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Abstract:
This article investigates whether the passage and the implementation of the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of American public targets to be bought by private acquirers rather than public ones with the corresponding change for foreign public targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, SOX appears to have had little effect on the going-private propensities of larger firms. (JEL G30, G34, G38, K22)

Abstract:
This article investigates whether the passage and the implementation of the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of public American targets to be bought by private acquirers rather than public ones with the corresponding change for foreign targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, SOX appears to have had little effect on the going-private propensities of larger firms.

Sarbanes-Oxley, Mergers, Going Private, Law and Finance, Securities Markets

Abstract:
It is generally accepted that good corporate governance, executive compensation and the threat of litigation are all important mechanisms for incentivizing managers of public corporations. While there are significant and robust literatures analyzing each of these policy instruments in isolation, their mutual relationship and interaction has received somewhat less attention. Such neglect is mildly surprising in light of a strong intuition that the three devices are structurally related to one another (either as complements or substitutes). In this paper, we construct an agency cost model of the firm in which corporate governance protections, executive compensation levels, and litigation incentives are all endogenously determined. We then test the predictions of the model using a firm-level data set including governance, executive compensation, and securities litigation variables. Consistent with our predictions, we find governance and compensation to be structural substitutes with one another, so that more protective governance structures tend to coincide with lower-powered incentives in executive contracts. Also consistent with our predictions, we find executive compensation and shareholder litigation appear to be structural complements to one another, so that higher powered incentives tend to catalyze more frequent litigation. In fact, we estimate that each 1% increase in the incentive component of a CEO's contract predicts 0.3% increase in the likelihood of a securities class action and a $3.4 million dollar increase in expected settlement costs. In addition, the complementarity of executive compensation and litigation allows us to formulate new ways to test for the effects of legal reform, such as the Private Securities Litigation Reform Act of 1995. The results of our preliminary tests appear inconsistent with the claims of the statute's proponents that the PSLRA systematically discouraged non-meritorious litigation without burdening meritorious claims, particularly for firms with relatively low volatility.

Abstract:
This article presents an overview of the regulatory regime created by the Sarbanes-Oxley Act of 2002 (SOX) and its implications for small firms. We review the available evidence in three distinct domains: compliance costs, stock price reactions, and firms' decisions to exit regulated securities markets.

Abstract:
This article analyzes how legal presumptions can mediate between costly litigation and ex ante incentives. We augment a moral hazard model with a redistributional litigation game in which a presumption parameterizes how a court 'weighs' evidence offered by the opposing sides. Strong prodefendant presumptions foreclose lawsuits altogether, but also engender shirking. Strong proplaintiff presumptions have the opposite effects. Moderate presumptions give rise to equilibria in which both shirking and suit occur probabilisitically. The socially optimal presumption trades off agency costs against litigation costs, and could be either strong or moderate, depending on the social importance of effort, the costs of filing suit, and the comparative advantage that diligent agents have over their shirking counterparts in mounting a defense. We posit three applications of our model: the litigation rate effects of the 1995 Private Securities Litigation Reform Act, the business judgment rule in corporations law, and fiduciary duties in financially distressed firms.

Abstract:
This paper develops a theoretical account of presumptions, focusing on their capacity to mediate between costly litigation and ex ante incentives. We augment a standard moral hazard model with a redistributional litigation game in which a legal presumption parameterizes how a court "weighs" evidence offered by the opposing sides. Strong pro-defendant presumptions can foreclose lawsuits altogether, but also lead to shirking. Strong pro-plaintiff presumptions have the opposite effects. Moderate presumptions give rise to equilibria in which productive effort and suit occur probabilistically. The socially-optimal presumption trades off litigation costs against agency costs, and could be either strong or moderate, depending on the social importance of effort, the costs of filing suit, and the comparative advantage that diligent agents have over their shirking counterparts in mounting a defense. We posit three applications of the model: the business judgment rule in corporations law, fiduciary duties in financially-distressed firms, and the doctrine of res ipsa loquitur in accident law.

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:
Behavioral Law and Economics has become an increasingly prominent field within legal scholarship, and most recently within the corporate area. A behavioral bias of particular relevance in corporate contexts is the differential between individuals' willingness to pay to obtain a legal entitlement and her willingness to accept to part with one, known as the "endowment effect." Should endowment effects pervade relationships within business organizations, it would significantly complicate much of the common wisdom within corporate law, such as the presumed optimality of ex ante voluntary agreements. Existing experimental research, however, does not adequately address whether and to what extent the endowment effect operates within corporate environments.

This Article presents an experimental test for endowment effects within a principal-agent relationship that typifies many firms. We find that subjects situated in an agency relationship do not exhibit a significant endowment effect. Using an additional experimental test, we argue that this dampening phenomenon is likely due to the fact that the agency context induces subjects to view property rights principally for their exchange value, thereby causing them to "disendow" their initial legal entitlements.

Abstract:
This paper presents a simple framework for analyzing a hierarchical system of judicial auditing. We concentrate on (what we perceive to be) the two principal reasons that courts and/or legislatures tend to scrutinize the decisions of lower-echelon actors: imprecision and ideological bias. In comparing these two reasons, we illustrate how each may yield systematically distinct auditing and reversal behaviors. While auditing for imprecision tends to bring about even-handed review/reversal, auditing for political bias tends to be significantly more one-sided. Examples of these tendencies can be found in a number of legal applications, including administrative law, constitutional law, and interpretive theories of jurisprudence. Moreover, our analysis suggests that political "diversity" among initial decision-makers (in addition to its other laudable goals) may be an important and generally underappreciated means for economizing on judicial administrative costs and easing the workload burdens on upper-echelon actors.

Abstract:
A number of corporate law scholars have recently proposed granting shareholders an enhanced right to oversee the use of takeover defenses. While these "shareholder choice" proposals vary somewhat in their content, they generally agree that shareholder oversight is justified if and only if shareholders hold a bona fide advantage over managers in evaluating and responding to hostile bids. This article challenges that basic premise, arguing that even if shareholders enjoy a comparative advantage over management in reacting to hostile bids, it does not follow that a shareholder choice regime is value enhancing, because it would give managers an incentive to search for ways to thwart prospective oversight, perhaps even through value-destroying managerial choices that render the firm an unattractive takeover target. We demonstrate (a) that a number of such thwarting defenses exist, (b) that managerial threats to use them are credible, and (c) that their utilization would be difficult or impossible for courts to regulate. We also find empirical support for these hypotheses. Consequently, an immutable, one-size-fits-all shareholder choice rule is likely to be an imprudent policy choice for courts.

Abstract:
A number of corporate law scholars have recently proposed granting shareholders an enhanced right to oversee the use of takeover defenses. While these "shareholder choice" proposals vary somewhat in their content, they generally agree that shareholder oversight is justified if and only if shareholders hold a bona fide advantage over managers in evaluating and responding to hostile bids. This article challenges that basic premise, arguing that even if shareholders enjoy a comparative advantage over management in reacting to hostile bids, it does not follow that a shareholder choice regime is value enhancing, because it would give managers an incentive to search for ways to thwart prospective oversight, perhaps even through value-destroying managerial choices that render the firm an unattractive takeover target. We demonstrate (a) that a number of such thwarting defenses exist, (b) that managerial threats to use them are credible, and (c) that their utilization would be difficult or impossible for courts to regulate. We also find empirical support for these hypotheses. Consequently, an immutable, one-size-fits-all shareholder choice rule is likely to be an imprudent policy choice for courts.

Abstract:
Law in modern market societies serves both democratic and economic functions. In its economic function, law is a service, a means of enhancing the value of transactions and organizations. Yet modern market economies continue to rely on the state, rather than the market, to provide this service. This article investigates whether private provision of law may be superior to public provision. We look in particular at corporate law, where there is a substantial literature exploring the efficiency implications of "regulatory competition" and compare this competition with market competition between private providers. Drawing from the well-known framework of spatial models of imperfect competition, we argue that while neither public nor private competition may lead to the optimal corporate law regimes, there are at least some reasons to believe that private provision may be preferable. Specifically, we present a model that demonstrates when regulatory competition is likely to produce widespread emulation and little innovation. Private competition, in contrast, is more likely to lead to greater "product" differentiation, which benefits heterogeneous consumers of corporate law services in the short term. Moreover, such differentiation also has long-term benefits, as providers are able to "learn" more about business organizations' demand-side characteristics and can thus tailor their services to business needs more effectively.

Abstract:
Law in modern market societies serves both democratic and economic functions. In its economic function, law is a service, a means of enhancing the value of transactions and organizations. Yet modern market economies continue to rely on the state, rather than the market, to provide this service. This paper investigates whether private provision of law may be superior to public provision. We look in particular at corporate law, where there is a substantial literature exploring the efficiency implications of "regulatory competition" and compare this competition with market competition between private providers. Drawing from the well-known framework of spatial models of imperfect competition, we argue that while neither public nor private competition may lead to the optimal corporate law regimes, there are at least some reasons to believe that private provision may be preferable. Specifically, we present a model that demonstrates in which regulatory competition is likely to produce widespread emulation, and little innovation. Private competition, in contrast, is more likely to lead to greater "product" differentiation, which benefits heterogeneous consumers of corporate law services in the short term. Moreover, such differentiation also has long-term benefits, as providers are able to "learn" more about business organizations' demand-side characteristics, and thus tailor their services to business needs more effectively.

Abstract:
Law in modern market societies serves both democratic and economic functions. In its economic function, law is a service, a means of enhancing the value of transactions and organizations. Yet modern market economies continue to rely on the state, rather than the market, to provide this service. This paper investigates whether private provision of law may be superior to public provision. We look in particular at corporate law, where there is a substantial literature exploring the efficiency implications of "regulatory competition" and compare this competition with market competition between private providers. Drawing from the well-known framework of spatial models of imperfect competition, we argue that while neither public nor private competition may lead to the optimal corporate law regimes, there are at least some reasons to believe that private provision may be preferable. Specifically, we present a model that demonstrates in which regulatory competition is likely to produce widespread emulation, and little innovation. Private competition, in contrast, is more likely to lead to greater "product" differentiation, which benefits heterogeneous consumers of corporate law services in the short term. Moreover, such differentiation also has long-term benefits, as providers are able to "learn" more about business organizations' demand-side characteristics, and thus tailor their services to business needs more effectively.

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:
This chapter provides a framework for assessing the contributions of experiments in Law and Economics. We identify criteria for determining the validity of an experiment and find that these criteria depend upon both the purpose of the experiment and the theory of behavior implicated by the experiment. While all experiments must satisfy the standard experimental desiderata of control, falsifiability of theory, internal consistency, external consistency and replicability, the question of whether an experiment also must be contextually attentive - in the sense of matching the real world choice being studied - depends on the underlying theory of decision-making being tested or implicated by the experiment.

We find that the importance of contextual attentiveness depends on whether the experiment tests or implicates a "nitary-process" theory of decision-making or a multiple-process theory. Unitary-process theories posit that people employ a single operational approach to make decisions across a broad (or universal) domain of activity. Rational Choice Theory is a unitary-process theory. Because unitary-process theories posit that people employ the same decision-making program in all contexts, experimenters can falsify a unitary-process theory using an experimental choice which bears little resemblance to any real-world choice. Faith in a unitary process account also permits legal policymakers to draw broad normative implications from experiments involving quite artificial choices. By contrast, multiple-process theories hold that people employ multiple decision-making programs when they make choices. Moreover, the relative impact of these programs can depend on the context of the decision. This posited interaction between context and decision-making implies that experimentalists seeking to examine legal decision-making must be sensitive to contextual factors likely to affect deliberative and non-conscious programs in the real world. In addition, policymakers must proceed cautiously before using experimental evidence to draw normative policy conclusions because experimental results may not be robust across contexts.

Abstract:
This paper employs an optimal contracting framework to study the question of how courts should adjudicate disputes over valuable trade secrets (such as customer lists). We focus principally on contexts where trade secrets are formed endogenously, through specific, non-contractible investments that could potentially come from either employers or employees (or both). Within such contexts, we argue, an "optimal" trade secret law diverges in many important respects from existing doctrine. In particular, an optimal doctrine would (1) expressly consider the parties' relative skills at making value enhancing investments rather than the mere existence of a valuable informational asset; (2) tend to favor "weak" entitlements (such as fractional property rights and/or liability rules) rather than undivided property rules; and (3) frequently have a dynamic structure that progressively favors employees during the lifetime of the disputed asset. Moreover, we argue, the considerations implicit in such a doctrine are relatively simple and need not impose prohibitive administrative costs on either the parties or on courts.

Abstract:
This article employs a "team-production" account of the firm to investigate the relationship between organizational structure and fiduciary duties. Although the fiduciaries or "closely-held" firms (such as partnerships and close corporations) have historically been held to stricter standards of comportment than have their counterparts in widely-held firms (such as public corporations), a team-production analysis raises some troubling questions about this traditional distinction. In particular, I shall argue that within closely-held firms, enhanced fiduciary duties can create inefficient monitoring incentives among team members -- a problem that is largely avoided within widely-held organizational structures. Moreover, these strategic costs imply that weaker rather than stricter fiduciary obligations are more appropriate within at least certain closely-held firms. This observation holds a number of practical implications, both for statutory law and for doctrinal development.

Abstract:
This article employs a "team-production" account of the firm to investigate the relationship between organizational structure and fiduciary duties. Although the fiduciaries of "closely-held" firms (such as partnerships and close corporations) have historically been held to stricter standards of comportment than have their counterparts in widely-held firms (such as public corporations), a team-production analysis raises some troubling questions about this traditional distinction. In particular, I argue that within closely-held firms, enhanced fiduciary duties can induce inefficient monitoring behavior among team members -- a problem that can largely be avoided within widely-held organizational structures. Moreover, these strategic costs may be sufficiently strong to imply that weak rather than strict fiduciary obligations are more appropriate within at least certain closely-held firms. This observation holds a number of practical implications for both statutory and doctrinal business law.

Abstract:
The law and economics literature on suit and settlement has tended to focus on two alternative conceptual models. On the one hand, the "optimism" model of pre-trial negotiation attempts to explain settlement failure as an artifact of unfounded optimism by one or both parties. The idea that bargaining agents can adopt such non-rational biases receives support from experimental evidence. On the other hand, the "private information" model of pre-trial bargaining portrays settlement failures as an artifact of strategic information rent extraction. It finds support in some experimental evidence as well. This paper presents (for the first time) a mechanism-design approach for studying suit and settlement in the presence of both optimism and two-sided private information. We use a parameterization of our framework to generate testable comparative statics that distinguish between the two competing models, and then test these predictions using data from civil jury trials before and after the limitation on non-economic medical malpractice damages introduced by California legislation during the 1970s. Our (preliminary) results appear to be most consistent with the optimism model rather than the information model.

Abstract:
A number of legal scholars have recently posited a "group herding" account of legal institutions and precedent. Their arguments draw heavily from the emergent literature on information cascades -- a set of theories that attempts to explain certain pathologies of group behavior. Explicitly, cascade theory demonstrates how rational individuals, when making ostensibly individual decisions, may ignore their own private inclinations, choosing to emulate others instead. When aggregated, such behavior can lead to significant errors of judgment on behalf of the entire group, particularly if exacerbated by other cognitive effects. If legal precedent is a species of cascade, then the consequences for legal theory are profound. Indeed, not only would such a theory call into question the wisdom of celebrated "watershed" cases from the last century, but it would also severely compromise virtually any positive account of law that conceives of precedent as a central mechanism for judicial learning.

This article critically analyzes the viability of a cascade theory of precedent, asking whether such phenomena are (a) possible, (b) plausible, and (c) empirically verifiable. Although I find that a precedential cascade is certainly possible as a matter of theory, the necessary conditions for its occurrence are either extremely rare or easily avoidable. Moreover, even the more modest task of diagnosing when precedential cascades occur may be unavailing: for the outward symptoms of a cascade are essentially indistinguishable from those of more plausible (and less troubling) behavioral hypotheses.

Abstract:
Professional service providers who wish to organize as multi-person firms have historically been limited to the partnership form. Such organizational forms trade the benefit of risk diversification off against the costs of diluted incentives and liability exposure in choosing their optimal size. More recently, states have permitted limited-liability entities that combine the simplicity, flexibility and tax advantages of a partnership with the liability shield of a corporation. We develop a game theoretic model of professional-firm organization that integrates the provision of incentives in a multi-person firm with the choice of business form. We then test the model's predictions with a new longitudinal data set on American law firms. Consistent with our predictions, initial firm size is a strong positive predictor of subsequent conversion to a new limited-liability form. Also consistent with our theory, growth rate of small converters substantially exceeds that of larger adopters; large converters grow more robustly than non-adopters, however. These findings suggest that while the promulgation of new organizational forms has stimulated growth in the legal services industry, the principal beneficiaries of this growth have been large, well established firms rather than small, entrepreneurial, boutique practices.

Abstract:
This paper explores the interdependence between market structure and an important class of extra-rational cognitive biases. Starting with a familiar bilateral monopoly framework, we characterize the endogenous emergence of preference distortions during bargaining which cause negotiators to perceive their private valuations differently than they would outside the adversarial negotiation context. Using this model, we then demonstrate how a number of external interventions in the structure and/or organization of market interactions (occurring before trade, after trade, or during negotiations themselves) can profoundly alter the nature of these dispositions. Our results demonstrate that many such interventions frequently (though not always) share qualitatively similar characteristics to market interventions that are often proposed for overcoming more conventional forms of market failure. Nevertheless, our analysis underscores the importance of understanding the precise link between cognitive failures and market structure prior to the implementation any particular proposed reform.

Market Design, Endogenous Preferences

Abstract:
This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an optimal liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.

Abstract:
This paper analyzes the normative role for civil liability in aligning terrorism precaution incentives, when the perpetrators of terrorism are unreachable by courts or regulators. We consider the strategic interaction among targets, subsidiary victims, and terrorists within a sequential, game-theoretic model. The model reveals that, while an "optimal" liability regime indeed exists, its features appear at odds with conventional legal templates. For example, it frequently prescribes damages payments from seemingly unlikely defendants, directing them to seemingly unlikely plaintiffs. The challenge of introducing such a regime using existing tort law doctrines, therefore, is likely to be prohibitive. Instead, we argue, efficient precaution incentives may be best provided by alternative policy mechanisms, such as a mutual public insurance pool for potential targets of terrorism, coupled with direct compensation to victims of terrorist attacks.

Abstract:
This note extends the Bernardo, Talley & Welch (1999) model of legal presumptions to study situations where litigation efforts are spent sequentially rather than simultaneously. The equilibria of the litigation stage are presented as functions of the underlying presumption. The equilibria and comparative statics are shown to be qualitatively similar to those of the simultaneous version. However, sequentiality allows the principal to pre commit to a litigation strategy, and thus possibly preempt any litigation effort whatsoever by the agent.

Abstract:
This article uses the recent Delaware Chancery Court case of Hexion v. Huntsman as a template for motivating thoughts about how contract law should interpret contractual conditions in general - and "material adverse event" provisions in particular - within environments of extreme ambiguity (as opposed to risk). Although ambiguity and aversion thereto bear some facial similarities to risk and risk aversion, an optimal contractual allocation of uncertainty does not always track the optimal allocation of risk. After establishing these intuitions as a conceptual proposition, I endeavor to test them empirically, using a unique data set of 528 actual material adverse event provisions in corporate acquisitions transactions between 2007 and 2008. My results are consistent with my conceptual account distinguishing risk from uncertainty. Although intuitive, the idea that material adverse event provisions can be a means for allocating uncertainty contrasts with the received wisdom in corporate law scholarship about the nature and purpose of such terms. Using MAC/MAE provisions as an animating narrative, this article concludes that the behavioral economics concept of ambiguity aversion is a helpful device for understanding contractual conditions and excuses.

Delaware, Journal, Corporate, Law, DJCL, Chancery, Hexion, Huntsman, ambiguity, aversion, risk, contractual, MAC, MAE

Abstract:
Behavioral Law and Economics (BLE) has become an immensely popular field among legal scholars. This trend is hardly surprising, given the interdisciplinary nature of law and the fact that BLE's chief aim is to unify two well-established (but traditionally distinct) accounts of human behavior: psychology and economics. While the influence of BLE is certainly wide-spread, a particularly pertinent application is in corporate law, which must regulate a rich and intricate set of agency relationships. The extent to which cognitive biases cause deviations from the predictions of rational choice theory in such contexts has significant implications both for our understanding of existing rules and for normative legal reform proposals.

Two such biases seem especially relevant in the corporate context: endowment effects and (so-called) "other regarding preferences." This Article presents the first experimental test for these biases in the corporate-law context. We find, somewhat surprisingly, that the agency context appears substantially to dampen both of them. However, this dampening effect appears to be far from uniform, with some demographic groups (such as single men) exhibiting virtually no evidence of biases while others (such as women, married and/or cohabitating subjects, and subjects from small families) exhibiting the opposite. As such, our findings may serve as cautionary tale for both those who uncritically apply BLE to corporations as well as those who staunchly defend traditional rational choice theory.

Abstract:
Within much of law and economics scholarship, it is commonly assumed that legal regulation and extra-legal norms represent "policy substitutes" for one another: That is, society faces a choice between regulating individual behavior by using legal rules on the one hand, or by depending on non-legal deterrents (such as reputational concerns, threats of dissipative punishment, or acquired tastes for cooperative play) on the other. Furthermore, this common wisdom asserts, when courts are prone to committing significant errors, this policy choice generally cuts in favor of preferring norms over law; consequently, severely error-prone courts should relax - or even eliminate - legal liability in order to permit less error-prone norms to operate unimpeded. This paper challenges the generality of this common wisdom, using a simple game-theoretic framework of market disclosure by privately-informed parties. Within this framework, I demonstrate that the relationship between optimal legal rules and extra-legal norms is somewhat more complex than many commentators appreciate. While norms and law can certainly serve as policy substitutes on some dimensions on which they operate (such as the size of their respective sanctions), the two phenomena may actually be complements of one another on other dimensions (such as instances that determine when sanctions are triggered to begin with). As such, a society with error-prone courts and a healthy system of extra-legal norms may, ironically, adopt more aggressive set of legal regulations than would a similarly situated society where norms are weak or nonexistent. The article applies this argument to a number of corporate and commercial contexts, focusing particularly on "safe harbor" doctrines within securities fraud and warranty law.

Abstract:
The corporate opportunities doctrine ("COD") regulates when and whether a corporate officer or director may appropriate new business prospects for her own account without first offering them to the firm. The doctrine -- a subspecies of the fiduciary duty of loyalty -- has been a mainstay of corporations law in most states for well over a century. At the same time, however, the COD has always been murky in application and is currently in a state of considerable disarray. In this Article, Professor Eric Talley attempts to chart a course out of this doctrinal quagmire by offering a contractarian account of the COD as a default mechanism for allocating intrafirm property rights between shareholders and fiduciaries. Within such a framework, Professor Talley develops a model of fiduciaries' incentive structures under various legal regimes. He then demonstrates that both the reach and the consequences of an "optimal" legal rule depend crucially on the information structure that governs the underlying agency relationship. When relevant information available to shareholders and fiduciaries is complete and symmetric, the optimal rule allocates each new project to whoever is the lowest cost producer. When corporate fiduciaries possess private, unverifiable knowledge about new projects, however, the optimal COD has a strict-liability flavor, imposing damages that need not correspond to either the corporation's losses or the fiduciary's gains. Consequently, such a doctrine will frequently overdeter fiduciaries from appropriating certain projects and may underdeter appropriation of others. This observation suggests (among other things) that coherence in the COD would be greatly improved if courts paid more attention to information structure than is currently the norm.

Abstract:
The corporate opportunities doctrine (or "COD") regulates when (and whether) a corporate officer or director may usurp new business prospects for her own account without first offering them to the firm. The doctrine -- a subspecies of the fiduciary duty of loyalty -- has been a mainstay of corporations law in most states for over a century. At the same time, however, the COD has always been somewhat murky in its application, and is currently in a state of considerable disarray. In this article, I attempt to clarify this doctrinal quagmire by offering a contractarian account of the doctrine as a default mechanism for allocating intra-firm property rights between parties possessing possibly distinct areas of expertise. Focusing on the information structure of the underlying principal-agent relationship, I demonstrate that both the reach and the consequences of an "optimal" rule depend crucially on the extent to which fiduciaries possess private, unverifiable knowledge about the profitability of new projects. In the presence of such asymmetries, I argue, the optimal COD tends to have a strict liability flavor, imposing damages that need not coincide systematically with the corporation's actual losses. As a consequence, the optimal "second-best" doctrine tends to overdeter fiduciaries from appropriating certain projects, and may even underdeter the appropriation of others.

Abstract:
This note develops a general game-theoretic framework for a model of auditing within a two-tiered judicial hierarchy. Using this framework, I characterize the equilibrium allocation of "real" versus "formal" authority between a lower court and a higher court, when the latter faces costs in reviewing lower court opinions. In particular, I study the equilibrium comparative statics relationship between (1) the costs of reviewing, (2) differences in "ideology" between the lower and higher court, and (3) the magnitude of measurement error within the lower court.