Returning Markets to the Center of Corporate Law

Abstract

This Article examines how the two blind spots of economics—markets and the interior of firms—combined over the past 40 years to create the modern corporate governance regime.

The focus of corporate law reformers over the past four decades on achieving ex-post welfare outcomes ignored the traditional centrality of supporting ex-ante market behaviors in corporate law. Corporate law was originally designed from the bottom up to promote the activities of bargaining, experimentation, and competition. None of these activities are currently much in evidence around the governance of public companies.

The current corporate governance regime has not succeeded, even on its own terms, and it has seriously damaged the relevant markets. This Article joins a trend in recent legal scholarship of pointing out the intrinsic social value of market activities and their importance in making sense of legal doctrine. Economic efficiency arises from market activities like bargaining and experimentation that are, themselves, inefficient. The modern corporate governance regime has forgotten this fact.

Keywords: corporate law, corporate governance, law and economics, capital markets, moral effects of markets

JEL Classification: G28, G30, K20, K22, N20, N22, P10