Law Commons^™

Retail Investors And Corporate Governance: Evidence From Zero-Commission Trading, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Law & Economics Working Papers

We examine the effects of the sudden abolition of trading commissions by major online brokerages in 2019, which lowered stock market entry costs for retail investors, on corporate governance. Firms already popular with retail investors experienced positive abnormal returns around the abolition of commissions. Firms with positive abnormal returns in response to commission-free trading subsequently saw a decrease in institutional ownership, a decrease in shareholder voting, and a deterioration in environmental, social, and corporate governance (ESG) metrics. Finally, these firms were more likely to adopt bylaw amendments to reduce the percentage of shares needed for a quorum at shareholder meetings. …

Pricing Corporate Governance, Albert Choi

Articles

Scholars and practitioners have long theorized that by penalizing firms with unattractive governance features, the stock market incentivizes firms to adopt the optimal governance structure at their initial public offerings (IPOs). This theory, however, does not seem to match with practice. Not only do many IPO firms offer putatively suboptimal governance arrangements, such as staggered boards and dual-class structures, but these arrangements have been gaining popularity among IPO firms. This Article argues that the IPO market is unlikely to provide the necessary discipline to incentivize companies to adopt the optimal governance package. In particular, when the optimal governance package differs …

Meme Corporate Governance, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Law & Economics Working Papers

Can retail investors revolutionize corporate governance and make public companies more responsive to social concerns? The U.S. stock market offered an unusual experiment to test the impact of retail investors in 2021, when there was a dramatic influx of retail investors into the shareholder base of companies such as GameStop and AMC. The meme surge phenomenon elicited a variety of reactions from scholars and practitioners. While some worried that affected companies’ share prices were becoming disjointed from their financial fundamentals, others predicted that retail shareholders will reduce the power of large institutional investors and democratize corporate governance. This Article presents …

The Meme Stock Frenzy: Origins And Implications, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

Law & Economics Working Papers

In 2021, several publicly traded companies, such as GameStop and AMC, became “meme stocks,” experiencing a sharp rise in their stock prices through a dramatic influx of retail investors into their shareholder base. Analyses of the meme stock surge and its implications for corporate governance have focused on the idiosyncratic creation of online communities around particular stocks during the COVID-19 pandemic. In this Article, we argue that the emergence of meme stocks is part of longer-running digital transformations in trading, investing, and governance. On the trading front, the sudden abolition of commissions by major online brokerages in 2019 reduced entry …

All Stick And No Carrot? Reforming Public Offerings, Stephen J. Choi, Adam C. Pritchard

Law & Economics Working Papers

The SEC heavily regulates the traditional initial public offering. Those regulatory burdens fuel interest in alternative paths for private companies to go public, “regulatory arbitrage.” The SEC’s response to the emergence of alternatives, most recently SPACs and direct listings, has been to suppress them by imposing heightened liability under Section 11 of the Securities Act. The SEC’s treatment of the traditional IPO regulatory process as a one-size-fits-all regime ignores the weaknesses of this process, in particular the informational inefficiency of the book-building process. In this essay we argue that the agency’s focus in regulating issuers going public should be on …

A New Framework For Taxing Cryptocurrencies, Reuven S. Avi-Yonah, Mohanad Salaimi

Articles

This Article explores the tax law challenges associated with the taxation of cryptocurrencies and offers proposals to address such challenges. The Article addresses the proper tax treatment of different cryptocurrency transactions and activities. It examines various aspects associated with the taxation of cryptocurrency through its life cycle, starting from earning cryptocurrency, through its disposal or exchange. The Article also examines the tax treatment of two special crypto events, hard forks and airdrops. Specifically, this Article describes a proposal to tax cryptocurrencies based on their unique features. It argues that various ways of earning or receiving crypto tokens (for example, mining …

Is Corporate Law Nonpartisan?, Ofer Eldar, Gabriel V. Rauterberg

Articles

Only rarely does the United States Supreme Court hear a case with fundamental implications for corporate law. In Carney v. Adams, however, the Supreme Court had the opportunity to address whether the State of Delaware’s requirement of partisan balance for its judiciary violates the First Amendment. Although the Court disposed of the case on other grounds, Justice Sotomayor acknowledged that the issue “will likely be raised again.” The stakes are high because most large businesses are incorporated in Delaware and thus are governed by its corporate law. Former Delaware governors and chief justices lined up to defend the state’s “nonpartisan” …

Liability For Non-Disclosure In Equity Financing, Albert H. Choi, Kathryn E. Spier

Law & Economics Working Papers

The paper analyzes the effects of holding firms liable for non-disclosure of material information when raising capital. We develop a model in which a privately-informed entrepreneur can choose to withhold information from prospective investors when issuing and selling stock and the investors can bring suit against the firm ex post for (alleged) non-disclosure. The damage payment received by the investors is partially offset by the reduced value of their equity stake. The analysis shows that the equilibrium depends on, among others, (1) the amount of personal capital the entrepreneur has to commit, (2) the frequency with which the entrepreneur is …

Initial Public Offering And Optimal Corporate Governance, Albert H. Choi

Law & Economics Working Papers

This paper examines the long-standing debate over whether firms have a market-based incentive to adopt optimal governance provisions at their initial public offering (IPO). Various scholars and practitioners have argued that firms that offer stock to the public with suboptimal governance structure will be penalized by the market through a lower IPO price. At the same time, others have documented empirical evidence that many IPO firms have putatively suboptimal governance provisions, such as anti-takeover provisions and dual class structure, and many, especially those with dual-class structure, enjoy a market premium at their IPO. This paper attempts to bridge this gap. …

Fenceposts Without A Fence, Katherine Di Lucido, Nicholas Kean Tabor, Jeffery Zhang

Law & Economics Working Papers

Banking organizations in the United States have long been subject to two broad categories of regulatory requirements. The first is permissive: a “positive” grant of rights and privileges, typically via a charter for a corporate entity, to engage in the business of banking. The second is restrictive: a “negative” set of conditions on those rights and privileges, limiting conduct and imposing a program of oversight and enforcement, by which the holder of that charter must abide. Together, these requirements form a legal cordon, or “regulatory perimeter,” around the U.S. banking sector.

The regulatory perimeter figures prominently in several ongoing policy …

Learning To Manipulate A Financial Benchmark, Megan Shearer, Gabriel V. Rauterberg, Michael P. Wellman

Law & Economics Working Papers

Financial benchmarks estimate market values or reference rates used in a wide variety of contexts, but are often calculated from data generated by parties who have incentives to manipulate these benchmarks. Since the London Interbank Offered Rate (LIBOR) scandal in 2011, market participants, scholars, and regulators have scrutinized financial benchmarks and the ability of traders to manipulate them.

We study the impact on market welfare of manipulating transaction-based benchmarks in a simulated market environment. Our market consists of a single benchmark manipulator with external holdings dependent on the benchmark, and numerous background traders unaffected by the benchmark. We explore two …

Shareholder Engagement In The United States, Vikramaditya S. Khanna

Book Chapters

Shareholder voting and engagement in the US have undergone substantial changes over the last 50 years. They have moved from being relatively sleepy issues to those that trigger insomnia in even the most hardened executives. The changes in the ownership structure of US publicly traded firms are probably the most important reason for the shift, but so too are rule changes that have facilitated greater shareholder activism. This chapter explores these developments while describing the rules of the road for shareholder voting in the US by focusing on Delaware jurisprudence and changes in US federal securities regulations. It also examines …

Controlling Externalities: Ownership Structure And Cross-Firm Externalities, Dhammika Dharmapala, Vikramaditya S. Khanna

Law & Economics Working Papers

In recent years, debates over the social purpose of corporations have taken center stage amidst rising concern about externalities (such as those associated with climate change and harmful speech) generated by firms. A key motivation is the claim that government regulation and liability regimes appear not to be functioning sufficiently well to force firms to internalize these externalities. There is thus rising interest in exploring alternative mechanisms. In particular, a rapidly growing body of scholarship argues that index funds increasingly approximate diversified “universal owners” with incentives to maximize portfolio value (and thus to internalize cross-firm externalities). However, much of this …

Stanley Surrey, The Code And The Regime, Reuven S. Avi-Yonah, Nir Fishbien

Articles

Stanley Surrey (1910-1984) was arguably the most important tax scholar of his generation. Surrey was a rare combination of an academic (Berkeley and Harvard law schools, 1947-1961 and 1969-1981) and a government official (Tax Legislative Counsel, 1942-1947; Assistant Secretary for Tax Policy, 1961-1969). Today he is mostly remembered for inventing the concept of tax expenditures and the tax expenditure budget. This paper will argue that while Surrey was influential in shaping domestic tax policy for a generation and had an impact after his death on the Tax Reform Act of 1986, his longest lasting contributions were in shaping the international …

A Case For Higher Corporate Tax Rates, Edward G. Fox, Zachary D. Liscow

Law & Economics Working Papers

In this report, Fox and Liscow argue that, while conventional wisdom holds that we should lower taxes on corporations because of international competition, two recent changes militate in favor of higher corporate taxes, which would close the deficit, fund social programs, and reduce inequality. First, changes in tax law have increasingly targeted the corporate tax at economic “rents,” the supersized returns that businesses receive when they enjoy advantages like market power. Because taxing rents is progressive and does little to harm economic activity, a higher rate is justified. Second, shifts in the American economy have allowed companies to earn more …

Introduction To The Symposium On Soft And Hard Law On Business And Human Rights, Steven R. Ratner

Articles

This symposium turns to a major debate within a field of international law that has moved from the periphery to center stage in just a few decades—business and human rights, or BHR: Can and should international law's approach to the human rights impacts of business activity shift from today's mostly soft-law framework to a multilateral treaty regime? While advocates for and against such a treaty debate this point at the UN Human Rights Council and other venues, this symposium examines the problem from four theoretical perspectives. Each contribution offers insights for practitioners and scholars alike, but they suggest no easy …

The Hague Rules On Business And Human Rights Arbitration, Bruno Simma, Diane Desierto, Martin Doe Rodriguez, Jan Eijsbouts, Ursula Kriebaum, Pablo Lumerman, Abiola Makinwa, Richard Meeran, Sergio Puig, Steven Ratner, Giorgia Sangiuolo, Martijn Scheltema, Anne Van Aaken, Katerina Yiannibas

Other Publications

The Hague Rules on Business and Human Rights Arbitration provide a set of procedures for the arbitration of disputes related to the impact of business activities on human rights. The Hague Rules are based on the Arbitration Rules of the United Nations Commission on International Trade Law (with new article 1, paragraph 4, as adopted in 2013) (the “UNCITRAL Rules”), with modifications needed to address certain issues likely to arise in the context of business and human rights disputes. Each article is accompanied by a commentary, which includes background on the drafting of various provisions in the Rules, explaining in …

Big Data In Finance: Highlights From The Big Data In Finance Conference Hosted At The University Of Michigan October 27-28, 2016, Michael S. Barr, Brian Koziara, Mark D. Flood, Alfred Hero, H. V. Jagadish

Law & Economics Working Papers

How can financial data be made more accessible and more secure, as well as more useful to regulators, market participants, and the public? As new data sets are created, opportunities emerge. Vast quantities of financial data may help identify emerging risks, enable market participants and regulators to see and better understand financial networks and interconnections, enhance financial stability, bolster consumer protection, and increase access to the underserved. Data can also increase transparency in the financial system for market participants, regulators and the public. These data sets, however, can raise significant questions about security and privacy; ensuring data quality; protecting against …

Business Tax Burdens And Tax Reform, James R. Hines Jr.

Articles

Tax reforms affect economic performance by changing incentives for business formation, expansion, and operation. The United States has the highest corporate tax rate among OECD countries in 2017, and despite offering significant additional deductions, exclusions, and tax credits, imposes the heaviest tax burdens. This paper offers a new measure of corporate tax burdens based on information in tax expenditure budgets; this measure implies that the burden of U.S. corporate taxation in 2017 is equivalent to that produced by a corporate tax rate between 31.2-34.6% without additional deductions, exclusions, or tax credits. Efficient design of a business tax system encourages activities …

Do International Organisations Play Favourites? An Impartialist Account, Steven Ratner

Book Chapters

The recent turn of politics and philosophy to serious appraisals of international law is welcome news for politics, ethics and law. Politics can offer us rich description of the international landscape – the actors and their policies, conflicts and approaches to overcoming them; and political and moral philosophy can produce reasoned prescription for devising a just world order. But international law is a critical bridge between them, for law, with its grounding in the institutional arrangements devised by global actors, provides a path to implementing theories of the right or of the good. Just as scholars of politics have realised …

Business, Steven R. Ratner

Book Chapters

This chapter seeks to expose some of the divergences between doctrine and reality, and to suggest ways of understanding the field that take proper account of business. It does so first by examining the roles and goals of business entities with respect to international environmental law. It then examines how international law has accommodated the place of business in environmental policy with respect to two key issues: (1) corporations as the target of legal obligations; and (2) corporations as participants in the process of international environmental law, particularly with respect to law-making and implementation. I conclude with some thoughts regarding …

Judicial Review Of Labor Arbitration Awards: A Second Look At Enterprise Wheel And Its Progeny, Theodore J. St. Antoine

Book Chapters

Logic, so the cliche goes, is not the life of the law. But logic is very much like the DNA of the law-the structural principle without which all is sprawl and muddle. In the last ten years a controversy has raged over the role of the labor arbitrator in issuing awards, and the role of the courts in reviewing and enforcing those awards. This controversy has largely taken the form of a continuing debate among scholars and practicing arbitrators at the annual meetings of the National Academy of Arbitrators. With due respect to the thoughtful and experienced persons who have …