Empirical Studies of Corporate Law

HANDBOOK OF LAW AND ECONOMICS, A. Mitchell Polinsky and Steven Shavell, Forthcoming

Yale ICF Working Paper No. 05-16

ECGI - Law Working Paper No. 44/2005

112 Pages Posted: 27 May 2005  

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Roberta Romano

Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Abstract

This chapter reviews the empirical literature, especially the event study literature, as it relates to corporate and securities law. Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This chapter begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then discusses one of the limitations of more conventional empirical work (cross-sectional analysis), the problem presented by the fact that the characteristics of firms that are studied in relation to each other (such as ownership and mechanisms of corporate governance) or to firm performance are not exogenous but self-selected by firms. Thereafter it reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation. Subsequently, we focus on the methodology's application to corporate law and corporate governance issues, supplemented with discussion of other relevant empirical work as well. Event studies are emphasized because they have played an important role in the making of corporate law and in applied corporate finance and corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. A further reason for emphasizing event study data is that they avoid the endogeneity concerns that can limit the results of other modes of empirical research in this area. Because the empirical literature related to corporate and securities law is vast, the chapter is necessarily selective and omits important topics and individual contributions in the field.

Keywords: event studies, corporate governance, empirical research in corporate law

JEL Classification: G14, G34, K22

Suggested Citation

Bhagat, Sanjai and Romano, Roberta, Empirical Studies of Corporate Law. HANDBOOK OF LAW AND ECONOMICS, A. Mitchell Polinsky and Steven Shavell, Forthcoming; Yale ICF Working Paper No. 05-16; ECGI - Law Working Paper No. 44/2005. Available at SSRN: https://ssrn.com/abstract=728103

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Roberta Romano

Yale Law School ( email )

P.O. Box 208215
New Haven, CT 06520-8215
United States
203-432-4965 (Phone)
203-432-4871 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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

HOME PAGE: http://www.ecgi.org

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