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Full-Text Articles in Law

Taking Shareholders' Social Preferences Seriously: Confronting A New Agency Problem, Adi Libson Mar 2019

Taking Shareholders' Social Preferences Seriously: Confronting A New Agency Problem, Adi Libson

UC Irvine Law Review

Oliver Hart, Nobel Laureate in Economics for 2016, and economist Luigi Zingales recently published an article justifying companies’ pursuit of social objectives at the expense of profits from within the shareholder primacy framework. This Article highlights an important consequence of this approach: a new agency problem between managers and shareholders regarding social preferences. This Article provides two possible solutions to this agency problem: a bottom-up solution focused on shareholders’ ability to submit proposals on such issues and a top-down solution based on an independent board sub- committee intended to identify social objectives and forward them for shareholder approval.


The Separation Of Corporate Law And Social Welfare, William W. Bratton Jan 2017

The Separation Of Corporate Law And Social Welfare, William W. Bratton

Faculty Scholarship at Penn Law

A half century ago, corporate legal theory pursued an institutional vision in which corporations and the law that creates them protect people from the ravages of volatile free markets. That vision was challenged on the ground during the 1980s, when corporate legal institutions and market forces came to blows over questions concerning hostile takeovers. By 1990, it seemed like the institutions had won. But a different picture has emerged as the years have gone by. It is now clear that the market side really won the battle of the 1980s, succeeding in entering a wedge between corporate law and social ...


Agency Costs In Law-Firm Selection: Are Companies Under-Spending On Counsel?, Elisabeth De Fontenay Jan 2016

Agency Costs In Law-Firm Selection: Are Companies Under-Spending On Counsel?, Elisabeth De Fontenay

Faculty Scholarship

A growing body of literature examines whether corporate clients derive sufficient value from the law firms that they engage. Yet little attention has been paid to whether clients optimally select among law firms in the first place. One entry-point is to identify discrepancies in the quality of counsel selected by different corporate clients for the very same work. Using a large sample of loans, this Article finds that major U.S. public companies select lower-ranked law firms for their financing transactions than do private equity-owned companies, controlling for various deal characteristics. While some of this discrepancy can be attributed to ...


Specific Investment: Explaining Anomalies In Corporate Law, Margaret M. Blair, Lynn A. Stout Feb 2015

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

Lynn A. Stout

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 ...


The Digital Shareholder, Andrew A. Schwartz Jan 2015

The Digital Shareholder, Andrew A. Schwartz

Articles

Crowdfunding, a new Internet-based securities market, was recently authorized by federal and state law in order to create a vibrant, diverse, and inclusive system of entrepreneurial finance. But will people really send their money to strangers on the Internet in exchange for unregistered securities in speculative startups? Many are doubtful, but this Article looks to first principles and finds reason for optimism.

Well-established theory teaches that all forms of startup finance must confront and overcome three fundamental challenges: uncertainty, information asymmetry, and agency costs. This Article systematically examines this “trio of problems” and potential solutions in the context of crowdfunding ...


Addressing Agency Costs Through Private Litigation In The U.S: Tensions, Disappointments, And Substitutes, James D. Cox, Randall S. Thomas Jan 2015

Addressing Agency Costs Through Private Litigation In The U.S: Tensions, Disappointments, And Substitutes, James D. Cox, Randall S. Thomas

Faculty Scholarship

Many scholars argue that over the past seventy years, shareholder representative litigation has acted as an important policing mechanism of managerial abuses at U.S. public companies. Different types of representative litigation have had their moment in the sun – derivative suits early on, followed by federal securities class actions, and most recently merger litigation – often producing benefits for shareholders, but posing difficult challenges as well. In particular, the benefits are qualified by another concern, the litigation agency costs that surround shareholder suits. This form of agency costs arises since the suits are invariably representative with no requirement that the named ...


Nonprofit Executive Pay As An Agency Problem: Evidence From U.S. Colleges And Universities, David Walker, Brian D. Galle Dec 2014

Nonprofit Executive Pay As An Agency Problem: Evidence From U.S. Colleges And Universities, David Walker, Brian D. Galle

Faculty Scholarship

We analyze the determinants of the compensation of private college and university presidents from 1999 through 2007. We find that the fraction of institutional revenue derived from current donations is negatively associated with compensation and that presidents of religiously-affiliated institutions receive lower levels of compensation. Looking at the determinants of contributions, we find a negative association between presidential pay and subsequent donations. We interpret these results as consistent with the hypotheses that donors to nonprofits are sensitive to executive pay and that stakeholder outrage plays a role in constraining that pay. We discuss the implications of these findings for the ...


The Nordic Model In An International Perspective: The Role Of Ownership, Ronald J. Gilson Jan 2014

The Nordic Model In An International Perspective: The Role Of Ownership, Ronald J. Gilson

Faculty Scholarship

This essay appears in a book entitled the Nordic Corporate Governance Model (Per Lekvall ed. 2014). It presents the Nordic country’s governance pattern as an ownership model, in contrast to the Anglo-Saxon model of dispersed shareholders. An ownership model contemplates an active controlling owner who addresses the agency problem confronting public corporations with dispersed shareholders, and a larger role for minority shareholders and courts in constraining the potential for self-dealing by the controlling owner. The essay concludes by noting the great increase in institutional ownership in the Nordic countries, especially Sweden, and raises the question of the role of ...


Legal Diversification, Kelli A. Alces Nov 2013

Legal Diversification, Kelli A. Alces

Scholarly Publications

The greatest protection investors have from the risks associated with capital investment is diversification. This Essay introduces a new dimension of diversification for investors: legal diversification. Legal diversification of investment means building a portfolio of securities that are governed by a variety of legal rules. Legal diversification protects investors from the risk that a particular method of minimizing agency costs will prove ineffective and allows investors to own securities in a variety of firms, with each security governed by the most efficient set of legal rules given the circumstances of the investment. Diversification of investment by legal rules is possible ...


Adapting To The New Shareholder-Centric Reality, Edward B. Rock Jan 2013

Adapting To The New Shareholder-Centric Reality, Edward B. Rock

Faculty Scholarship at Penn Law

After more than eighty years of sustained attention, the master problem of U.S. corporate law—the separation of ownership and control—has mostly been brought under control. This resolution has occurred more through changes in market and corporate practices than through changes in the law. This Article explores how corporate law and practice are adapting to the new shareholder-centric reality that has emerged.

Because solving the shareholder–manager agency cost problem aggravates shareholder–creditor agency costs, I focus on implications for creditors. After considering how debt contracts, compensation arrangements, and governance structures can work together to limit shareholder–creditor ...


The Agency Costs Of Agency Capitalism: Activist Investors And The Revaluation Of Governance Rights, Ronald J. Gilson, Jeffery N. Gordon Jan 2013

The Agency Costs Of Agency Capitalism: Activist Investors And The Revaluation Of Governance Rights, Ronald J. Gilson, Jeffery N. Gordon

Faculty Scholarship

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to "the agency costs of agency capitalism." This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low-cost diversified investment vehicles. A new set of agency costs arises because in addition to divergence between the interests of record owners and the ...


Agency Capitalism: Further Implications Of Equity Intermediation, Ronald J. Gilson, Jeffrey N. Gordon Jan 2013

Agency Capitalism: Further Implications Of Equity Intermediation, Ronald J. Gilson, Jeffrey N. Gordon

Faculty Scholarship

This chapter continues our examination of the corporate law and governance implications of the fundamental shift in ownership structure of U.S. public corporations from the Berle-Means pattern of widely distributed shareholders to one of Agency Capitalism – the reconcentration of ownership in intermediary institutional investors as record holders for their beneficial owners. A Berle-Means ownership distribution provided the foundation for the agency cost orientation of modern corporate law and governance – the goal was to bridge the gap between the interests of managers and shareholders that dispersed shareholders could not do for themselves. The equity intermediation of the last 30 years ...


The False Promise Of Risk-Reducing Incentive Pay: Evidence From Executive Pensions And Deferred Compensation, Kelli A. Alces, Brian D. Galle Oct 2012

The False Promise Of Risk-Reducing Incentive Pay: Evidence From Executive Pensions And Deferred Compensation, Kelli A. Alces, Brian D. Galle

Scholarly Publications

No abstract provided.


Strengthening Investment In Public Corporations Through The Uncorporation, Kelli A. Alces Jul 2012

Strengthening Investment In Public Corporations Through The Uncorporation, Kelli A. Alces

Scholarly Publications

No abstract provided.


The Diminishing Returns Of Incentive Pay In Executive Compensation Contracts, Gregg D. Polsky, Andrew Lund Dec 2011

The Diminishing Returns Of Incentive Pay In Executive Compensation Contracts, Gregg D. Polsky, Andrew Lund

Scholarly Works

For the past 30 years, the conventional wisdom has been that executive compensation packages should include very large proportions of incentive pay. This incentive pay orthodoxy has become so firmly entrenched that the current debates about executive compensation simply take it as a given. We argue, however, that in light of evolving corporate governance mechanisms, the marginal net benefit of incentive-laden pay packages is both smaller than appreciated and getting smaller over time. As a result, the assumption that higher proportions of incentive pay are beneficial is no longer warranted.

A number of corporate governance mechanisms have evolved to duplicate ...


Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch Jul 2010

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

Faculty Scholarship at Penn Law

The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means ...


Has Corporate Law Failed? Addressing Proposals For Reform, Antony Page Apr 2009

Has Corporate Law Failed? Addressing Proposals For Reform, Antony Page

Michigan Law Review

Part I of this Review discusses the modem "nexus of contracts" approach to corporations and highlights how Greenfield's views differ. Part II examines corporate goals and purposes, suggesting that Greenfield overstates the impact of the shareholder-primacy norm and does not offer a preferable alternative. Part III critiques the means to the ends--Greenfield's proposals for changing the mechanics of corporate governance. Although several of his proposals are intriguing, they seem unlikely to achieve their pro-social aims. This Review remains skeptical, in part because-even given its problems-the U.S. "director-centric governance structure has created the most successful economy the world ...


Debunking The Corporate Fiduciary Myth, Kelli A. Alces Jan 2009

Debunking The Corporate Fiduciary Myth, Kelli A. Alces

Scholarly Publications

No abstract provided.


Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Charles K. Whitehead, Ronald J. Gilson Jan 2008

Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Charles K. Whitehead, Ronald J. Gilson

Cornell Law Faculty Publications

The traditional law and finance focus on agency costs presumes that the premise that diversified public shareholders are the cheapest risk bearers is immutable. In this Essay, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity wave in which the size and range of public companies being taken private expanded significantly. In brief, we argue that private owners, in increasingly complete markets, can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they choose to ...


Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Ronald J. Gilson, Charles K. Whitehead Dec 2007

Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Ronald J. Gilson, Charles K. Whitehead

Charles K Whitehead

The traditional law and finance focus on agency costs presumes that the premise that diversified public shareholders are the cheapest risk bearers is immutable. In this Essay, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity wave in which the size and range of public companies being taken private expanded significantly. In brief, we argue that private owners, in increasingly complete markets, can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they choose to ...


Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Ronald J. Gilson, Charles K. Whitehead Jan 2007

Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Ronald J. Gilson, Charles K. Whitehead

Faculty Scholarship

The traditional law and finance focus on agency costs presumes, without acknowledgement, that the premise that diversified public shareholders are the cheapest risk-bearers is immutable. In this Essay, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity buying wave in which the size and range of public companies being taken private expanded significantly. In brief, we argue that private owners, in increasingly complete markets, can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they ...


Specific Investment: Explaining Anomalies In Corporate Law, Margaret M. Blair, Lynn A. Stout Apr 2006

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 ...