Politics, Adaptation and Change in Corporate Law

Abstract:     
Berle & Means observed that US corporate structure was inefficient because shareholders owned too little of their firms to monitor effectively. This leaves ultimate control with non-owner managers. But many have argued that firm structure adapts efficiently to transaction cost problems. A necessary corollary of this view is that corporate law is efficient. Mark Roe has forcefully challenged this view. He suggests that US laws created corporations with weak, dispersed owners and strong managers. But I argue that, even if US corporate structure has been shaped by history and politics, the survival of this structure may be some evidence of efficiency if both laws and firms were under significant competitive pressure to change over time. This theory provides a basis for comparing the efficiency of the corporate law and structure of different countries. The more a country's corporate law and structure is subject to competitive forces, and thereby "market tested," the closer it will come to a first-best adjustment to inherent transaction costs. The US is a dynamic system that facilitates challenges to attempted political wealth transfers. There is less such testing in other countries, including Japan, Germany and New Zealand. Under this theory, the US weak-owner model looks better than under Roe's analysis.

Accepted Paper Series