Economic Crisis and the Integration of Law and Finance: The Impact of Volatility Spikes

94 Pages Posted: 26 Feb 2014 Last revised: 1 Apr 2015

Edward G. Fox

University of Michigan at Ann Arbor - Department of Economics; Law and Economics Fellow, NYU School of Law, Center for Law & Economics

Merritt B. Fox

Columbia University - Law School

Ronald J. Gilson

Stanford Law School; Columbia Law School; European Corporate Governance Institute (ECGI)

Date Written: March 15, 2015

Abstract

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.

JEL Classification: A12, D02, D89, E32, E44, G01, G12, G20, G34, K00, K22, N22

Suggested Citation

Fox, Edward G. and Fox, Merritt B. and Gilson, Ronald J., Economic Crisis and the Integration of Law and Finance: The Impact of Volatility Spikes (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 . Available at SSRN: https://ssrn.com/abstract=2401712 or http://dx.doi.org/10.2139/ssrn.2401712

Edward G. Fox

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Law and Economics Fellow, NYU School of Law, Center for Law & Economics ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Merritt B. Fox (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Ronald J. Gilson

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-723-0614 (Phone)
650-725-0253 (Fax)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-1655 (Phone)
212-854-7946 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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