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http://ssrn.com/abstract=2134458
 
 

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On Derivatives Markets and Social Welfare: A Theory of Empty Voting and Hidden Ownership


Jordan M. Barry


University of San Diego School of Law

John William Hatfield


University of Texas at Austin

Scott Duke Kominers


Harvard University

August 22, 2012

Rock Center for Corporate Governance at Stanford University Working Paper No. 122
Becker Friedman Institute for Research in Economics Working Paper No. 2012-11
Stanford Law and Economics Olin Working Paper No. 433

Abstract:     
In the past twenty-five years, derivatives markets have grown exponentially. Large, modern derivatives markets increasingly enable investors to hold economic interests in corporations without owning voting rights, and vice versa. This leads to both empty voters — investors whose voting rights in a corporation exceed their economic interests — and hidden owners — investors whose economic interests exceed their voting rights.

We present formal models that show how, when financial markets are opaque, empty voting and hidden ownership can render financial markets unpredictable, unstable, and inefficient. By contrast, we show that when financial markets are transparent, empty voting and hidden ownership have dramatically different effects: they follow predictable patterns, encourage stable outcomes, and promote efficiency. Our analysis lends insight into the operation of securities markets in general and derivatives markets in particular. It also provides a new justification for a robust mandatory disclosure regime and facilitates analysis of proposed substantive securities regulations.

Number of Pages in PDF File: 66

Keywords: derivatives, disclosure, empty voting, hidden ownership, morphable ownership, corporate governance, shareholder rights and obligations, financial markets, securities laws, law and economics, competitive equilibrium, core outcome, corporate voting, shareholder voting, regulatory arbitrage, securities

JEL Classification: C71, G14, G18, G30, K22, L29

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Date posted: August 23, 2012 ; Last revised: June 6, 2014

Suggested Citation

Barry, Jordan M. and Hatfield, John William and Kominers, Scott Duke, On Derivatives Markets and Social Welfare: A Theory of Empty Voting and Hidden Ownership (August 22, 2012). Rock Center for Corporate Governance at Stanford University Working Paper No. 122; Becker Friedman Institute for Research in Economics Working Paper No. 2012-11; Stanford Law and Economics Olin Working Paper No. 433. Available at SSRN: http://ssrn.com/abstract=2134458 or http://dx.doi.org/10.2139/ssrn.2134458

Contact Information

Jordan Barry (Contact Author)
University of San Diego School of Law ( email )
5998 Alcala Park
San Diego, CA 92110-2492
United States
John William Hatfield
University of Texas at Austin ( email )
Austin, TX 78712
United States
Scott Duke Kominers
Harvard University ( email )
One Brattle Square, suite 6
Cambridge, MA 02138
United States
HOME PAGE: http://www.scottkom.com/
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