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
Stanford Graduate School of Business
Scott Duke Kominers
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
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, L29working papers series
Date posted: August 23, 2012 ; Last revised: February 18, 2013
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