GEOFFREY P. MILLER, New York University - School of Law
Email: geoffrey.miller@nyu.edu
GERALD ROSENFELD, New York University - School of Law
Email: gerald.rosenfeld@us.rothschild.com

This paper identifies an important but previously unrecognized systemic risk in financial markets: intellectual hazard. Intellectual hazard, as we define it, is the tendency of behavioral biases to interfere with accurate thought and analysis within complex organizations. Intellectual hazard impairs the acquisition, analysis, communication and implementation of information within an organization and the communication of such information between an organization and external parties. We argue that intellectual hazard was a cause of the Crisis of 2008 and suggest that this risk may be an important factor in all financial crises. We offer tentative suggestions for reforms that might mitigate intellectual hazard going forward.

STEPHEN HABER, Hoover Institution and Political Science, Stanford University, National Bureau of Economic Research (NBER)
Email: Haber@stanford.edu
F. SCOTT KIEFF, George Washington University - Law School, Stanford University - Hoover Institution on War, Revolution and Peace
Email: skieff@law.gwu.edu

Few doubt the seriousness of the recent crisis afflicting the financial systems of the United States and the world. Few claim that nothing needs to be fixed. And few have missed the major debates about what types of solutions are best - often conducted at high volume, intensity, and frequency. So rather than try to add to one side or the other of the well-rehearsed arguments about each type of proposed reform, we try to refocus the analysis on some core incentives: when the basic rules of the game are changing, property rights and the rule of law are too ill-defined, creating exactly the wrong incentives for investment and economic growth. The wrong incentives created by repeated surges of bold government action pose risks that have direct, short-term impacts, which we fear have been seriously underexplored during both the end of the Bush administration and the beginning of the Obama administration. We hope that, by pointing out these risks, they can be significantly mitigated at relatively low cost.

We begin by recommending a change to the general approach: halt soon the introduction of new, bold programs. We are not saying that nothing should be done; we are saying that it is important in times like these for government to reach closure on its decisions so that it can pick one set of rules of the game and then stick to them. We then focus more narrowly on the process of structuring workouts from bad deals and recommend avoiding approaches that undermine bankruptcy. Bankruptcy allows the large group of private professionals who are experts at restructuring or winding up bad deals - consultants, financiers, lawyers, managers, and so on - to get involved. Given the magnitude of the problem of toxic assets, any solution to the current crisis will almost certainly need to involve these private actors. We then explore how particular reform proposals can be implemented without running afoul of the cautions that are the focus of our effort. In the final analysis, we applaud the Herculean efforts by so many serious thinkers in the Bush and Obama administrations and outside government who have thrown themselves into this important work in good faith and with great sacrifice. All we can hope to add to the conversation are these relatively easy-to-deploy (and important to deploy quickly) tools for mitigating some vital but underappreciated risks with proposed financial system fixes.

SOHNKE M. BARTRAM, Lancaster University
Email: s.m.bartram@lancaster.ac.uk
PHILIP R. BROWN, University of New South Wales - Australian School of Business, University of Western Australia - Department of Accounting and Finance, Lancaster University - Department of Accounting and Finance, University of New South Wales - School of Accounting
Email: philip.brown@unsw.edu.au
JANICE C.Y. HOW, Queensland University of Technology
Email: janice.how@qut.edu.au
PETER VERHOEVEN, Queensland University of Technology - Faculty of Business
Email: p.verhoeven@auckland.ac.nz

We investigate the roles of firm and country level agency conflicts in determining corporate payout policies. Based on a large sample of 55,399 firm-years in 42 countries from 2001 to 2006, our results show there is a form of “pecking order� in investors’ ability to extract cash (whether as dividends only or share repurchases) from firms. Although investors are able to use their legal powers to extract cash from firms in high protection countries, their ability to do so can be substantially hindered when agency costs at the firm level are high. In poor protection countries, investors seem to take whatever cash they can get, even though the amount may be small, and with scant regard for investment opportunities and firm level agency conflicts. Finally, we find that dividends as the sole method of payout compared to repurchases is more likely in high protection countries.