Blue Sky Meetings
September 18, 2017 (Monday) at 12:10 PM
- Isidor and Seville Sulzbacher Professor of Law, Columbia Law School
Location: Jerome Greene Hall, room 602
Topic: The Utility of Finance
(co-authored with Shlomit Azgad-Tromer)
Abstract: Public Utilities Commissions (PUCs) are charged with regulating a utility’s rates at levels that serve the public’s interest while allowing the utility’s investors to earn a rate of return commensurate with that expected by businesses facing similar risks. Although the process of adjusting rates for risk is a staple of modern finance, we know surprisingly little about how well PUCs accomplish their regulatory mandate when judged against standard benchmarks of financial economics. This article analyzes a dozen years’ worth of gas and electric rate-setting decisions from PUCs across the United States and Canada, demonstrating empirically that allowed returns on equity diverge significantly and systematically from the predictions of accepted asset pricing methodologies in finance. Our analysis suggests that current regulatory practice more plausibly reflects an amalgam of other non-finance desiderata, including political goals, incentive provision, regulatory capture and lack of financial valuation expertise among regulators. We also present evidence based on a unique field experiment suggesting that training in finance can partially ameliorate the divergence between PUC rate setting and financial methodologies.
September 27, 2017 (Wednesday) at 12:10 PM
- Visiting Professor of Law, Columbia Law School
- Alain Poher Professor of Law at Tel Aviv University
- Fischel-Neil Distinguished Visiting Professor of Law at the University of Chicago
Location: Jerome Greene Hall, room 807
Topic: The Restoration Remedy in Private Law: A Novel Approach to Compensation for Emotional Harm
(co-authored with Omri Ben-Shahar)
Abstract: One of the most perplexing problems in private law is when and how to compensate victims for emotional harm. This article proposes a novel way to accomplish this remedial goal—a restoration measure of damages. It solves the two fundamental problems of compensation for emotional harm—measurement and verification. Instead of measuring the emotional harm and awarding the aggrieved party money damages, the article proposes that damages be paid to directly restore the underlying interest, the impairment of which led to the emotional harm. And to solve the problem of verification—compensating only those who truly suffered the emotional harm—the article develops a sorting mechanism that separates those emotionally harmed from fakers, awarding the restoration measure of damages only to account for the harm suffered by the former class. The article demonstrates how the proposed restoration remedy would apply in important cases, and discusses its relevance to additional remedial challenges in private law.
October 11, 2017 (Wednesday) at 12:10 PM
Zohar Goshen (Columbia Law School) & Doron Yizhak Levit (Wharton)
- Zohar Goshen is the Alfred W. Bressler Professor of Law and Director of the Center for Israeli Legal Studies at Columbia Law School.
- Doron Levit is Assistant Professor of Finance at The Wharton School.
Location: Jerome Greene Hall, room 602
Topic: The Irrelevance of Corporate Governance Structure
(co-authored with Doron Yizhak Levit, Wharton)
Abstract: We develop a model analyzing the conditions under which the allocation of control rights between a shareholder and a manager is irrelevant to the firm value. In our model managers differ in their competence and integrity and shareholders only differ in their competence. Given their type, managers can either create value or destroy value and consume private benefits. Given a shareholders competence, she then needs to deduct from the decision made by the manager whether he should be retained or fired. The allocation of control rights allowing a shareholder to fire a manager can scale from easy to impossible. We show that as long as shareholders do not have perfect competence, and managers with meaningful career concerns are likely to do as much harm as good, the allocation of control rights is irrelevant to firm value. Our result has two important implications. First, to the study of corporate governance structures: it encourages specifying the conditions explaining why one will assume a certain allocation of control rights is consistently better than others (beyond the mere risk of agency cost). Second, to the absence of valuation models for control rights: it explains why developing such a model is impossible; a valuation model requires abstracting away from firm specific elements, but doing so will result in control rights having no value at all.
October 16, 2017 (Monday) at 12:10 PM
- Joseph Pulitzer II and Edith Pulitzer Moore Professor of Journalism, Columbia Journalism School
- Dean Emeritus, Columbia Journalism School
Location: Jerome Greene Hall, room 646
Topic: Adolf Berle and Political Economy
Abstract: Most legal scholars think of Columbia law professor Adolf Berle (1895-1971) as the author of a series of highly influential law review articles, written when he was very young, proposing the idea that in the American corporation, ownership had become separated from control—meaning that managers of corporations could effectively ignore their passive and widely distributed shareholders. But Berle also considered himself to be one of the world’s major political philosophers (Columbia College for many years assigned his work to all first-year students taking the Contemporary Civilization course), and he had the good fortune of being, in addition, a highly influential advisor to two important politicians, Franklin Roosevelt and Fiorello La Guardia, so his ideas had consequences. This talk, by a journalist working on a narrative history, will focus on Berle’s vision of a good American society, which was rooted in but went far beyond his work on corporate governance: what it was, and what its strengths and weaknesses turned out to be.
October 25, 2017 (Wednesday) at 12:10 PM
- Visiting Professor of Law, Columbia Law School (Fall 2017)
- Associate Professor of Law and Finance and Fellow of Linacre College, Faculty of Law, Oxford University, UK
Location: William & June Warren Hall (aka "Big Warren," room 600)
"Big Warren" Hall is at the northeast corner of 115th St. and Amsterdam Ave.
Topic: Derivatives Deconstructed
Paper to be distributed via email to event attendees.
Abstract: Derivatives are sophisticated financial instruments that bundle elements of state-contingent contracting, the formal allocation of property and decision-making rights, and informal mechanisms such as reputation and the expectation of future dealings. This hybridity splits every derivative contract into two separate contracts: one that governs under normal market conditions, and another that governs under conditions of fundamental uncertainty. In good times, derivative contracts contemplate the near automatic determination and performance of each counterparty's obligations. In bad times, these contracts include various mechanisms designed to provide counterparties with the flexibility to incorporate new information, fill contractual gaps, and facilitate efficient renegotiation.
Deconstructing derivative contracts in order to highlight their inherent hybridity yields a number of important policy insights. These insights relate to (i) whether derivatives should be regulated as 'securities', (ii) the desirability of allowing clearinghouses to unilaterally restructure the derivative portfolios of failed counterparties, (iii) the promise and perils of using distributed ledger technology and smart contracts to create a new infrastructure for the execution, clearing, and settlement of derivative contracts, and (iv) the important role played by central banks as 'dealers of last resort' during periods of fundamental uncertainty and financial instability.
October 30, 2017 (Monday) at 12:10 PM
- Associate Professor of Law, Columbia Law School
Location: Case Lounge (Jerome Greene Hall room 701)
Topic: The Law and Macroeconomics of Corporate Governance
Paper to be distributed via email to event attendees.
Abstract: Corporate governance has long focused on the microeconomic benefits of change while giving less attention to the macroeconomic consequences of instability. The classical justification for ignoring volatility is diversification. Portfolio theory shows that diversified investors should be indifferent to idiosyncratic risk, and firm-specific governance changes should add little to the total variance of a diversified investor’s portfolio.
But the effects of governance changes are not necessarily confined to individual firms. For example, layoffs can enhance efficiency but also impose adjustment costs as employees search for new jobs and forego consumption (Gordon, 2017). While disagreement and difference of opinion often lead to better decisions, they can also increase aggregate volatility in product, labor and capital markets. Investors cannot diversify away macroeconomic volatility, and these costs are generally not internalized by activists and other shareholders agitating for change.
In this project, I consider the implications of macroeconomic instability for corporate governance. I distinguish the impact of aggregate volatility from classical distributional considerations. Even if tax policy were to facilitate perfect income redistribution, macro-volatility would still impose costs on fully diversified shareholders whose wealth is invested in the capital markets. Instability is a first-order consideration when evaluating the welfare implications of corporate governance institutions.
November 27, 2017 (Monday) at 12:10 PM
- Charles Evans Gerber Professor of Law, Columbia Law School
Location: JG 807
Topic: Race and Consumer Bankruptcy
Abstract: Among consumers who file for bankruptcy, African Americans file Chapter 13 petitions at substantially higher rates than other racial groups. Some have hypothesized that the difference is attributable to discrimination by attorneys, who “steer” African American debtors into Chapter 13, instead of Chapter 7, which is less lucrative for the attorneys. We explore an alternative hypothesis: Among distressed consumers, African Americans have longer commutes to work and supermarkets, rely more heavily on cars for these commutes, and therefore have greater demand for a bankruptcy process (Chapter 13) that allows them to retain their cars. We begin by showing that African Americans tend to have longer commuting times than other consumers and, when they do have longer commuting times, they also have relatively high Chapter 13 filing rates. We show this using data from Atlanta, Chicago, and Memphis, each of which has been identified as a location with overrepresentation of African Americans in Chapter 13. We then test our hypothesis that African Americans’ reliance on automobiles is a cause of their substantially higher use of Chapter 13. We do this using data from Chicago, where the the city recently implemented an aggressive program to collect parking debts by seizing the cars and suspending the licenses of consumers with large debts. We show that this city-wide program disproportionately affected African Americans living on the West and South Sides of the City. Because African Americans were most affected by the program, their share of Chapter 13 filings increased substantially. Although we do not disprove the possibility of discrimination by attorneys, our data show that selection effects are potentially as important in explaining racial patterns in Chapter 13 cases.
December 6th, 2017 (Wednesday) at 12:10 PM
- Stephen and Barbara Friedman Visiting Professor of Law (Fall 2017)
- Hogan Lovells Professor of Law and Finance at Oxford University
- Fellow of the European Corporate Governance Institute
Location: JG 807
Topic: Directors’ Rewards: A Compliance-Focused Reappraisal
Abstract: This paper considers the relationship between changes in directorial compensation and directors’ liability for compliance oversight. We make two claims. First, as a positive matter, the shift to stock-based pay has the propensity to undermine directors’ engagement with compliance oversight where this conflicts with shareholder value. We describe two distinct ways in which this occurs, through short-termism in stock-based compensation generally and upside bias in option-based compensation more specifically.
Second, in the light of the changes in compensation practice, we argue it is appropriate to rethink the scope of judicial scrutiny of boards’ compliance oversight. Although corporations’ compliance obligations have grown since 1996, and compensation practices have changed in ways that tend to compromise boards’ ability to meet them, the Caremark doctrine has remained static. Moreover, the expectation that directors will receive and accumulate company stock provides a discrete target for liability recoveries that does not extend beyond the director’s firm-specific wealth and thus ought not substantially to diminish a director’s willingness to serve.