Business Commons^™

The New Public/Private Equilibrium And The Regulation Of Public Companies, Elisabeth De Fontenay, Gabriel Rauterberg

Faculty Scholarship

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other …

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.

The Enduring Distinction Between Business Entities And Security Interests, Ofer Eldar, Andrew Verstein

Faculty Scholarship

What are business entities for? What are security interests for? The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors. But if both bodies of law partition assets, then what distinguishes them? In fact, these bodies of law appear to be converging as increasing flexibility irons out any differences. Indeed, many legal products, such as securitization vehicles, insurance products known as captive insurance, and mutual funds, employ entities to create distinct asset pools. Moreover, recent legal innovations, such as “protected cells,” which were created to facilitate such products, …

Seeking An Objective For Regulating Insider Trading Through Texas Gulf Sulphur, James D. Cox

Faculty Scholarship

Data summarized in the opening of this article document that inside trading is a growth industry. And, as deals get ever bigger, the growth curve becomes steeper as more the data confirms intuition that the more who know about a good thing the more who will seek to harvest its benefits. Even though insider trading appears to have thrived during the fifty years after Texas Gulf Sulphur, we gather in this symposium to celebrate the decision. But why? As developed below, the Second Circuit’s landmark decision gave way to the Supreme Court’s erection of a fiduciary framework that this article …

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?

The Myth Of The Ideal Investor, Elisabeth De Fontenay

Faculty Scholarship

Critiques of specific investor behavior often assume an ideal investor against which all others should be compared. This ideal investor figures prominently in the heated debates over the impact of investor time horizons on firm value. In much of the commentary, the ideal is a longterm investor that actively monitors management, but the specifics are typically left vague. That is no coincidence. The various characteristics that we might wish for in such an investor cannot peacefully coexist in practice.

If the ideal investor remains illusory, which of the real-world investor types should we champion instead? The answer, I argue, is …

Regulatory Competition And The Market For Corporate Law, Ofer Eldar, Lorenzo Magnolfi

Faculty Scholarship

This article develops an empirical model of firms’ choice of corporate laws under inertia. Delaware dominates the incorporation market, though recently Nevada, a state whose laws are highly protective of managers, has acquired a sizable market share. Using a novel database of incorporation decisions from 1995- 2013, we show that most firms dislike protectionist laws, such as anti-takeover statutes and liability protections for officers, and that Nevada’s rise is due to the preferences of small firms.Our estimates indicate that despite inertia, Delaware would lose significant market share and revenues if it adopted protectionist laws. Our findings support the hypothesis that …

The Deregulation Of Private Capital And The Decline Of The Public Company, Elisabeth De Fontenay

Faculty Scholarship

From its inception, the federal securities law regime created and enforced a major divide between public and private capital raising. Firms that chose to “go public” took on substantial disclosure burdens, but in exchange were given the exclusive right to raise capital from the general public. Over time, however, the disclosure quid pro quo has been subverted: Public companies are still asked to disclose, yet capital is flooding into private companies with regulators’ blessing.

This Article provides a critique of the new public-private divide centered on its information effects. While regulators may have hoped for both the private and public …

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.

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.

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 …

Brief Of Corporate Law Professors As Amici Curie In Support Of Respondents, John C. Coates, Lucian A. Bebchuk, Bernard S. Black, John C. Coffee, James D. Cox, Ronald J. Gilson, Jeffrey N. Gordon, Lawrence Hamermesh, Henry B. Hansmann, Robert J. Jackson Jr., Marcel Kahan, Vikramaditya S. Khanna, Michael Klausner, Reinier H. Kraakman, Donald C. Langevoort, Brian Jm Quinn, Edward B. Rock, Mark J. Roe, Helen S. Scott

Faculty Scholarship

The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt …

"We're Cool" Statements After Omnicare: Securities Fraud Suits For Failures To Comply With The Law, James D. Cox

Faculty Scholarship

As part of a symposium celebrating the multiple contributions of the late Alan Bromberg, this article examines implications flowing from the Supreme Court’s recent decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund. Because Omnicare lands so squarely on the Court’s earlier opaque opinion in Virginia Bankshares, Inc. v. Sandberg addressing the treatment of the materiality of opinion statements, Omnicare is the new currency in the realm that will have far-reaching implications. In Virginia Bankshares, the Supreme Court quickly concluded shareholders would attach significance to the board of directors’ statement that the cash-out merger …

Putting The Securities Laws To The Test: The Long-Standing Approach To Federal Securities Regulation Is Not Working, Elisabeth De Fontenay

Faculty Scholarship

No abstract provided.

Does Board Independence Reduce The Cost Of Debt?, Michael Bradley, Dong Chen

Faculty Scholarship

Using the passage of the Sarbanes-Oxley Act and the associated change in listing standards as a natural experiment, we find that while board independence decreases the cost of debt when credit conditions are strong or leverage low, it increases the cost of debt when credit conditions are poor or leverage high. We also document that independent directors set corporate policies that increase firm risk. These results suggest that, acting in the interest of shareholders, independent directors are increasingly costly to bondholders with the intensification of the agency conflict between these two stakeholders.

Do The Securities Laws Matter? The Rise Of The Leveraged Loan Market, Elisabeth De Fontenay

Faculty Scholarship

One of the enduring principles of federal securities regulation is the mantra that bonds are securities, while commercial loans are not. Yet the corporate bond and loan markets in the U.S. are rapidly converging, putting significant pressure on the disparity in their regulatory treatment. As securities, corporate bonds are subject to onerous public disclosure obligations and liability regimes, which corporate loans avoid entirely. This longstanding regulatory distinction between loans and bonds is based on the traditional conception of a commercial loan as a long-term relationship between the borrowing company and a single bank, in contrast to bonds, which may be …

Strengthening Financial Reporting: An Essay On Expanding The Auditor’S Opinion Letter, James D. Cox

Faculty Scholarship

Users of financial statements, foremost of which are investors, have a voracious appetite for information that better enables them to assess the financial position and performance of the reporting firm. Even though financial statements purport to address their needs, because the statements, which are prepared by the firm’s managers, conceal a range of managerial estimates, assumptions, judgments, and choices, investors are deprived of the most fundamental kernel of information they seek, namely the overall quality of the financial reports themselves. In this Article, the author sets forth several modest steps that would enhance the overall quality of financial reporting by …

Understanding Causation In Private Securities Lawsuits: Building On Amgen, James D. Cox

Faculty Scholarship

With Amgen, the Supreme Court’s majority once again holds that inquiry into the alleged market impact of a misrepresentation is not required to invoke fraud on the market approach to causation so that the class can be certified. Rather than just leaving matters where they have been since the Supreme Court’s muddled encounter with causation in Basic Inc. v. Levinson, the Supreme Court’s most recent decision appears to relax some earlier-held tenets with respect to markets believed sufficiently efficient for fraud on the market to be invoked. This Article not only identifies the central flaw of Basic that has over …

Lawyers In The Shadows: The Transactional Lawyer In A World Of Shadow Banking, Steven L. Schwarcz

Faculty Scholarship

This article examines how the role of transactional lawyers should change in the new world of shadow banking. Although transactional lawyers should consider the potential systemic consequences of their client's actions, their actions should be tempered by their primary duties to the client and by their responsibilities to the l,egal system more broadly.

Reinventing The Sec By Staring Into Its Past, James D. Cox

Faculty Scholarship

No abstract provided.

Initial Public Offerings And The Failed Promise Of Disintermediation, A. Christine Hurt

Faculty Scholarship

No abstract provided.

Proprietary Norms In Corporate Law: An Essay On Reading Gambotto In The United States, Deborah A. Demott

Faculty Scholarship

No abstract provided.