Economic Crisis and the Integration of Law and Finance: The Impact of Volatility Spikes
Edward G. Fox
University of Michigan at Ann Arbor - Department of Economics
Merritt B. Fox
Columbia University - Law School
Ronald J. Gilson
Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)
March 15, 2015
Columbia Law Review, Forthcoming
European Corporate Governance Institute (ECGI) - Law Working Paper No. 243/2014
Columbia Law and Economics Working Paper No. 468
Stanford Law and Economics Olin Working Paper No. 460
Rock Center for Corporate Governance at Stanford University Working Paper No. 173
During the recent financial crisis, there was a dramatic spike, across all industries, in the volatility of individual firm share prices after adjustment for movements in the market as a whole. In this Article, we demonstrate that a similar spike has occurred with each major downturn in the economy since the 1920s. The existence of this long history of crisis-induced spikes has not been previously recognized.
The Article evaluates a number of potential explanations for these recurrent spikes in firm-specific price volatility, a pattern that poses a puzzle in terms of existing financial theory. The most convincing explanations relate to reasons why information specifically concerning individual firms would become more important in difficult economic times.
This discovery of a long history of crisis-induced spikes in firm-specific price volatility has important implications for several areas of corporate and securities law. With regard to securities law, the Article concludes, for example, that because of these spikes, private damages actions are much less effective deterrents to corporate misstatements and insider trading in crisis times than in normal times. Consequently, substantial additional resources should be devoted to SEC enforcement actions during crisis times. The Article considers as well the most contentious corporate law issue of the last 30 years: the extent to which a target board of directors will be allowed to prevent shareholders from accepting a hostile takeover bid at a premium over the pre-bid share price. The Delaware Supreme Court’s approach to this question has been largely based on the difficult-to-define concept of “substantive coercion.” The Article concludes that these spikes could be a way of giving real meaning to the “substantive coercion” justification for board approval of defenses against hostile takeover attempts, but that the instances where this justification is appropriate will be rare.
Number of Pages in PDF File: 94
JEL Classification: A12, D02, D89, E32, E44, G01, G12, G20, G34, K00, K22, N22
Date posted: February 26, 2014 ; Last revised: April 1, 2015
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