Business Commons^™

“Safe” Annuity Retirement Products And A Possible Us Retirement Crisis, Thomas E. Lambert, Christopher B. Tobe

Faculty Scholarship

This paper examines a looming possible crisis in many Americans’ retirement plans due to the proliferation of annuity products in their retirement investment portfolios. As defined benefit pension plans have almost completely disappeared as a means of retirement savings and have been replaced by defined contribution retirement plans over the last 40 to 50 years, a great number of private and public sector defined contribution retirement plans have become laden with insurance contracts called annuities. Of the remaining solid defined benefit plans many, through a process called Pension Risk Transfer are being converted to high-risk single entity annuities. Such products …

Cleaning Corporate Governance, Jens Frankenreiter, Cathy Hwang, Yaron Nili, Eric L. Talley

Faculty Scholarship

Although empirical scholarship dominates the field of law and finance, much of it shares a common vulnerability: an abiding faith in the accuracy and integrity of a small, specialized collection of corporate governance data. In this paper, we unveil a novel collection of three decades’ worth of corporate charters for thousands of public companies, which shows that this faith is misplaced.

We make three principal contributions to the literature. First, we label our corpus for a variety of firm- and state-level governance features. Doing so reveals significant infirmities within the most well-known corporate governance datasets, including an error rate exceeding …

Deterring Algorithmic Manipulation, Gina-Gail S. Fletcher

Faculty Scholarship

Does the existing anti-manipulation framework effectively deter algorithmic manipulation? With the dual increase of algorithmic trading and the occurrence of “mini-flash crashes” in the market linked to manipulation, this question has become more pressing in recent years. In the past thirty years, the financial markets have undergone a sea change as technological advancements and innovations have fundamentally altered the structure and operation of the markets. Key to this change is the introduction and dominance of trading algorithms. Whereas initial algorithmic trading relied on preset electronic instructions to execute trading strategies, new technology is introducing artificially intelligent (“AI”) trading algorithms that …

Foreign Corruption As Market Manipulation, Gina-Gail S. Fletcher

Faculty Scholarship

No abstract provided.

Tepoel Lecture: Bond Trustees And The Rising Challenge Of Activist Investors, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Securitization Ten Years After The Financial Crisis: An Overview, Steven L. Schwarcz

Faculty Scholarship

This symposium issue examines securitization a decade after the 2008 financial crisis. Prior to the crisis, securitization was one of America’s dominant means of financing. Many observers, however, blamed securitization for causing the crisis, sparking regulation that arguably has been overly restrictive and, in some cases, even punitive. Where are we now?

Regulating Complacency: Human Limitations And Legal Efficacy, Steven L. Schwarcz

Faculty Scholarship

This Article examines how insights into limited human rationality can improve financial regulation. The Article identifies four categories of limitations—herd behavior, cognitive biases, overreliance on heuristics, and a proclivity to panic—that undermine the perfect-market regulatory assumptions that parties have full information and will act in their rational self-interest. The Article then analyzes how insights into these limitations can be used to correct resulting market failures. Requiring more robust disclosure and due diligence, for example, can help to reduce reliance on misleading information cascades that motivate herd behavior. Debiasing through law, such as requiring more specific, poignant, and concrete disclosure of …

Benchmark Regulation, Gina-Gail S. Fletcher

Faculty Scholarship

Benchmarks are metrics that are deeply embedded in the financial markets. They are essential to the efficient functioning of the markets and are used in a wide variety of ways—from pricing oil to setting interest rates for consumer lending to valuing complex financial instruments. In recent years, benchmarks have also been at the epicenter of numerous, multi-year market manipulation scandals. Oil traders, for example, deliberately execute trades to drive benchmarks lower artificially, allowing the traders to capitalize on the manipulated benchmarks. This ensures that later trades relying on the benchmarks will be more profitable than they otherwise would have been. …

Too Big To Fool: Moral Hazard, Bailouts, And Corporate Responsibility, Steven L. Schwarcz

Faculty Scholarship

Domestic and international regulatory efforts to prevent another financial crisis have been converging on the idea of trying to end the problem of “too big to fail”—that systemically important financial firms take excessive risks because they profit from success and are (or at least, expect to be) bailed out by government money to avoid failure. The legal solutions being advanced to control this morally hazardous behavior tend, however, to be inefficient, ineffective, or even dangerous—such as breaking up firms and limiting their size, which can reduce economies of scale and scope; or restricting central bank authority to bail out failing …

Controlling Systemic Risk Through Corporate Governance, Steven L. Schwarcz

Faculty Scholarship

Most of the regulatory measures to control excessive risk taking by systemically important firms are designed to reduce moral hazard and to align the interests of managers and investors. These measures may be flawed because they are based on questionable assumptions. Excessive corporate risk taking is, at its core, a corporate governance problem. Shareholder primacy requires managers to view the consequences of their firm’s risk taking only from the standpoint of the firm and its shareholders, ignoring harm to the public. In governing, managers of systemically important firms should also consider public harm. This proposal engages the long-standing debate whether …

Rethinking Corporate Governance For A Bondholder Financed, Systemically Risky World, Steven L. Schwarcz

Faculty Scholarship

This Article makes two arguments that, combined, demonstrate an important synergy: first, including bondholders in corporate governance could help to reduce systemic risk because bondholders are more risk averse than shareholders; second, corporate governance should include bondholders because bonds now dwarf equity as a source of corporate financing and bond prices are increasingly tied to firm performance.

Understanding The Global In Global Finance And Regulation, Lawrence G. Baxter

Faculty Scholarship

No abstract provided.

Shadow Banking And Regulation In China And Other Developing Countries, Steven L. Schwarcz

Faculty Scholarship

The rapid but largely unregulated growth in shadow banking in developing countries such as China can jeopardize financial stability. This article discusses that growth and argues that a regulatory balance is needed to help protect financial stability while preserving shadow banking as an important channel of alternative funding. The article also analyzes how that regulation could be designed.

Keynote Address, Regulating Corporate Governance In The Public Interest: The Case Of Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

There’s long been a debate whether corporate governance law should require some duty to the public. The accepted wisdom is not to require such a duty—that corporate profit maximization provides jobs and other public benefits that exceed any harm. This is especially true, the argument goes, because imposing specific regulatory requirements and making certain actions illegal or tortious can mitigate the harm without unduly impairing corporate wealth production. Whether that is true in other contexts, this paper—delivered as the keynote address at the June 2016 National Business Law Scholars Conference at The University of Chicago Law School—questions if it’s true …

Misalignment: Corporate Risk-Taking And Public Duty, Steven L. Schwarcz

Faculty Scholarship

This article argues for a “public governance duty” to help manage excessive risk-taking by systemically important firms. Although governments worldwide, including the United States, have issued an array of regulations to attempt to curb that risk-taking by aligning managerial and investor interests, those regulations implicitly assume that investors would oppose excessively risky business ventures. That leaves a critical misalignment: because much of the harm from a systemically important firm’s failure would be externalized onto the public, including ordinary citizens impacted by an economic collapse, such a firm can engage in risk-taking ventures with positive expected value to its investors but …

Perspectives On Regulating Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

This book chapter, which synthesizes several of the author’s articles, attempts to provide useful perspectives on regulating systemic risk. First, it argues that systemic shocks are inevitable. Accordingly, regulation should be designed not only to try to reduce those shocks but also to protect the financial system against their unavoidable impact. This could be done, the chapter explains, by applying chaos theory to help stabilize the financial system. The chapter then focuses on trying to prevent excessive corporate risk-taking, which is one of the leading triggers of systemic shocks and widely regarded to have been a principal cause of the …

Pricing Disintermediation: Crowdfunding And Online Auction Ipos, A. Christine Hurt

Faculty Scholarship

No abstract provided.

Student Evaluation Instruments: Online Vs. Paper, R. Brian Balyeat, Julie Cagel

Faculty Scholarship

No abstract provided.

Mirr: The Means To An End? Reinforcing Optimal Investment Decisions Using The Npv Rule, R. Brian Balyeat, Julie Cagel

Faculty Scholarship

Unlike other investment decision techniques, Modified Internal Rate of Return (MIRR) has yielded mixed academic opinions. MIRR is sometimes heralded as a superior decision rule, sometimes seen as having little value, and sometimes ignored altogether. We offer an alternative view; that the value of MIRR lays in improving students’ understanding of net present value (NPV) as the primary decision criteria for investment decisions. Results of a classroom experiment support MIRR’s pedagogical value for reinforcing the NPV rule.

Corporate Risk-Taking And Public Duty, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

The Duty To Manage Risk, A. Christine Hurt

Faculty Scholarship

No abstract provided.

Activism And The Shift To Annual Director Elections, Re-Jin Guo, Timothy A. Kruse, Tom Nohel

Faculty Scholarship

No abstract provided.

Facilitating Successful Failures, Michelle M. Harner, Jamie Marincic Griffin

Faculty Scholarship

Approximately 80,000 businesses fail each year in the United States. This article presents an original empirical study of over 400 business restructuring professionals focused on a critical, arguably contributing factor to these failures—the conduct of boards of directors and management. Anecdotal evidence suggests that management of distressed companies often bury their heads in the sand until it is too late to remedy the companies’ problems, a phenomenon commonly called “ostrich syndrome.” The data confirm this behavior, show a prevalent use of loss framing, and suggest trends consistent with prospect theory. The article draws on these data and behavioral economics to …

The Bankruptcy-Law Safe Harbor For Derivatives: A Path-Dependence Analysis, Steven L. Schwarcz, Ori Sharon

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers—whether in the United States or abroad—should not automatically assume, based on its …

Regulating Systemic Risk In Insurance, Daniel Schwarcz, Steven L. Schwarcz

Faculty Scholarship

As exemplified by the dramatic failure of AIG, insurance companies and their affiliates played a central role in the 2008 global financial crisis. It is therefore not surprising that the Dodd-Frank Act—the United States’ primary legislative re-sponse to the crisis—contained an entire title dedicated to insurance regulation, which has traditionally been the responsibility of individual states. The most important insurance-focused reforms in Dodd-Frank empower the Federal Reserve Bank to impose an additional layer of regulatory scrutiny on top of state insurance regulation for a small number of “systemically important” nonbank financial companies, such as AIG. This Article argues, however, that …

Extraterritorial Impacts Of Recent Financial Regulation Reforms: A Complex World Of Global Finance, Lawrence G. Baxter

Faculty Scholarship

No abstract provided.

Comments On The September 29, 2014 Fsb Consultative Document, ‘Cross-Border Recognition Of Resolution Action’, Steven L. Schwarcz, Mark Jewett, Bruce Leonard, Catherine Walsh, David Kempthorne

Faculty Scholarship

This CIGI Paper No. 51 was released on December 3, 2014 by the Centre for International Governance Innovation (CIGI) as a response to the Financial Stability Board’s (FSB) Consultative Document, “Cross-Border Recognition of Resolution Action.” Principally authored by CIGI Senior Fellow Steven L. Schwarcz (who works with the think tank’s International Law Research Program), the Paper comments on the policy measures proposed by the FSB, an international body that monitors and makes recommendations about the global financial system, to address the cross-border legal uncertainties of troubled systemically important financial firms. In that context, the Paper explains why a statutory approach …

Transnational Regulatory Regimes In Finance: A Comparative Analysis Of Their (Dis-)Integrative Effects, Katharina Pistor

Faculty Scholarship

Financial markets have become increasingly interconnected with financial intermediaries and instruments linking local and national markets to form regional or even global ones. The global financial crisis of 2008 demonstrated once more that financial interdependence can be both a blessing and a curse. It facilitates the movement of capital and the expansion of credit, and as such promotes economic development in good times; however, in bad times it transmits liquidity shortages throughout the system triggering financial crises and economic recessions where credit expansion earlier fuelled expansion and growth. A critical question therefore is how to structure the governance of transnational …

Walking Back From Cyprus, Lee C. Buchheit, Mitu Gulati

Faculty Scholarship

Last Friday, the European leaders trespassed on consecrated ground by putting insured depositors in Cypriot banks in harm’s way. They had other options, none of them pleasant but some less ominous than the one they settled on.

Dispersed Ownership: The Theories, The Evidence, And The Enduring Tension Between "Lumpers" And "Splitters", John C. Coffee Jr.

Faculty Scholarship

This article argues that dispersed ownership resulted less from inexorable forces and more from private ordering. Neither legal nor political conditions mandated or prevented the appearance of dispersed ownership. Rather, entrepreneurs, investment bankers, and investors — all seeking to maximize value — sometimes saw reasons why selling control into the public market would maximize value for them. But when and why? That is the article's focus. It argues that law played less of a role than specialized intermediaries — investment banks, securities exchanges, and other agents — who found it to be in their self-interest to foster dispersed ownership and …