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CENTER FOR LAW AND ECONOMIC STUDIES
Fall 2002
Columbia Law and Economic Workshop Series
with
NYU Law School's Colloquium on Corporate Law
During the 2002 fall term, Columbia Law School's Workshop on Law and Economics and New York University Law School's Colloquium on Corporate Law are meeting jointly. The Workshop/Colloquium will meet approximately every other week on Mondays between 4:00 p.m. and 6:00 p.m. The location will alternate between CU and NYU. Presentations during these Workshop/Colloquium sessions will focus primarily on corporate governance. All are welcome. The following is the fall schedule to date:
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September 9th Professor Marcel Kahan, New York University, School of Law
Topic: "The Myth of State Competition in Corporate Law," co-authored with Ehud Kamar
Location: Columbia Law School, (Jerome Greene Hall, Rm. 102), 435 West 116th Street
Abstract - This Article challenges the conventional wisdom that states compete for incorporations. Delaware aside, no state stands to gain meaningful tax revenues or legal business from chartering firms, and no state has taken significant steps to attract incorporations. The explanation for this apathy lies not only in economic entry barriers but, importantly, in political factors. This analysis of the market for incorporations has implications for the present structure of corporate law, for the desirability of federal intervention, and for theories of regulatory competition and federalism in general.
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September 30th Professor Roberta Romano, Yale Law School
Topic: "Does Confidential Proxy Voting Matter?"
Location: Columbia Law School, (Jerome Greene Hall, Rm. 102), 435 West 116th Street
Abstract - Confidential voting in corporate proxies is a principal recommendation in activist institutional investors' guidelines for corporate governance reforms. This paper examines the impact of the adoption of confidential corporate proxy voting on proposal outcomes through a panel data set of shareholder and management proposals submitted from 1986-98 to the 130 firms that adopted confidential voting in those years. Institutional investors promoting confidential voting maintain that private sector institutions have conflicts of interest that prevent them from voting against management even though to do so would maximize the value of their shares; they contend that anonymous ballots will enable such investors to vote their true interest, and thereby anticipate reduced support for management proposals and increased support for shareholder proposals. The paper finds, contrary to confidential voting advocates' expectations, that adoption of confidential voting has no significant effect on voting outcomes. Voting outcomes are best explained by proposal type; neither institutional nor insider ownership, nor prior performance, significantly affect the level of support a proposal receives. Moreover, the conflict of interest hypothesis is not supported in the data, as private institutional holdings post-adoption of the voting reform do not affect the support level for proposals. Confidential voting also does not affect firms' stock performance. The results suggest that institutional investor initiatives directed at confidential voting are not a fruitful allocation of investors' resources.
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October 14th Professor Darius Palia, Rutgers University, Department of Finance
Topic: "The Role of Founders in Large Companies: Entrenchment or Valuable Human Capital?," co-authored with S. Abraham Ravid
Location: NYU Law School, (Vanderbilt Hall, Rm. 210), 40 Washington Square South
Abstract - Why are founders of large companies different from other CEO's? On the on hand, they have financial incentives to maximize shareholder value, given that their pay-performance sensitivity is typically higher than that of non-founder CEO's. On the other hand, they might be entrenched. In extending Shleifer and Vishny's (1989) manager-specific investments model, we present a model in which founders work harder, become endogenously entrenched, and are not responsive to increases in pay-performance sensitivity. We then test this model using a panel data set of large companies, controlling for the endogeneity of managerial compensation. We find that founders tend to be less responsive to performance incentives. We also find that founder led firms also tend to be more profitable (in terms of Q and operating profits), supporting our "Benevolent entrenchment" hypothesis.
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October 28th Professor Lucien Bebchuk, Harvard University Law School
Topic: "The Effects of Takeover Defenses on Bid Outcomes"
Location: Columbia Law School, (Jerome Greene Hall, Rm. 102), 435 West 116th Street
Abstract - This paper analyzes how asymmetric information affects the choice of corporate governance arrangements by firms that go public. It is shown that such asymmetry might lead firms to adopting - through the design of securities and of corporate charters - corporate governance arrangements that are known to be inefficient both by public investors and those taking firms public. When assets with higher value produce opportunities for higher private benefits of control, asymmetric information about the characteristics of assets or managers will lead some or all of the firms going public to offer a sub-optimal level of investor protection. These results can help explain why charter provisions cannot be relied on to provide optimal investor protection in countries with poor investor protection, why companies going public in the US commonly include substantial antitakeover protections in their charters, and why companies rarely restrict self-dealing or the taking of corporate opportunities more than is done by the corporate laws of their country. The results also identify a beneficial role that mandatory legal rules can plan in the area of corporate governance.
Key words: Adverse selection, asymmetric information, corporate governance, ivestor protection, security design, takeovers, private benefits of control, agency costs, self-dealing, IPO, going public, corporate charter, private ordering.
JEL classification: G30,G34, K22
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November 11th Professor Merritt Fox, University of Michigan, School of Law
Topic: "Law Share Price Accuracy and Economic Performance: The New Evidence," authored with Randall Morck, Bernard Yeung & Artyom Durnev
Location: NYU Law School, (Vanderbilt Hall, Rm. 210), 40 Washington Square South
Abstract - An active debate exists within law and economics concerning the desirability of mandatory disclosure. This article introduces important new empirical evidence to this debate that helps resolve two central, highly disputed questions. First, is the efficiency of the real economy enhanced when share prices become more accurate? Second, do rules mandating issuers to make public disclosures increase share price accuracy?
We start by discussing recently published studies in the finance literature by authors of this paper and others utilizing the R2 methodology for measuring share price accuracy. These studies strongly suggest that greater share price accuracy does lead to enhanced efficiency in the real economy.
We then present the results of a new study that we have conducted, utilizing the same methodology, that suggests that mandatory disclosure in fact does increase the amount of meaningful information reflected in share prices. The new study examines the effect of the change in disclosure rules in December 1980 enhancing requirements concerning management discussion and analysis of issuer financial condition and operating results (MD&A). This change for the first time in effect requires managers to disclose any material information that suggests that the issuer=s most recent results are not necessarily indicative of future operating results or future financial condition. The study suggests that share prices did in fact become more informed as a result of the enhanced MD&A requirements.
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November 25th Professor Robert Daines, New York University, School of Law
Topic: "The Incorporation Choices of IPO Firms and the Market for Corporate Law"
Location: Columbia Law School, (Jerome Greene Hall, Rm. 102), 435 West 116th Street
Abstract - This article presents the first evidence about the choice of corporate law and the structure of the market for corporate charters at an IPO. Though firms are free to incorporate in any of the 50 states and are said to search for optimal legal rules, they appear to simply make a binary choice: Delaware or their home state. Federalism has thus resulted in a series of local markets with one national producer, and not a nationwide market or "race to the top/bottom." This pattern raises questions about how firms choose a state of incorporation and suggests that there is a substantial home state advantage (or home bias). I explore reasons for this home bias and report evidence that lawyers play a key role in determining state of incorporation and agency costs may affect the advice they provide. I also examine other factors that may affect a firm's domicile, including variation in state law and firm characteristics. Takeover laws do not appear to be important and there is some mixed evidence that network qualities may matter.
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December 9th Professors Robert B. Thompson and Randall S. Thomas, Vanderbilt University School of Law
Topic: "Shareholder Litigation: Reexamining the Balance Between Litigation Agency Costs and Management Agency Costs"
Location: NYU Law School, (Vanderbilt Hall, Rm. 210), 40 Washington Square South
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