Posts Tagged ‘Legal systems’

Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 29, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from John Core and Rodrigo Verdi of the Accounting Group at MIT, and Luzi Hail of the Department of Accounting at the University of Pennsylvania.

Whether mandatory disclosure regulation and insider ownership affect a firm’s cost of capital is an important question in financial economics. In our paper, Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital, which was recently made publicly available on SSRN, we examine this question on a large global sample of more than 10,000 firms across 35 countries.

Theory predict that disclosure regulation is negatively related to the cost of capital due to two separate effects: (i) an information effect in which better disclosure improves investors’ prediction of future cash flows, or (ii) a stewardship effect in which better disclosure improves managerial alignment with shareholders and therefore increases expected cash flows. The stewardship effect is not unique to disclosure, but is also present in other governance mechanisms that increase managerial alignment such as inside ownership. As a result, these alternative alignment mechanisms potentially reinforce or substitute for the stewardship effect of disclosure. We test this argument by examining whether inside ownership is negatively associated with the cost of capital and how inside ownership affects the relation between disclosure and the cost of capital.

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The State of State Competition for Incorporations

Posted by Marcel Kahan, NYU School of Law, on Monday September 22, 2014 at 9:05 am
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Editor’s Note: Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law.

The competition by states for incorporations has long been the subject of extensive scholarship. Views of this competition differ radically. While some commentators regard it as “The Genius of American Corporate Law,” others believe it leads to a “Race to the Bottom” and yet others have taken the position that it barely exists. Despite this lack of consensus among corporate law scholars, scholars in other fields have treated state competition for incorporations as a paradigm case of regulatory competition.

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Revisiting American Exceptionalism

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 5, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Naomi R. Lamoreaux, Stanley B. Resor Professor of Economics and History, Yale University, and Research Associate, NBER.

The legal rules governing businesses’ organizational choices have varied across nations along two main dimensions: the number of different forms that firms could adopt; and the extent to which firms had the contractual freedom to modify the available forms to suit their needs. Until the last quarter of the twentieth century, businesses in the U.S. had a narrower range of forms from which to choose than their counterparts in most other countries and also much less ability to modify the basic forms contractually. In the recent NBER Working Paper, Revisiting American Exceptionalism: Democracy and the Regulation of Corporate Governance in Nineteenth-Century Pennsylvania, I explore the exceptional character of the U.S. legal rules by focusing on the different structure of U.S. and British general incorporation laws.

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The Foundations of Corporate Social Responsibility

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 19, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Hao Liang and Luc Renneboog, both of the Department of Finance at Tilburg University.

A fundamental issue in business and economics is the sustainability—and not merely the growth—of economic development, which crucially hinges on the socially responsible operational and investment behavior of modern corporations (Porter, 1991). There is a widespread recognition, as well as growing empirical evidence, that corporate social responsibility (CSR) can substantially contribute to social progress and stakeholder wealth, including the wealth of shareholders (e.g., Dimson, Karakas, and Li, 2012; Deng, Kang, and Low, 2013). In our paper, The Foundations of Corporate Social Responsibility, which was recently made publicly available on SSRN, we examine the forces that fundamentally steer companies to behave as good citizens in society.

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Law and History by Numbers: Use, But With Care

Posted by Brian R. Cheffins, University of Cambridge, on Tuesday December 17, 2013 at 9:13 am
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Editor’s Note: Brian Cheffins is a Professor of Corporate Law at the University of Cambridge. This post is based on a paper co-authored by Professor Cheffins, Steven A. Bank, Paul Hastings Professor of Business Law at UCLA School of Law, and Harwell Wells of Temple University Beasley School of Law.

“Leximetrics,” which involves quantitative measurement of law, has become a prominent feature in empirical work done on comparative corporate governance, with particular emphasis being placed on the contribution that robust shareholder protection can make to a nation’s financial and economic development. Using this literature as our departure point, we are currently engaging in a leximetric analysis of the historical development of U.S. corporate law. Our paper, Law and History by Numbers: Use, But With Care, prepared for a University of Illinois College of Law symposium honoring Prof. Larry Ribstein, is part of this project. We identify in this paper various reasons for undertaking a quantitative, historically-oriented analysis of U.S. corporate law. The paper focuses primarily, however, on the logistical challenges associated with such an inquiry.

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Corporate Governance in the Shadow of the State

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 10, 2013 at 9:25 am
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Editor’s Note: The following post comes to us from Marc Moore, Deputy Director of the University College London Centre for Commercial Law.

Over recent decades, corporate governance has become an increasingly high profile aspect of legal scholarship and practice. But despite this widespread interest, there remains considerable uncertainty about how exactly corporate governance should be defined or understood. Of particular concern is whether corporate governance is most appropriately understood as an aspect of ‘private’ (facilitative) law, or else as a part of ‘public’ (regulatory) law. In my recent book, Corporate Governance in the Shadow of the State (2013, Hart Publishing), I demonstrate that this question is not just an academic one in the pejorative sense. On the contrary, it is arguably the most important issue confronting those who study or teach the subject of corporate governance in any level of depth or analytical rigour.

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Legal Diversification

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 2, 2013 at 9:08 am
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Editor’s Note: The following post comes to us from Kelli A. Alces, Loula Fuller and Dan Myers Professor at Florida State University College of Law.

Diversification is the best protection investors have from the risks of capital investment. Modern portfolio theory requires that investors diversify their holdings by investing in firms whose financial returns are influenced by different factors. That has traditionally meant investing in firms in different industries. The object is to identify the factors that could cause a firm’s return to vary from what is expected and to invest in firms that differ with regard to those elements of risk. By employing this investment strategy, investors can “diversify away” firm-specific risks.

In my forthcoming Essay, Legal Diversification, I introduce a new dimension along which investors can diversify. “Legal diversification” is an investment strategy whereby investors purchase securities governed by different legal rules in order to diversify away the risk that any one set of legal rules will fail to adequately limit the agency costs of business management. An investor may hold a diversified portfolio of stocks in different kinds of public corporations, but that portfolio would not necessarily be legally diversified. A portfolio would be legally diversified if it contained various kinds of securities issued by privately held limited liability companies, public corporations, emerging growth companies, and various derivatives. By holding a diversified portfolio of investments in firms and securities governed by different legal rules, investors can enjoy some protection from the failures of a particular legal regime while also sampling the benefits more successful regimes offer.

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How Law Can Address the Inevitability of Financial Failure

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday June 13, 2013 at 9:04 am
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Editor’s Note: The following post comes to us from Iman Anabtawi, Professor of Law at UCLA School of Law, and Steven L. Schwarcz, Stanley A. Star Professor of Law & Business at Duke University School of Law and Founding/Co-Academic Director of Duke Global Capital Markets Center.

In our forthcoming article, Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure, 92 Texas Law Review (2013), we observe that, unlike many other areas of regulation, financial regulation operates in the context of a complex interdependent system. This, we argue, has implications for financial regulatory policy, especially the choice between ex ante regulation aimed at preventing financial failures and ex post regulation aimed at responding to those failures.

Our article begins by considering the nature of systems and the usefulness of systems analysis as a methodology for studying law. Law-related systems are systems in which the law is an integral element. The financial system can be viewed as a complex network in which financial firms interact directly and indirectly (through markets) against the background of legal rules.

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Comparative Company Law: Case Based Approach

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday May 24, 2013 at 9:16 am
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Editor’s Note: The following post comes to us from Mathias Siems of Durham University and David Cabrelli of Edinburgh University, UK.

There has been an exponential growth in interest in comparative company law in recent years. For example, in the period from 2002 to 2011, no fewer than ten monographs or edited collections were published exploring this new field of enquiry. The burgeoning literature was mirrored by an increase in University Postgraduate courses or programs in comparative company law and corporate governance. Moreover, the dissolution of trade barriers and mass cross-border capital flows engendered by the forces of competition and globalization have necessitated legal practitioners to be conversant with the company laws of jurisdictions other than their own.

In Mathias Siems and David Cabrelli (eds.), Comparative Company Law: A Case Based Approach, Hart Publishing, 2013 (publisher’s website; introduction on SSRN) we have aimed to fill an important gap in this field. Existing books on comparative company law tend to focus on the institutional structure of the corporation but this approach risks overlooking specific cases and how the issues arising from disputes are resolved in different jurisdictions. For example, topics related to directors’ liability, creditor protection and shareholders’ rights may best be understood by analyzing how selected hypothetical cases would be solved in different countries.

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Towards a Legal Theory of Finance

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 19, 2012 at 8:53 am
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Editor’s Note: The following post comes to us from Katharina Pistor, Michael I. Sovern Professor of Law at Columbia University School of Law.

The paper, Towards a Legal Theory of Finance, develops the building blocks for a legal theory of finance (LTF). By placing law at the center of the analysis of financial systems LTF sheds light on the construction of financial markets, their interconnectedness and thus vulnerability to crisis, and situates power where law is elastic or suspended in the name of financial stability. LTF has four elements: It holds that modern financial markets are (1) rule-bound systems; (2) essentially hybrid; (3) beset by the law-finance paradox; (4) and in the last instance subject to discretionary rather than rule-bound actions.

…continue reading: Towards a Legal Theory of Finance

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