How to Fix Wall Street: A Voucher Financing Proposal

2 Pages Posted: 16 Dec 2002

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

Jill E. Fisch

University of Pennsylvania Law School - Institute for Law and Economics

Date Written: December 10, 2002


Securities market intermediaries operate in a number of areas in the capital markets reducing the collective action problem facing investors. Analysts provide securities research. Proxy advisory firms assist investors in determining how to vote their shares. And even shareholders bringing proxy contests can be viewed as providing a collective benefit to the extent the contests are motivated out of a desire to increase share value. Despite the service they provide investors, many intermediaries face financing problems due to pervasive free riding on the part of dispersed shareholders. In some areas, the law provides for mandatory financing of intermediaries (including the independent audit requirement for most public firms). Regulators are poorly suited, however, to make decisions on precisely how to distribute subsidies to intermediaries. Much of the current level of subsidization therefore is left to firms (and their managers) to provide voluntarily. Firms may subsidize analysts, for example, through elevated investment banking fees to a financial brokerage firm. Managers, however, may then use firm financing of intermediaries to corrupt the intermediaries in favor of the managers.

Understanding the problem of intermediary corruption as an outgrowth of the financing problem facing intermediaries cautions against simply imposing regulatory prohibitions on voluntary firm subsidies. Instead, we propose to separate the decision of how much to subsidize intermediaries from the decision on who should get the subsidies through voucher financing. Under our proposal, regulators determine a subsidy amount funded through levies on public firms (roughly equal to the present amount of subsidies which flow from firms to intermediaries). Shareholders are then given the ability to direct (using vouchers) to which intermediaries their subsidy dollars should go in proportion to their shares. Voucher financing provides a market-based mechanism to finance intermediaries, resulting in greater flexibility and responsiveness in the provision of intermediary financing. With vouchers, shareholders may mass vouchers from several firms in their portfolios and direct them across time (saving them for the future) and across different intermediaries to their highest value use. Shareholders, of course, may lack full information on the value of different intermediaries. Shareholders may also fail to coordinate in the distribution of vouchers. We think, nonetheless, that solutions exist for such problems. Moreover, voucher financing represents a superior alternative compared with error-prone mandatory regulatory attempts at providing financing for intermediaries as well as conflict-of-interest prone voluntary firm financing.

Keywords: securities market research, analysts, voucher financing, securities market intermediaries

JEL Classification: G2, H4, K2, N2

Suggested Citation

Choi, Stephen J. and Fisch, Jill E., How to Fix Wall Street: A Voucher Financing Proposal (December 10, 2002). Yale Law Journal, Vol. 113, p. 269, 2003. Available at SSRN: or

Stephen J. Choi

New York University School of Law ( email )

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

Jill E. Fisch (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)

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