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Abstract:
This Article provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act (SOX) of 2002 that is informed by the relevant empirical accounting and finance literature, and of the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, much of which was available when Congress was debating the bill, is that SOX's corporate governance provisions were ill conceived.

The political environment explains why Congress would enact legislation with such mismatched means and ends. SOX was enacted as emergency legislation amid a free-falling stock market and media frenzy over corporate scandals shortly before midterm congressional elections. The governance provisions, introduced toward the end of the legislative process in the Senate, were not a focus of any considered attention. Their inclusion stemmed from the interaction between election-year politics and the Senate Banking Committee chairman's response to the suggestions of policy entrepreneurs. The scholarly literature at odds with those individuals' recommendations was not brought to Congress's attention (and was ignored on the rare occasions that it was referenced).

The pattern of congressional decisionmaking in SOX is not, however, unique. Much of the expansion of federal regulation of financial markets has occurred after significant market turmoil. The Article concludes that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional. To mitigate future policy blunders on the scale of SOX, it also suggests that emergency or crisis-mode legislation provide for reevaluation at a later date when more deliberative reflection is possible.

Sarbanes-Oxley Act, corporate governance, corporate law

Abstract:
This paper provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act of 2002 that is informed by the relevant empirical accounting and finance literature and the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating the mandates' effectiveness, by facilitating identification of whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, which was available when Congress was legislating, is that SOX's corporate governance provisions were ill-conceived. The political environment explains why Congress would enact legislation with such mismatched means and ends. SOX was enacted as emergency legislation amidst a free-falling stock market and media frenzy over corporate scandals shortly before the midterm congressional elections. The governance provisions, included toward the end of the legislative process in the Senate, were not a focus of any considered attention. Their inclusion stemmed from the interaction between election year politics and the Senate banking committee chairman's response to suggestions of policy entrepreneurs. The scholarly literature at odds with those individuals' recommendations was ignored, while the interest groups whose position was more consistent with the literature - the business community and accounting profession - had lost their credibility and become politically radioactive. The paper's conclusion is that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional. Other nations, such as the members of the European Union who have been revising their corporation codes, would be well advised to avoid Congress' policy blunder.

corporate governance, corporate law, securities regulation, Sarbanes-Oxley Act

Abstract:
Institutional investors have increasingly engaged in corporate governance activities, introducing proxy proposals and negotiating with management, with a goal of improving corporate performance. As shareholder activism has increased, financial economists have sought to measure its effect on performance. This paper reviews the corporate finance literature on institutional investors' activities in corporate governance and also empirically investigates the effect of confidential voting proposals on voting outcomes. It then uses the findings of the empirical literature to inform normative recommendations for the proxy process. In brief, there is an apparent paradox: Notwithstanding the development of shareholder activism and commentators' generally positive assessments of it, the empirical research indicates that such activism has little or no effect on targeted firms' performance. This implies that activist institutions ought to reassess their agenda, in order to use their resources more effectively. The paper takes a two-pronged approach to furthering this aim. First, it suggests a mechanism of internal control, whereby funds would engage in periodic review of their shareholder-activism programs to identify the most fruitful governance objectives. Second, it seeks to provide incentives to undertake such internal revaluations by advocating elimination or significant reduction of the subsidy of proposal sponsorship under the SEC rules unless a proposal achieves substantial voting support, or permitting firms' shareholders to choose what level of subsidy they wish to provide proposal sponsors. The estimated savings from eliminating the subsidy for proposals that fail to receive at least 40% of the votes ranges from $293 million to $1.9 billion.

Abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.

Abstract:
This paper is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The paper concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.

Abstract:
This chapter reviews the empirical literature, especially the event study literature, as it relates to corporate and securities law. Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This chapter begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then discusses one of the limitations of more conventional empirical work (cross-sectional analysis), the problem presented by the fact that the characteristics of firms that are studied in relation to each other (such as ownership and mechanisms of corporate governance) or to firm performance are not exogenous but self-selected by firms. Thereafter it reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation. Subsequently, we focus on the methodology's application to corporate law and corporate governance issues, supplemented with discussion of other relevant empirical work as well. Event studies are emphasized because they have played an important role in the making of corporate law and in applied corporate finance and corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. A further reason for emphasizing event study data is that they avoid the endogeneity concerns that can limit the results of other modes of empirical research in this area. Because the empirical literature related to corporate and securities law is vast, the chapter is necessarily selective and omits important topics and individual contributions in the field.

event studies, corporate governance, empirical research in corporate law

Abstract:
This article provides an analysis of why regulatory competition in corporate law has operated, for the most part, successfully in the United States, and critiques the position of commentators who are sceptical of the significance and extent of state competition. The article begins by setting out the context in which regulatory competition has been most recently criticized, the US Congress`s response to corporate accounting scandals in the Sarbanes-Oxley Act, and by briefly noting how the problematic features of that legislative response underscore the benefits of regulatory competition. It then evaluates recent criticisms of regulatory competition that focus on the role of the federal government, or the incentives of states other than the leading incorporation state, Delaware, and conclude that US corporate law is not the product of state competition. The article contends that these permutations on the state competition debate do not provide a satisfactory positive explanation of the behaviour or the influence of the states and federal government. The minimum policy implication of the analysis is that it would be imprudent for policy-makers to overlook the competitive regulatory experience in US corporate law when assessing the approach to take to company and securities law.

Abstract:
This article provides an analysis of why regulatory competition in corporate law has operated, for the most part, successfully in the United States, and critiques the position of commentators who are skeptical of the significance and extent of state competition. The article begins by setting out the context in which regulatory competition has been most recently criticized, the U.S. Congress's response to corporate accounting scandals in the Sarbanes-Oxley Act, and by briefly noting how the problematic features of that legislative response underscore the benefits of regulatory competition. It then evaluates recent criticisms of regulatory competition that focus on the role of the federal government, or the incentives of states other than the leading incorporation state, Delaware, and conclude that U.S. corporate law is not the product of state competition. The article contends that these permutations on the state competition debate do not provide a satisfactory positive explanation of the behavior or the influence of the states and federal government. The minimum policy implication of the analysis is that it would be imprudent for policymakers to overlook the competitive regulatory experience in U.S. corporate law when assessing the approach to take to company and securities law. Prepared for the Special Issue of the Oxford Review of Economic Policy on Corporate Governance and the Corporate Governance Conference at the Said Business School, University of Oxford, January 28, 2005.

regulatory competition,corporate law,corporate governance,Sarbanes-Oxley Act

Abstract:
Financial economists and commercial providers of governance services have in recent years created measures of the quality of firms' corporate governance which collapse into a single number (a governance index or rating) the multiple dimensions of a company's governance. The aim of this paper is twofold, to analyze the performance of corporate governance indices in predicting corporate performance, and to consider the implications for public policy that follow from that assessment. We highlight methodological shortcomings of the extant papers that claim a relation between particular governance measures and corporate performance. Our core conclusion is that there is no consistent relation between governance indices and measures of corporate performance. Namely, there is no one "best" measure of corporate governance: the most effective governance institution appears to depend on context, and on firms' specific circumstances. It would therefore be difficult for an index, or any one variable, to capture critical nuances for making informed decisions. As a consequence, we conclude that governance indices are highly imperfect instruments for determining how to vote corporate proxies, let alone for portfolio investment decisions, and that investors and policymakers should exercise caution in attempting to draw inferences regarding a firm's quality or future stock market performance from its ranking on any particular corporate governance measure. Most important, the implication of our analysis is that corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable, because there is considerable variation in the relation between the indices and measures of corporate performance.

corporate governance, corporate performance, governance indices

Abstract:
This article advocates opening up international securities regulation to greater regulatory competition than the scant competition that exists at present. After sketching the contours of an international regime of regulatory competition in securities laws and the reasons why such competition is desirable, the article provides a detailed response to objections that have been raised to a proposal for a competitive securities regime that was principally focused on the United States, objections that would accordingly also be raised against this article's proposal. These include whether the U.S. securities regime is directed at mitigating problems regarding disclosure of interfirm externalities, and whether international competition will result in a regulatory race to the lowest level of disclosure. Because the analysis in support of regulatory competition in securities law draws upon the learning regarding competition across U.S. states over the production of corporate law, which has been successful in creating a regime that, on balance, benefits shareholders, the article concludes by indicating that recent critiques of the efficacy of state charter competition are unfounded.

Securities regulation, regulatory competition

Abstract:
This paper advocates opening up international securities regulation to greater regulatory competition than the scant competition that exists at present. After sketching the contours of an international regime of regulatory competition in securities laws and the reasons why such competition is desirable, the paper provides a detailed response to objections that have been raised to a proposal for a competitive securities regime that was principally focused on the United States, objections that would accordingly also be raised against this paper's proposal. These include whether the U.S. securities regime is directed at mitigating problems regarding disclosure of interfirm externalities and whether international competition will result in a regulatory race to the lowest level of disclosure. Because the analysis in support of regulatory competition in securities law draws upon the learning regarding competition across U.S. states over the production of corporate law, which has been successful in creating a regime that, on balance, benefits shareholders, the paper concludes by showing that recent critiques of the efficacy of state charter competition are unfounded.

Abstract:
Corporate law is a field that underwent as thorough a revolution in the 1980s as can be imagined, in scholarship and practice, methodological and organizational, in which finance and the economic theory of the firm were used to inform the field. The timing of this revolution was not a fortuitous occurrence: it followed a revolution in corporate finance and the theory of the firm, and was mid-wived in a period of dynamic innovation in corporate transactions. The transformation in corporate law scholarship and practice accomplished by this revolution, has important implications for legal education in the 21st century. There is a need for greater integration of law school and management school curriculums, to ensure that law school graduates will obtain the technical proficiency necessary to be at the leading edge of corporate law practice and scholarship. In addition, the sea change in corporate law scholarship places law schools with larger faculties and associated with universities with strong finance groups at a competitive advantage in recruiting business law faculty and in maintaining a first rate business law program. Corporate law centers have emerged as an institutional device for smaller elite schools to adapt to this new environment.

corporate law, legal education, corporate law centers

Abstract:
This paper examines the impact on shareholder voting of the mutual fund voting disclosure regulation adopted by the SEC in 2003, using a paired sample of proposals submitted before and after the rule change. We focus on how voting outcomes relate to institutional ownership and the voting behavior of mutual funds. While voting support for management has decreased over time, there is no evidence that mutual funds' support for management declined after the rule change, as expected by advocates of disclosure. In fact, in the context of management-sponsored proposals on executive equity incentive compensation plans, mutual funds appear to have increased their support for management after the rule change. We also find that this result is not due to changes in compensation plan features, nor that voting outcomes were plausibly related to broker voting, which was eliminated in a parallel 2003 stock exchange rule change. Finally, there is some evidence that firms with greater mutual fund ownership adopt a higher frequency of sponsoring executive equity incentive compensation plans, which could partly explain our findings.

Proxy Voting, Mutual Funds, Institutional Investors, Disclosure

Abstract:
Confidential voting in corporate proxies is a principal recommendation in activist institutional investors' guidelines for corporate governance. This article examines the impact of the adoption of confidential corporate proxy voting on proposal outcomes through a panel data set of shareholder and management proposals at firms that adopted confidential voting. Institutional investors promoting confidential voting maintain that private sector institutions have conflicts of interest that prevent them from voting against management even though to do so would maximize the value of their shares; they contend that anonymous ballots will enable such investors to vote their true interest, and thereby anticipate reduced support for management proposals and increased support for shareholder proposals. The article finds, contrary to confidential voting advocates' expectations, that adoption of confidential voting has no significant effect on voting outcomes. Voting outcomes are best explained by proposal type; neither institutional nor insider ownership, nor prior performance, significantly affect the level of support a proposal receives. Moreover, the conflict of interest hypothesis is not supported in the data, as private institutional holdings post-adoption of the voting reform do not affect the support level for proposals. These results are not a function of selection bias in the ownership of firms with confidential voting: firms that have adopted the voting procedure in fact have higher ownership levels of investors with supposed conflicts (banks and insurance companies) than firms that have been subjected to confidential voting proposals and not adopted the practice. Moreover, the ownership level of the firms by such investors does not change after adoption of the practice, nor does the ownership level of the class of institutions that includes the principal advocates of confidential voting (public pension funds). Confidential voting also does not affect firms' stock performance. The results suggest that institutional investor initiatives directed at confidential voting are not a fruitful allocation of investors' resources.

Corporate governance, shareholder voting, institutional activism

Abstract:
Confidential voting in corporate proxies is a principal recommendation in activist institutional investors' guidelines for corporate governance reforms. This paper examines the impact of the adoption of confidential voting on proposal outcomes through a panel data set of shareholder and management proposals submitted from 1986-98 to 130 firms that adopted confidential voting in those years. Institutional investors promoting confidential voting maintain that private sector institutions have conflicts of interest that prevent them from voting against management even though to do so would maximize the value of their shares; they contend that anonymous ballots will enable such investors to vote their true interest, and thereby anticipate reduced support for management proposals and increased support for shareholder proposals. The paper finds, contrary to confidential voting advocates' expectations, that adoption of confidential voting has no significant effect on voting outcomes. Voting outcomes are best explained by proposal type; neither institutional nor insider ownership, nor prior performance, significantly affect the level of support a proposal receives. Moreover, the conflict of interest hypothesis is not supported in the data, as private institutional holdings post-adoption of the voting reform do not affect the support level for proposals. Confidential voting also does not affect firms' stock performance. The results suggest that institutional investor initiatives directed at confidential voting are not a fruitful allocation of investors' resources

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Confidential voting in corporate proxies is a principal
recommendation in activist institutional investors' guidelines for corporate governance reforms. This paper examines the
impact of the adoption of confidential corporate proxy voting on proposal outcomes through a panel data set of shareholder and management proposals submitted from 1986-98 to the 130 firms that adopted confidential voting in those years. Institutional investors promoting confidential voting maintain that private sector institutions have conflicts of interest that prevent them from voting against management even though to do so would maximize the value of their shares; they contend that anonymous ballots will enable such investors to vote their true interest, and thereby anticipate reduced support for management proposals and increased support for shareholder proposals. The paper
finds, contrary to confidential voting advocates' expectations, that adoption of confidential voting has no significant effect on voting outcomes. Voting outcomes are best explained by proposal type; neither institutional nor insider ownership, nor prior performance, significantly affect the level of support a proposal receives. Moreover, the conflict of interest hypothesis is not supported in the data, as private institutional holdings post-adoption of the voting reform do not affect the support level for proposals. Confidential voting also does not affect firms'stock performance. The results suggest that institutional investor initiatives directed at confidential voting are not a fruitful allocation of investors' resources.

Institutional Activism, Shareholder Voting, Corporate Governance

Abstract:
This is an edited transcript of the proceedings of the Yale Law School Center for the Study of Corporate Law's Weil, Gotshal & Manges Roundtable on the Future of Financial Regulation, which was held on February 13, 2009. The roundtable was jointly sponsored with the Yale Journal on Regulation, and brought together academics from finance, economics and law to discuss causes and solutions for the ongoing financial crisis.

The roundtable consisted of four panel sessions. The first session examined "Crisis Origins and Historical Comparisons." Panelists were Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia University Graduate School of Business; John Geanakoplos, James Tobin Professor of Economics, Yale University; Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance, University of Chicago Booth School of Business; Andrew Metrick, Theodore Nierenberg Professor of Corporate Governance and Professor of Finance, Yale School of Management; and Frank Partnoy, George E. Barrett Professor of Law and Finance, University of San Diego School of Law. Roberta Romano, Oscar M. Ruebhausen Professor of Law and Center Director, moderated.

The second session analyzed "Causes of the Crisis: Conflicts, Compensation and Reputation." Panelists were Sanjai Bhagat, Professor of Finance, University of Colorado at Boulder Leeds School of Business; Edward J. Kane, James F. Cleary Professor of Finance, Boston College; Jonathan R. Macey, Deputy Dean and Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law, Yale Law School; and Steven L. Schwarcz, Stanley A. Star Professor of Law & Business, Duke University School of Law. The panel was moderated by Richard Brooks, Professor of Law, Yale Law School.

The third session considered "Reforming Financial Institution Regulation." Panelists were Lucian A. Bebchuk, William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics and Finance, Harvard Law School; John C. Coates, John F. Cogan Jr. Professor of Law and Economics, Harvard Law School; Richard J. Herring, Jacob Safra Professor of International Banking, Professor of Finance and Co-Director, Wharton Financial Institutions Center, University of Pennsylvania Wharton School; and Geoffrey P. Miller, Stuyvesant P. Comfort Professor of Law and Director, Center for the Study of Central Banks and Financial Institutions, New York University Law School. Melanie L. Fein, Esq., moderated.

The fourth session focused on "Reforming Subprime Mortgages." Panelists were William N. Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies and Director of the International Center for Finance, Yale School of Management; Susan P. Koniak, Professor of Law, Boston University School of Law; Christopher Mayer, Senior Vice Dean and Paul Milstein Professor of Real Estate, Columbia University Graduate School of Business; and Susan M. Wachter, Richard B. Worley Professor of Financial Management and Professor of Real Estate, Finance and City and Regional Planning, University of Pennsylvania Wharton School. The moderator was Ian Ayres, William K. Townsend Professor of Law, Yale Law School.

Note: John Morley and Roberta Romano are editors, not authors, of this paper.

Abstract:
Corporate law is an arena in which the metaphor of the states as a laboratory describes actual practice, and, for the most part, this is a laboratory that has worked reasonably well. The goal of this paper is to map out over time the diffusion of corporate law reforms across the states. The law-making pattern we observe indicates a dynamic process in which legal innovations originate from several sources, and a period of legal experimentation that tends to identify a statutory formulation that is adopted by the vast majority of states. Delaware and the Model Act quite often work in tandem. But there are occasions when they advance differing legal rules, accounting for some of the diversity in corporation codes that we observe. Prepared for the Conference on Promoting the General Welfare: American Democracy and the Political Economy of Government Performance at the University of Virginia, November 12-13, 2004.

Corporate law, corporate governance, legal innovation, regulatory competition

Abstract:
Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. We suggest that executive incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold or the option cannot be exercised for a period of at least two to four years after the executive’s resignation or last day in office. This will provide superior incentives for executives to manage corporations in investors’ longer-term interest, and diminish their incentives to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation.

executive compensation, restricted stock, financial institution regulation, emergency economic stabilization act

Abstract:
Although the enactment of the Sarbanes-Oxley Act (SOX) received nearly unanimous congressional support, only a few years thereafter its wisdom was increasingly questioned and its supporters had to stave off attempts to recraft the legislation. The financial crisis of 2008 has sidelined efforts to alter the legislation’s most costly provision, as Congress’s attention has turned to overhauling the regulatory regime for financial institutions. There is, nonetheless, much to be learned about financial regulation and SOX’s future, from an in-depth examination of the interplay of the government and private commissions created with an eye to revising the legislation, media coverage of those entities, and congressional responses. That interaction provides a map of political fault lines and assists in forecasting the prospects for recrafting SOX’s most costly provision. It also serves as a cautionary tale regarding significant regulation enacted in the midst of a financial market crisis. The ongoing financial crisis has sidelined SOX, but its burdensome costs suggest that it might well, in due course, reemerge on the legislative agenda.

Sarbanes-Oxley Act, financial regulation, media, corporate governance

Abstract:
An extensive empirical literature suggests that mandates passed as part of the Sarbanes-Oxley Act are not likely to improve audit quality or otherwise enhance firm performance and thereby benefit investors as Congress intended. This suggests that the mandates should be rescinded or at least made voluntary. More broadly, these analyses caution that legislating in the immediate aftermath of a public scandal or crisis is a formula for poor public policymaking.

Corporate Governance, Sarbanes-Oxley Act, firm performance, SOA

Abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. This article begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: defendants experience economically meaningful and statistically significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as for criminal ones. The article concludes with some recommendations for researchers: the standards for conducting an event study are well established; researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time frame as possible. The companion article reviews the use of event studies in corporate law and regulation.

Abstract:
This article is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth, and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The article concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.

Abstract:
This Article advances an executive compensation reform proposal that is specifically addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that all firms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold nor the options exercised for a period of at least two to four years after an individual resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives(and traders whose actions can substantially impact an organization) to manage firms in investors longer-term interest, and diminish their incentive to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management incentive to take on unwarranted risk, our proposal would therefore also decrease the probability that public resources will be dissipated in bailouts of financial firms, particularly those deemed by public officials as “too big to fail.”

executive compensation, restricted stock, financial institution regulation, emergency economic stablization act

Abstract:
This paper examines the impact on shareholder voting of the mutual fund voting disclosure regulation adopted by the SEC in 2003, using a paired sample of management proposals on executive equity incentive compensation plans submitted before and after the rule change. While voting support for management has decreased over time, we find no evidence that mutual funds' support for management declined after the rule change, as expected by advocates of disclosure. In fact, we find evidence of increased support for management by mutual funds after the change. There is some evidence that firms sponsoring such proposals both before and after the rule change differ from those sponsoring a proposal only before the change. For example, firms are more likely to sponsor a proposal both before and after the rule change if they have higher mutual fund ownership. Such endogeneity could partly explain our findings of increased support after the rule.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This article is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The article concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.

corporate law, corporate governance, event studies

Abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. It reviews the event study methodology, its strengths and limitations for policy analysis, and how event studies have been used to evaluate the wealth effects of corporate litigation. The companion article reviews the use of event studies in corporate law and regulation. The event studies of corporate litigation indicate that defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. Those findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and the reputational losses are of equal magnitude for civil fines as criminal ones. The article concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, or/and narrowing the public announcement to as short a time-frame as possible.

Abstract:
Institutional investors have increasingly engaged in corporate governance activities, introducing proxy proposals and negotiating with management, with a goal of improving performance. As shareholder activism has become more pronounced, financial economists have attempted to measure its effect on performance. This Article reviews the finance literature on institutional investors' activities in corporate governance and uses the findings of the empirical literature to inform normative recommendations for the proxy process. In brief, there is an apparent paradox: notwithstanding the development of shareholder activism and commentators' generally positive assessments of it, the empirical research indicates that such activism has little or no effect on targeted firms' performance. This implies that activist institutions ought to reassess their agendas, in order to use their resources more effectively. The Article takes a two-pronged approach to furthering this aim. First, it suggests a mechanism of internal control, whereby funds would engage in periodic review of their shareholder-activism programs to identify the most fruitful governance objectives. Second, it seeks ways to provide incentives to undertake such internal revaluations, advocating elimination or significant reduction of the subsidy of proposal sponsorship under the SEC rules unless a proposal achieves substantial voting support, or permitting firms' shareholders to choose what level of subsidy they wish to provide proposal sponsors. The estimated savings from eliminating the subsidy for proposals that fail to receive at least 40% of the votes ranges from $293 million to $1.9 billion.

Institutional investors, corporate governance, shareholder activism

Abstract:
This Article contends that the current legislative approach to securities regulation is mistaken. It advocates a market-oriented approach of competitive federalism that would expand the role of the states in securities regulation and would fundamentally reconceptualize the regulatory scheme. Under a system of competitive federalism for securities regulation, only one sovereign will have jurisdiction over all transactions in the securities of a corporation that involve the issuer or its agents and investors: the sovereign chosen by the issuer from among the federal government, the fifty states, or foreign nations. The aim is to replicate for the securities setting the benefits produced by state competition for corporate charters -- a responsive legal regime that has tended to maximize share value. As a competitive legal market supplants a monopolist federal agency in the fashioning of regulation, it will produce rules more aligned with the preferences of investors, whose decisions drive the capital market. Competitive federalism for U.S. securities regulation also has important implications for international securities regulation. The jurisdictional principle applicable to domestic securities transactions is equally applicable: Foreign issuers selling shares in the United States would be able to opt out of the federal securities laws and choose the law of another nation, such as their country of incorporation, or of a U.S. state, to govern those U.S. transactions.

Abstract:
This dictionary entry concerns the regulation of derivative securities in the United States. Regulation of financial derivatives has focused on reducing the different risks -- credit, legal, market, and operational -- generated by derivative instruments, in contrast to the historical emphasis of the regulatory regime on market manipulation, an important issue for contracts to deliver agricultural products that are susceptible to natural shortages. The entry criticizes recent regulatory approaches to market and operational risks, distinguishes between the appropriate regulatory approach to private and public entities' participation in over-the-counter markets, and assesses common proposals to shift from the current dispersed regulatory regime to a unitary regulator.

Abstract:
We have seen a revival in interest in corporate law and corporate governance since the 1980s, as researchers applied the tools of the new institutional economics and modern corporate finance to analyze the new transactions emerging in the 1980s takeover wave. This article focuses on three mechanisms of corporate governance to illustrate the analytical usefulness of transaction cost economics for corporate law. They are the board of directors; relational investing, a form of block ownership in which a large shareholder is more actively involved in firm management than is ordinarily expected of non-management shareholders; and the choice of law governing shareholder-manager relations, referred to in the literature as state competition for corporate charters. Each of the three sections in the article sketches first the theory of the corporate governance mechanisms from the perspective of transaction cost economics and then addresses the question whether corporate governance matters, by discussing the empirical evidence on whether the mechanism is effective. In addition to limning Williamson's contribution, the objective is to relate theory and data, to ascertain where we are, 20 years after Williamson's fundamental contribution was the first articulated in Markets and Hierarchies, and over a decade after the corporate law applications were first explicitly worked out.