Law Commons^™

Specific Investment: Explaining Anomalies In Corporate Law, Margaret M. Blair, Lynn A. Stout

Cornell Law Faculty Publications

This Article has two goals: to praise Professor Robert Clark as a remarkable corporate scholar, and to explore how his work has helped to advance our understanding of corporations and corporate law. Clark wrote his classic treatise at a time when corporate scholarship was dominated by a principal-agent paradigm that viewed shareholders as the principals or sole residual claimants in public corporations and treated directors as shareholders' agents. This view naturally led contemporary scholars to believe that the chief economic problem of interest in corporate law was the "agency cost" problem of getting corporate directors to do what shareholders wanted …

Share Price As A Poor Criterion For Good Corporate Law, Lynn A. Stout

Cornell Law Faculty Publications

Academics, reformers, and business leaders all yearn for a single, objective, easy-to-read measure of corporate performance that can be used to judge the quality of public corporation law and practice. This collective desire is so powerful that it has led many commentators to grab onto the first marginally plausible candidate: share price.

Contemporary economic and corporate theory, as well as recent business history, nevertheless warn us against unthinking acceptance of share price as a measure of corporate performance. This Essay offers a brief reminder of some of the many reasons why stock prices often fail to reflect true corporate performance, …

European Law On Capital Markets – Quo Vadis?, Daniela Huemer

Cornell Law School Inter-University Graduate Student Conference Papers

The occurrence of more than a dozen accounting scandals in the United States over the past few years have deeply shaken the capital market and have led some to believe that “corporate and legal culture has lost all sense of right and wrong.” Scandals at companies such as Enron and Worldcom have cost thousands of employees their jobs and caused thousands of investors to lose their investments completely. Similar scandals have happened in Europe as well, such as at Parmalat and Lernout & Hauspie, which has caused an increasing reluctance among investors to trust companies with their dollars.

These circumstances …

The Fate Of Firms: Explaining Mergers And Bankruptcies, Clas Bergström, Theodore Eisenberg, Stefan Sundgren, Martin T. Wells

Cornell Law Faculty Publications

Using a uniquely complete data set of more than 50,000 observations of approximately 16,000 corporations, we test theories that seek to explain which firms become merger targets and which firms go bankrupt. We find that merger activity is much greater during prosperous periods than during recessions. In bad economic times, firms in industries with high bankruptcy rates are less likely to file for bankruptcy than they are in better years, supporting the market illiquidity arguments made by Shleifer and Vishny (1992). At the firm level, we find that, among poorly performing firms, the likelihood of merger increases with poorer performance, …

On The Nature Of Corporations, Lynn A. Stout

Cornell Law Faculty Publications

Legal experts traditionally distinguish corporations from unincorporated business forms by focusing on corporate characteristics like limited shareholder liability, centralized management, perpetual life, and free transferability of shares. While such approaches have value, this essay argues that the nature of the corporation can be better understood by focusing on a fifth, often-overlooked, characteristic of corporations: their capacity to "lock in" equity investors' initial capital contributions by making it far more difficult for those investors to subsequently withdraw assets from the firm. Like a tar pit, a corporation is much easier for equity investors to get into, than to get out of. …

Who Pays The Auditor Calls The Tune?: Auditing Regulations And Clients' Incentives, Amy Shapiro

Cornell Law Faculty Publications

As we move on from the financial scandals of the early 2000s, the question of how to prevent the next Enron continues to be a pressing one. This Article focuses on the law’s deeply conflicted treatment of auditors of public corporations. Though the audit firm is charged with serving as the public’s watchdog in insuring good financial disclosure, the auditor’s actual client is the audited corporation itself, whose interests concerning disclosure are not necessarily aligned with those of investors. Because the Sarbanes-Oxley Act of 2002 left this structure in place, further reform is needed. One promising suggestion is to give …

Was Arthur Andersen Different? An Empirical Examination Of Major Accounting Firm Audits Of Large Clients, Theodore Eisenberg, Jonathan R. Macey

Cornell Law Faculty Publications

Enron and other corporate financial scandals focused attention on the accounting industry in general and on Arthur Andersen in particular. Part of the policy response to Enron, the criminal prosecution of Andersen eliminated one of the few major audit firms capable of auditing many large public corporations. This article explores whether Andersen’s performance, as measured by frequency of financial restatements, measurably differed from that of other large auditors. Financial restatements trigger significant negative market reactions and their frequency can be viewed as a measure of accounting performance. We analyze the financial restatement activity of approximately 1,000 large public firms from …

Taxation Of Spin-Off – U.S. And German Corporate Tax Law, Stefan W. Suchan

Cornell Law School J.D. Student Research Papers

Corporate law provides for a transaction commonly referred to as “spin-off”. The corporate enterprise is divided in (at least) two corporations. The stock of a controlled subsidiary will be distributed pro rata by a parent corporation to its shareholders which end up owning a brother/sister pair of corporate enterprises.

The Internal Revenue Code (IRC) in § 355 provides special rules for the distribution of stock and securities of a controlled corporation. The transaction is known as a “D reorganization”, if such a distribution follows the transfer by a corporation of all or a part of its assets to another corporation, …

Post-Enron: U.S. And German Corporate Governance, Stefan W. Suchan

Cornell Law School J.D. Student Research Papers

Only five years after Henry Hansmann and Reinier Kraakmann announced "the End of History of Corporate Law" – borrowing the words of Francis Fukuyama–, this observation seems at least questionable. Following two major failures of the “American Model” with the bankruptcy of Enron and WorldCom, the question of the "right" Corporate Governance regime is again under discussion.

Legislators around the globe assume that further development of Corporate Governance is necessary. There is consent for the need of improvement, but no clear answer on how to improve. A first step to solving the arising problems might be to evaluate the reasons …

Untaxing Taxes: An Attempt To Compare Philippine And Us Laws On Tax-Free Corporate Reorganizations, Salvador B. Belaro Jr.

Cornell Law School J.D. Student Research Papers

In comparing tax-free corporate reorganizations between Philippine and US law, the author wishes to learn how the US legal system would approach similar tax situations in the Philippines so he could apply it in the practice of law. Labyrinthine as they may be, US tax rules are so well-developed that they are excellent subjects for a comparative study. This paper validates the fact that Philippine and US tax laws on tax-free corporate exchanges have a lot in common. It also shows that in a lot of areas where Philippine law is silent, US tax laws have already devoted extensive treatment …

Legal And Ethical Duties Of Lawyers After Sarbanes-Oxley, Roger C. Cramton, George M. Cohen, Susan P. Koniak

Cornell Law Faculty Publications

No abstract provided.

Was Arthur Andersen Different? An Empirical Examination Of Major Accounting Firm Audits Of Large Clients, Theodore Eisenberg, Jonathan R. Macey

Cornell Law Faculty Publications

Enron and other corporate financial scandals focused attention on the accounting industry in general and on Arthur Andersen in particular. Part of the policy response to Enron, the criminal prosecution of Andersen eliminated one of the few major audit firms capable of auditing many large public corporations. This article explores whether Andersen's performance, as measured by frequency of financial restatements, measurably differed from that of other large auditors. Financial restatements trigger significant negative market reactions and their frequency can be viewed as a measure of accounting performance. We analyze the financial restatement activity of approximately 1,000 large public firms from …

Shareholder As Ulysses: Some Empirical Evidence On Why Investors In Public Corporations Tolerate Board Governance, Lynn A. Stout

Cornell Law Faculty Publications

This Article evaluates two possible explanations for why shareholders of public corporations tolerate board control of corporate assets and outputs: the widely accepted monitoring hypothesis, which posits that shareholders rely on boards primarily to control the "agency costs" associated with turning day-to-day control over the firm over to self-interested corporate executives, and the mediating hypothesis, which posits that shareholders also seek to "tie their own hands" by ceding control to directors as a means of attracting the extracontractual, firm-specific investments of such stakeholder groups as executives, creditors, and rank-and- file employees.

Part I reviews each hypothesis and concludes that each …

The Petrochina Syndrome: Regulating Capital Markets In The Anti-Globalization Era, Stephen F. Diamond

Cornell Law Faculty Publications

No abstract provided.

On The Proper Motives Of Corporate Directors (Or, Why You Don't Want To Invite Homo Economicus To Join Your Board), Lynn A. Stout

Cornell Law Faculty Publications

One of the most important questions in corporate governance is how directors of public corporations can be motivated to serve the interests of the firm. Directors frequently hold only small stakes in the companies they manage. Moreover, a variety of legal rules and contractual arrangements insulate them from liability for business failures. Why then should we expect them to do a good job?

Conventional corporate scholarship has great difficulty wrestling with this question, in large part because conventional scholarship usually adopts the economist's assumption that directors are rational actors motivated purely by self-interest. This homo economicus model of behavior may …

Do Antitakeover Defenses Decrease Shareholder Wealth? The Ex Post/Ex Ante Valuation Problem, Lynn A. Stout

Cornell Law Faculty Publications

Over the past two decades, academics have generated a large empirical literature examining whether antitakeover defenses like poison pills or staggered board provisions decrease the wealth of shareholders in target corporations. Many studies, however, rely primarily on ex post analysis-they consider only how antitakeover defenses (ATDs) influence shareholder wealth after the corporation has been formed and, in some cases, long after the ATD was adopted. This Response argues that it may be impossible to fully understand the purpose or effects of ATDs without also considering their ex ante effects. In particular, ATDs may increase net target shareholder wealth ex ante …

Enron And The Corporate Lawyer: A Primer On Legal And Ethical Issues, Roger C. Cramton

Cornell Law Faculty Publications

The stunning collapse of Enron, coupled with the large number of accounting irregularities and apparent corporate fraud, have created a climate in which reform and improvement of the law governing corporate lawyers is underway. The ABA Task Force on Corporate Responsibility has issued a preliminary report that recommends promising changes in the rules of professional conduct. And, the Corporate Reform Act of 2002 has changed the landscape by authorizing the SEC to promulgate rules of professional conduct for securities lawyers and directing the SEC to issue a rule requiring securities lawyers to climb the corporate ladder to prevent or rectify …

Bad And Not-So-Bad Arguments For Shareholder Primacy, Lynn A. Stout

Cornell Law Faculty Publications

In 1932, the Harvard Law Review published a debate between two preeminent corporate scholars on the subject of the proper purpose of the public corporation. On one side stood the renowned Adolph A. Berle, coauthor of the classic The Modern Corporation and Private Property. Berle argued for what is now called "shareholder primacy"—the view that the corporation exists only to make money for its shareholders. According to Berle, "all powers granted to a corporation or to the management of a corporation, or to any group within the corporation. . . [are] at all times exercisable only for the ratable …

Secured Debt And The Likelihood Of Reorganization, Clas Bergström, Theodore Eisenberg, Stefan Sundgren

Cornell Law Faculty Publications

Theory suggests that secured creditors may increasingly oppose a debtor’s reorganization as the value of their collateral approaches the amount of their claims. If reorganization occurs and the value of the firm appreciates, the secured creditor receives only part of the gain. But if the firm’s value depreciates, the secured creditor bears all of the cost. Secured claimants, thus, often have more to lose than to gain in reorganizations. This study of Finnish reorganizations filed in districts that account for most of the country’s reorganizations finds that creditor groups most likely to be well-secured are most likely to oppose reorganization. …

In Praise Of Procedure: An Economic And Behavioral Defense Of Smith V. Van Gorkom And The Business Judgment Rule, Lynn A. Stout

Cornell Law Faculty Publications

No abstract provided.

The Investor Confidence Game, Lynn A. Stout

Cornell Law Faculty Publications

Academic discussions of securities policy often assume that investors are hyperrational and distrustful actors who do not need the protections of the securities laws to avoid being defrauded. The time has come to recognize the limitations of this assumption and to consider as well the possibility and implications of investor trust. Experienced policymakers and businesspeople (and certainly experienced con artists) have long known that trust is a potent force in explaining and manipulating investor behavior. They are right. They are right to believe that investor confidence-meaning investor trust-is important to the market. They are right to think that trust has …

Judges, Prosecutors, Jurors, And Organized Labor: Four Perspectives Of Corporate Citizenship, Noel Beasley, Janine P. Geske, Valerie P. Hans, E. Michael Mccann, Frank Daily

Cornell Law Faculty Publications

Some people argue that the civil jury is in decline. They argue that it's not really so important to be focusing on jurors and jurors' views about corporate responsibility as it might have been in prior times. I want to raise some arguments in favor of the continuing importance of the civil jury. First of all, the cases that juries try may be very important cases in terms of the company and in terms of the role of the company vis-a-vis government regulation. Jurors are symbolic representatives of the public in the courtroom. Finding out what juries do when they …

Director Accountability And The Mediating Role Of The Corporate Board, Margaret M. Blair, Lynn A. Stout

Cornell Law Faculty Publications

One of the most pressing questions facing both corporate scholars and businesspeople today is how corporate directors can be made accountable. Before addressing this issue, however, it seems important to consider two antecedent questions: To whom should directors be accountable? And for what?

Contemporary corporate scholarship often starts from a "shareholder primacy" perspective that holds that directors of public corporations ought to be accountable only to the shareholders, and ought to be accountable only for maximizing the value of the shareholders' shares. This perspective rests on the conventional contractarian assumption that the shareholders are the sole residual claimants and …

Trust, Trustworthiness, And The Behavioral Foundations Of Corporate Law, Margaret M. Blair, Lynn A. Stout

Cornell Law Faculty Publications

Conventional legal and economic analysis assumes that opportunistic behavior is discouraged and that cooperation is encouraged within firms primarily through the use of legal and market incentives. This presumption is embedded in the modern view that the corporation is best described as a "nexus of contracts, " a collection of explicit and implicit agreements voluntarily negotiated among the rationally selfish parties who join in the corporate enterprise. In this Article we take a different approach. We start from the observation that, in many circumstances, legal and market sanctions provide, at best, imperfect means of regulating behavior within the firm. We …

Why The Law Hates Speculators: Regulation And Private Ordering In The Market For Otc Derivatives, Lynn A. Stout

Cornell Law Faculty Publications

A wide variety of statutory and common law doctrines in American law evidence hostility towards speculation. Conventional economic theory, however, generally views speculation as an efficient form of trading that shifts risk to those who can bear it most easily and improves the accuracy of market prices. This Article reconciles the apparent conflict between legal tradition and economic theory by explaining why some forms of speculative trading may be inefficient. It presents a heterogeneous expectations model of speculative trading that offers important insights into antispeculation laws in general, and the ongoing debate concerning over-the-counter (OTC) derivatives in particular.

Although trading …

Corporate-Family Conflicts, Charles W. Wolfram

Cornell Law Faculty Publications

Larger Board Size And Decreasing Firm Value In Small Firms, Theodore Eisenberg, Stefan Sundgren, Martin T. Wells

Cornell Law Faculty Publications

Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.

Inherent Powers In The Crucible Of Lawyer Self-Protection: Reflections On The Llp Campaign, Charles W. Wolfram

Cornell Law Faculty Publications

Realigning Corporate Governance: Shareholder Activism By Labor Unions, Stewart J. Schwab, Randall S. Thomas

Cornell Law Faculty Publications

No abstract provided.

The Illusions And Realities Of Jurors' Treatment Of Corporate Defendants, Valerie P. Hans

Cornell Law Faculty Publications

Business leaders have voiced the opinion that they are often victimized by civil juries, who rule against them more on the basis of deep-seated hostility to business than on the grounds of actual negligence. Claims that the jury engages in undeservedly negative treatment of the business corporation have been central to heated debate over the role of the jury and its place in an alleged litigation crisis, which in turn has fueled tort reform efforts across the nation. This Article contrasts the illusions and realities of jurors' treatment of corporate defendants in civil litigation.

In this Article, I argue that …