Financial Innovation and Corporate Law
University of San Diego School of Law
San Diego Legal Studies Paper No. 07-89
Iowa Journal of Corporation Law, Vol. 31, p. 799, 2006
This article was my contribution to the Symposium Professor Hillary Sale at Iowa organized to celebrate Robert C. Clark's treatise, Corporate Law. This abstract is taken from the review essay of the Symposium by Professors Ronald Gilson and Reinier Kraakman, 31 Iowa J. Corp. L. at 606, and is an advertisement for the entire Symposium issue. In any event, Gilson and Kraakman summarize the article better than I could.
Frank Partnoy's contribution to this Symposium adopts a different tact to questioning the dominant ideology of shareholder primacy in corporate law. Rather than proposing someone other the shareholders to whom, in the eyes of the law, the board owes allegiance, Partnoy questions the internal coherence of the claim that corporate law should follow shareholder interests. The essential point of Partnoy's paper is that the capital structure of a typical modern corporation is likely to contain several ticket-holders with equity-like claims on the firm's cash flows. In any given conflict-of-interest scenario, forcing the board to favor the nominal shareholders over another class of the firm's residual claimants may have perverse consequences. Instead, lining up with Jill Fisch, Partnoy concludes that the board should maximize the economic value of the firm, regardless of how cash flows are ultimately distributed to the firm's security holders.
Number of Pages in PDF File: 30
Keywords: CDOs, credit derivatives, credit quality, banks, credit default swap, collateralized debt obligation, risks, moral hazard, disclosure, credit ratings, bankruptcy
JEL Classification: G20, G28, K20, K22, K23, L10, L13
Date posted: March 29, 2007