors, regression analysis

Abstract:
This article provides the first empirical analysis of punitive damages in securities arbitrations. Using a data set of over 6,800 securities arbitration awards, we find that claimants prevailed in 48.9 percent of arbitrations, and that 9.1% of those claimant victories included a punitive damages award. The existence of a punitive damages award was associated with claims that suggested egregious misbehavior and with claims that provided higher compensatory awards. The pattern of punitive awards is more consistent with a traditional view of punitive damages that incorporates a retributive component than with a law and economics emphasis on efficient deterrence. We also test whether securities arbitration results in different punitive damages compared with litigation before juries and judges. The relation between punitive and compensatory awards did not differ substantially between the securities arbitrators’ data and data on juries available from periodic Civil Justice Surveys by the Bureau of Justice Statistics. The rate of punitive awards by arbitrators was higher than the overall rates for juries and judges and slightly lower than the rate of punitive awards by juries in cases lacking bodily injury.

Securities, Arbitration, Punitive Damages

Abstract:
In a recent and provocative essay, Lucian Bebchuk and Allen Ferrell put forward a proposal for takeover-related corporate law that they contend 'dominates' the present system of state competition. They advocate in favor of a new federal takeover regime combined with a mandatory choice rule through which shareholders may force a corporation to opt into the new federal regime. We applaud Bebchuk and Ferrell's proposal in so far it expands the amount of choice available to corporations and thereby increases competition within the market for takeover-related legal rules. While some choice makes the present system better, we argue that greater choice, perhaps even in the form of privately-supplied corporate law rules, can further improve overall shareholder welfare. We are also skeptical that simply adding one additional option, albeit at the federal level, will generate significantly more choice for corporations and shareholders. Finally, we disagree with the mandatory choice rule for shareholders on the grounds that shareholders as a group may not always benefit from such a regime.

corporate governance, regulatory competition, corporate law, takeovers

Abstract:
Several studies report that judges on panels together with at least one judge of a different political party (a "mixed panel") tend to moderate their votes, particularly on politically charged subject matter cases. We examine whether this observed moderation in voting is the product of bargaining among mixed panel judges, where authoring judges, who might otherwise face a dissenting vote (or find themselves in dissent), trade their votes for the ability to craft a unanimous majority opinion closer to their own policy preferences and thereby affect the opinion's precedential value. Using judicial citation patterns within individual opinions as a proxy for how judges reason, we report that authoring judges on mixed panels are more likely to employ partisan reasoning for opinions relating to salient subject matter areas. Partisan reasoning in top salient areas is higher where the authoring judges have more bargaining leverage over opposite party judges on the same panel. Finally, partisanship in top salient areas is greater for authoring judges who have greater skill at writing influential opinions. The overall pattern is consistent with judges engaging in covering: moderating their voting when associated with an opposite party judge on the same panel, a highly visible activity, but adjusting the judicial reasoning in the opinion to tilt the decision back toward the authoring judge's own preferred ideological position, a less visible activity done under the cover of the more visible, moderated vote.

judges, courts

Abstract:
Using a dataset of securities class actions filed from 2003 to 2005, this paper assesses the effect of the lead plaintiff presumption enacted as part of the Private Securities Litigation Reform Act of 1995 (PSLRA) on agency costs between lead counsel for the class and class members. Examining the pre-trial motions for lead plaintiff for each class action, the paper reports evidence that plaintiffs' attorneys retain significant control over the selection of lead plaintiff, cutting side deals to determine the selection of lead plaintiff and thereby lead counsel. Using proxies for where plaintiffs' attorneys have relatively greater influence over the selected lead plaintiff, the paper reports that plaintiffs' attorneys with greater power are able to negotiate higher attorneys' fees as a percentage of the recovery and work fewer hours.

Securities litigation, lead plaintiffs, class actions

Abstract:
Using a sample of securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). This decision clarified the law with respect to one of the most hotly contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a very lenient Seventh Circuit decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate in circuits previously applying a higher preponderance standard, including the Ninth Circuit, which previously had the most stringent standard for pleading scienter. Perhaps because of the greater difficulty in obtaining dismissal, Tellabs correlates with an increase in nuisance settlements in the Ninth Circuit.

Private Securities Litigation Reform Act of 1995 (PSLRA), Tellabs, Inc., Supreme Court

Abstract:
The public debate over the need to raise judicial salaries has been one-sided. Sentiment appears to be that judges are underpaid. But neither theory nor evidence provides much support for this view. The primary argument being made in favor of a pay increase is that it will raise the quality of judging. Theory suggests that increasing judicial salaries will improve judicial performance only if judges can be sanctioned for performing inadequately or if the appointments process reliably screens out low-ability candidates. However, federal judges and many state judges cannot be sanctioned, and the reliability of screening processes is open to question. An empirical study of the high court judges of the fifty states provides little evidence that raising salaries would improve judicial performance.

judges, judicial salaries

Abstract:
Using a sample of securities fraud class actions filed between 2003 and 2007, we study the impact of a widely-followed Supreme Court decision from that period, Tellabs, Inc. v. Makor Issues & Rights, Ltd. This decision clarified the law with respect to one of the most contested issues in securities litigation: pleading scienter. The Tellabs decision reversed a lenient Seventh Circuit decision with respect to pleading scienter, but replaced it with a standard that is nonetheless relatively generous to plaintiffs. Looking at opinions resolving motions to dismiss decided before and after that decision, we find that Tellabs correlates with a significantly lower dismissal rate in circuits previously applying a higher preponderance standard in determining scienter, including the Ninth Circuit. We also find that the number of dismissal decisions before defendants obtain a final motion to dismiss increased after Tellabs in the Ninth Circuit. Perhaps because of the greater difficulty and time involved in obtaining dismissal, Tellabs correlates with an increase in nuisance settlements in the Ninth Circuit. In contrast, Tellabs also correlates with a decrease in nuisance settlements in circuits that previously applied the more lenient Seventh Circuit standard.

Abstract:
Regulation S provides U.S. issuers with an exemption from the registration requirements of the Securities Act of 1933 to the extent that securities are offered and sold solely outside the United States. Through resales back into the United States, however, U.S. investors may become exposed to unregistered securities initially distributed abroad through Regulation S. This Article identifies two distinct risks from an offshore securities offering. First, issuers may conduct an offering under Regulation S as a means to sell securities indirectly into the United States through resales in situations where the U.S. secondary market overvalues the issuer's securities. Second, even where the U.S. secondary market does not overvalue an issuer's securities, the managers of the issuer may utilize Regulation S to engage in self-dealing and other opportunistic behavior for their own private benefit at the expense of U.S. investors. Employing a dataset of 701 offerings conducted pursuant to Regulation S from 1993 to 1997, this Article presents evidence that insider self-dealing may result in a greater offering discount for certain overseas offerings. Given the specific risks facing U.S. investors, the Article then argues that the SEC's 1998 reforms to Regulation S represent only an untailored response. Instead, the Article recommends specific reforms that both reduce the risk facing U.S. investors and lessen the regulatory burden on offshore securities offerings that pose little risk of investor abuse.

Abstract:
Market Lessons For Gatekeepers grows out of my earlier work on how intermediaries may work to alleviate problems of fraud in markets, as discussed in my articles on company registration (64 U. Chi. L. Rev. 567 (1997)) and securities fraud class actions (144 U. Penn. L. Rev. 903 (1996)). Where certifiers act as intermediaries between producers and purchasers in a market, contract alone, in many situations, should provide certifiers adequate incentives to signal product quality to purchasers and invest in their ability to screen accurately for different product qualities. Markets, however, may fail. In response, commentators have argued for legal liability on market intermediaries to force them into a certification role.

My paper takes an intermediate course. It first argues that lawmakers may have more success bolstering market incentives for intermediaries to act as certifiers where market defects exist rather than directly mandating third party gatekeeping.

The paper provides a simple economic model of the interaction of purchasers, producers, and third party certifiers -- taking into account the decision of certifiers to invest in screening accuracy as well as the decision of producers to invest in product quality -- to identify potential market defects. Where purchasers are uninformed on the quality levels of different certifiers in the market, lawmakers should provide information disclosure on certifiers' past history to allow the market to punish -- through lower prices -- certifiers that do not perform their screening function well. Similarly, where certifiers may cheat on their certification duties, I propose self-tailored liability, under which certifiers themselves would submit their desired level of screening procedures and accuracy to the government. The paper argues that certifiers should be allowed to bind (or not bind) themselves to these procedures for any fixed period of time and be able to choose to allow the government to publicize the procedures as well as impose civil or even criminal penalties for breach (and use public enforcement to obtain such penalties). Where all relevant market participants are linked through contract, self tailored liability provides certifiers a means of bonding themselves to a particular level of screening accuracy credibly.

Abstract:
This paper argues that regulators should embrace international regulatory competition. Specifically, it advocates the adoption of a regime termed "portable reciprocity." Under such a regime, a firm would be able to issue its securities under the laws of any country and, regardless of what country is chosen, the securities then could be traded in every country. Thus, for example, an American company could choose to have Japanese law apply to its transactions on the New York Stock Exchange. As long as investors are informed of the regime that applies to the securities, they will be able to discount the price accordingly. In addition to increasing capital mobility, adopting such a regime would lead to a variety of securities regimes for firms to choose from and, in making their choice, firms would signal valuable information about their issue, allowing more accurate pricing by the market.

Abstract:
This paper tests three related hypotheses on factors that drive voter outcome in institution-sponsored proxy issue contests dealing with corporate governance proposals. First, the effect of signals on the potential value of a proposal is tested. In particular, shareholders use the text of the proposal, the sponsor identity, and measures of the proxy company's corporate governance structure to determine the value of the proposal. Second, the significance of institutional investor vote holdings is tested. The paper finds that potentially wealth-enhancing proposals receive a higher for-vote percentage where institutional investors willing to undertake the expense of investigating a proposal and communicating with other shareholders are present. Proposals, conversely, do poorly to the extent management, directors, and insiders hold a large percentage of the voting shares. Third, the paper tests one particular factor that may affect voting outcomes: The presence of institutional investors with some relationship ties with either the proxy company or the proxy company's board of directors. The paper finds that related institutional investors act to reduce the expected for-vote percentage. Evidence also exists that companies relatively more vulnerable to a proxy issue contest tend to establish a greater amount of ties with institutional investors.

Abstract:
This article puts forth a framework for analysis of international regulatory competition and cooperative efforts in the capital market context. Over the past decade, the SEC has pushed repeatedly for international accords on accounting standards and insider-trading. This paper critiques such cooperative efforts, arguing that international agreements are both difficult and slow to obtain. Moreover, such agreements are vulnerable to political rent-seeking among other faults. Rather, the paper argues for more regulatory competition among countries. To analyze the effects of regulatory competition, the paper uses its framework to examine how countries interact with one another in fashioning their domestic securities regulatory regimes. Mobility is particularly important where countries, investors, and companies are heterogeneous. The paper concludes that greater mobility of both heterogeneous investors and companies results in a "race-to-the-top" separating equilibrium among country-specific regimes leading to better informed investors and greater social welfare as a result.

Abstract:
This article argues for shift in the antifraud rules within the securities laws to a more company-based approach. The article contends also that most of the recent SEC recommendations to shift to a company-based registration and disclosure system are either unrelated to achieving a company registration system or move the current regime only marginally toward such a system in substance. The article also argues that, in fact, the only area where a company-based approach would add value is in the application of the antifraud rules. Antifraud rules currently apply based on the transaction-involved; public offerings, for example, encounter much more stringent antifraud protection than private placements. Company-based antifraud rules - that applied the same level of antifraud protection against a company regardless of the transaction involved - not only would reduce frivolous litigation and conserve judicial resources, but a company-based antifraud regime would also reduce the incentive for companies to make use of the Securities Act's many transaction exemptions. As a result, company-based antifraud rules also provide many of the reduced complexity benefits as the Advisory Committee's more formal recommendation.