BENJAMIN VAN ROOIJ, University of California, Irvine School of Law, University of Amsterdam - Faculty of Law
Email: b.vanrooij@uva.nl
MELISSA RORIE, University of Nevada, Las Vegas
Email: melissa.rorie@unlv.edu

Abstract: One of the core challenges in compliance measurement is to assess and analyze undetected instances of illegal behavior. This chapter discusses interview strategies to best capture such deviant conduct and the factors of influence on it. It discusses two core approaches. First is the informant approach, where multiple rounds of interviews with key informants with deep knowledge of the regulated organization are combined and triangulated to construct a case study of what happened in the organization and what influenced it. Second is the respondent approach, where the same interview is held once with a larger group of similar actors in regulated organizations to understand and compare how these individual actors see compliance and the forces that shape it. The chapter discuses for what purposes each of these approaches is best suited, what their strengths and weaknesses are, and how they can best be conducted. Here it shows the importance of a pilot study, proper interview design, and thorough preparation in interview techniques used during the actual interview.

JOHN MANUEL BARRIOS, Washington University in St. Louis - Olin Business School, National Bureau of Economic Research
Email: John.barrios@wustl.edu
YAEL V. HOCHBERG, National Bureau of Economic Research (NBER), Rice University - Jesse H. Jones Graduate School of Business
Email: hochberg@rice.edu
DANIELE MACCIOCCHI, University of Miami Herbert Business School
Email: dmacciocchi@miami.edu

How do geographic and historical-cultural factors shape new business formation? Using novel data on new business registrations, we document that 75% of the variation in new business formation is explained by time-invariant county-level factors and examine the extent to which such variation is driven by historical, cultural, and geographic factors. Current-day new business formation is positively related to historical attributes that presage individualist culture: frontier experience and historical birthplace diversity, as well as the county’s topographical features. The relation holds when we exploit plausibly exogenous variation in frontier experience driven by shocks to the settlement process that arise from historical immigration flows. Our study points to the fundamental role of geographic and historical-cultural features, especially rugged individualism, in explaining contemporary new business formation in the U.S.

NIZAN GESLEVICH PACKIN, City University of NY, Baruch College, Zicklin School of Business, City University of New York (CUNY) - Department of Law
Email: nizan20@gmail.com
SRINIVAS NIPPANI, Department of Accounting and Finance, Texas A&M University-Commerce
Email: Sri.Nippani@tamuc.edu

Unlike the Federal Reserve (Fed) and its role as the lender of last resort, commercial banks do not seek to maximize social welfare, which can make them operate in ways that undermine the government’s fiscal policy goals. The case of disbursement of pandemic-related Federal relief funds, was a good illustration of these misaligned interests as commercial banks (semi-agents) had divergent objectives from the Federal Government’s (semi-principal’s) goals of Diversity, Equity and Inclusion (DEI). Accordingly, the discriminatory, self-interested, risk-return tradeoff behavior of banks worsened the economic crisis for many persons, especially harming women and minorities, and even intensifying racial injustice.

Banks play a unique role in the financial system, including their distinctive function in connection with money creation. Appreciating this unique role, some commentators have even suggested that banking regulation should be understood as a subcategory of infrastructure regulation. Focusing on this unique role, this Article argues that banks should help advance the government’s fiscal policy, which includes environmental, social and governance (ESG) goals, and particularly the DEI social agenda – at the very least during critical time junctures and economic crisis. But since government-calls or industry-led initiatives for banks to increase transparency in connection with their social activities do not guarantee that banks would promote the government social agendas even during future crises – and even if they do, they would probably do so in conjunction with pursuing their own strategic objectives – there is a need to adopt a top-down incentive-based regulatory approach. Specifically, financial regulators should intensify the public debate on DEI, by adopting a carrots and sticks-based system, which would require banks to provide transparency, integrity, and consistency in connection with addressing ESG goals in their businesses.

Illustrating a way to implement government fiscal policy goals by commercial banks, this Article argues that it is within the financial regulators' purview and legal mandate to require banks to do so, via adopting a CAMELS rating-like system that would be based on social goals such as DEI rating, which would help achieve the promotion of the government’s social policy objectives. The CAMELS rating encourages banks to carry out the government’s monetary policy, while ensuring the banks’ financial safety and soundness, by measuring their performance using financial ratios. This Article suggests creating an additional rating whereby banks can pursue their economic goals while fully complying with the Federal government’s fiscal policy directives. This suggested rating, unlike the CAMELS rating, would not measure financial soundness, but instead measure evaluate banks' commitment to financial inclusion, racial equity, and socially-responsible investing, and environmental stewardship, etc. If banks do not comply, they would be subject to public criticism and consequences, including depositors possibly taking out their money from lower-rated banks and redepositing them in top-rated banks, which could result in higher-rated banks overtaking lower-rated banks. Likewise, higher-rated banks would be encouraged by getting greater access to funds in future crises and more involvement in government programs. Thus, our suggested rating will provide an incentive for banks to compete for more socially responsible behavior. Lastly, DEI-based scores could also help commercial banks not find themselves on the losing side in connection with the growing movement towards public banks in the United States. Especially, if the banks would be wise enough to harness the power of FinTech, as a key driver for inclusion, and a tool that can support sustainable development goals.

DONALD J. WEIDNER, Florida State University College of Law
Email: dweidner@law.fsu.edu

Recent LLC acts impose upon LLCs the corporate rule that most owner claims against managers or other owners are merely “derivative” rather than “direct.” These acts give LLCs the right to appoint special litigation committees (“SLCs”) to decide how to dispose of derivative claims. As in the corporate area, SLCs present the risk that insiders are deciding what to do about claims brought against “one of their own.” This article first reviews the two basic paradigms of judicial review of SLCs that emerged in corporate law: New York applies the deferential business judgment rule to SLCs whereas Delaware offers enhanced scrutiny even if the technical requirements of the business judgment rule are met. The article then considers LLCs directly, beginning with recent LLC acts that limit the standing of members to bring direct actions. The imposition of the machinery of derivative litigation on closely held firms imposes significant transaction costs that serve no purpose and is contrary to the presumptive intent of the members. Legislatures should permit LLCs to “opt in” to the complexities of derivative litigation rather than force them to “opt out” of it. They should consider the Texas approach of exempting closely held LLCs from the machinery of derivative litigation. In this way, members may once again directly sue one another or their firm. At the very least, legislatures should amend the statutory rule that permits a majority of derivative defendants to appoint the SLC that resolves the claims against them. Even in the absence of legislative change, courts should adopt the Delaware approach that subjects the composition, work and recommendations of SLCs to enhanced scrutiny. In particular, courts should require SLC members to be financially, socially, and personally independent.

LORIEN STICE-LAWRENCE, University of Southern California - Marshall School of Business
Email: sticelaw@usc.edu
YU TING FORESTER WONG, University of Southern California - Leventhal School of Accounting
Email: YWong16@gsb.columbia.edu
WUYANG ZHAO, University of Texas at Austin - Department of Accounting
Email: wuyang.zhao@mccombs.utexas.edu

We examine market returns following short-selling attacks, where short sellers publicly disclose the negative information that led them to short their targets. Counterintuitively, we find that for a significant proportion of these attacks (about 30%), the initial market reactions are positive. Consistent with short squeezes being a major driver of these positive returns, we demonstrate that about half of initially positive returns fully reverse over the following quarter, relative to about a third of initially negative returns, and this asymmetric reversal pattern cannot be explained by short sellers profitably covering their positions, by misleading disclosures, or by market attention. Further, short covering levels are high for target firms with initially positive returns that reverse, further suggesting that price pressure from short sellers forced to close their positions explains some of these positive returns. We find that short squeezes are difficult to predict ahead of time but may be triggered by conditions on the day of the attack, including insider purchases, highlighting the difficulty short sellers face in avoiding this risk. Lastly, short squeezes impose substantial costs on short sellers, leading to an average loss of $70 million per suspected squeezed campaign relative to estimated profits of $35 million per successful campaign.

RACHEL GEOFFROY, Ohio State University (OSU) - Department of Accounting & Management Information Systems
Email: geoffroy.1@osu.edu
HEEMIN LEE, Stan Ross Department of Accountancy, Zicklin School of Business, Baruch College, City University of New York
Email: heemin.lee@baruch.cuny.edu

To shed light on the role that academic research plays in Securities and Exchange Commission (SEC) rulemaking, this paper examines the SEC's patterns of consumption of academic research from 2007 through 2017. We show how the Business Roundtable v. SEC ruling in 2011 increased consideration given to academic research during SEC rulemaking. We find that after the ruling, the SEC cites more papers in its proposed rules and, in particular, more papers that illustrate the costs of regulation. This change in academic citations results in fewer negative comment letters on proposed SEC regulations. We survey academics whose research was cited by the SEC, and the majority respond that the SEC's description of their work is completely or mostly accurate. When we survey general academics, their average rating of the SEC's accuracy is lower, although the rating improves regarding specific SEC quotes citing academic research. Although there is still room for a more substantive discussion of research, having a higher standard of cost-benefit analysis leads to a more balanced discussion of academic research.

MAZIAR PEIHANI, University of British Columbia (UBC), Faculty of Law
Email: peihani@allard.ubc.ca

Bail-in within resolution has been at the forefront of the regulatory agenda to end too-big-to fail. The article examines Canada’s recently introduced bail-in framework through a comparative lens, in the backdrop of the COVID-19 pandemic. It argues that Canada embraces a less stringent approach than its international counterparts in applying the bail-in tool and permitting use of public funds. This flexible approach is preferable as it can help the stabilization of the bailed-in bank by facilitating its access to liquidity. Yet, the administration of the bail-in tool will not be without difficulties in Canada. The extensive administrative discretion and opaqueness embedded in the regime come at the expense of rule of law and creditor protection. Further challenges arise from the country’s highly concentrated financial system and interdependencies among the large banks which can also result in a reluctance to turn to bail-in if systemic solvency concerns are present.