Law Commons^™

Driver For Contactless Payments, Ronald J. Mann

Faculty Scholarship

As a consumer, my primary experience with cash before the virus was standing in checkout lines observing the sluggish pace of cash transactions in front of me. Like so many things in our lives, the advent of the virus has changed the situation markedly. From the earliest days of infection, it has been far more unsettling to observe cash transactions knowing that the virus persists on paper and metal surfaces for days.

The dynamic that has driven the choices merchants offer in face-to-face retail transactions will change as well. Driven by the private exigencies of the retail environment, the last …

Restructuring Vs. Bankruptcy, Jason Roderick Donaldson, Edward R. Morrison, Giorgia Piacentino, Xiaobo Yu

Faculty Scholarship

We develop a model of a firm in financial distress. Distress can be mitigated by filing for bankruptcy, which is costly, or preempted by restructuring, which is impeded by a collective action problem. We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring, rather than crowding it out. And so does making bankruptcy more debtor-friendly, under a condition that seems likely to hold now in the United States. The model gives new perspectives on current relief policies (e.g., subsidized loans to firms in bankruptcy) and on long-standing legal debates (e.g., the efficiency of the absolute …

Why The Fed Should Issue A Policy Framework For Credit Policy, Kathryn Judge

Faculty Scholarship

The Federal Reserve has long used policy frameworks to both explain and inform its policymaking. These policy frameworks typically explain what the Fed is seeking to achieve in a given domain and how it plans to achieve its desired aims. Two prominent examples are the Fed’s use of Bagehot’s dictum when acting as a lender of last resort and its monetary policy framework issued in 2012 and revised in 2020. In both instances, the framework provides a foundation for informed debate among Fed policymakers, Congress, and the public, enhancing both efficacy and accountability. Since the onset of the Covid crisis, …

Don't Go Chasing Waterfalls: Fiduciary Duties In Venture Capital Backed Startups, Sarath Sanga, Eric L. Talley

Faculty Scholarship

Venture-capital-backed startups are often crucibles of conflict between common and preferred shareholders, particularly around exit decisions. Such conflicts are so common, in fact, that they have catalyzed an emergent judicial precedent – the Trados doctrine – that requires boards to prioritize common shareholders' interest and to treat preferred shareholders as contractual claimants. We evaluate the Trados doctrine using a model of startup governance that interacts capital structure, corporate governance, and liability rules. The nature and degree of inter-shareholder conflict turns not only on the relative rights and options of equity participants, but also on a firm's intrinsic value as well …

Executive Underreach, In Pandemics And Otherwise, David E. Pozen, Kim Lane Scheppele

Faculty Scholarship

Legal scholars are familiar with the problem of executive overreach, especially in emergencies. But sometimes, instead of being too audacious or extreme, a national executive's attempts to address a true threat prove far too limited and insubstantial. In this Essay, we seek to define and clarify the phenomenon of executive underreach, with special reference to the COVID-19 crisis; to outline ways in which such underreach may compromise constitutional governance and the international legal order; and to suggest a partial remedy.

Economic Democracy And Enterprise Form In Finance, William H. Simon

Faculty Scholarship

This article considers the relative advantages of alternative enterprise forms in finance from the point of view of public accountability. The business corporation is compared to the state agency or authority, the cooperative, the state corporation, and the charitable nonprofit. These forms can be distinguished according to whether they aspire to enhance general electoral democracy or stakeholder democracy and whether their democratic controls operate directly or indirectly. The article suggests that the indirect democratic forms may be more promising than the direct ones. It also argues that the project of democratizing finance depends on the development of practices of multifactor …

Price And Prejudice: An Empirical Test Of Financial Incentives, Altruism, And Racial Bias, Kristen Underhill

Faculty Scholarship

Many argue that paying people for good behavior can crowd out beneficial motivations like altruism. But little is known about how financial incentives interact with harmful motivations like racial bias. Two randomized vignette studies test how financial incentives affect bias. The first experiment varies the race of a hypothetical patient in need of a kidney transplant (black or white), an incentive ($18,500 or none), and addition of a message appealing to altruism. Incentives encouraged donation but introduced a significant bias favoring white patients. The second experiment assesses willingness to donate to a patient (black or white) without an incentive and …

The Separation Of Platforms And Commerce, Lina M. Khan

Faculty Scholarship

A handful of digital platforms mediate a growing share of online commerce and communications. By structuring access to markets, these firms function as gatekeepers for billions of dollars in economic activity. One feature dominant digital platforms share is that they have inte­grated across business lines such that they both operate a platform and market their own goods and services on it. This structure places domi­nant platforms in direct competition with some of the businesses that de­pend on them, creating a conflict of interest that platforms can exploit to further entrench their dominance, thwart competition, and stifle innovation.

This Article argues …

Being True To Trulia: Do Disclosure-Only Settlements In Merger Objection Lawsuits Harm Shareholders?, Eric L. Talley, Giuseppe Dari‐Mattiacci

Faculty Scholarship

A significant debate within mergers and acquisitions law concerns the explosive popularity of the “merger objection lawsuit” (MOL), a shareholder action seeking to enjoin an announced deal on fiduciary duty grounds. MOLs blossomed during the Financial Crisis, becoming popularly associated with “shareholder shakedowns,” whereby quick-triggered plaintiff attorneys would file against – and then rapidly settle with – acquirers, typically on non-monetary terms containing modest added disclosures in exchange for blanket class releases and attorney fee awards. This practice unleashed a torrent of criticism from lawyers, commentators, academics, and (ultimately) judges, culminating in a doctrinal shift in Delaware law in the …

Corporate Governance For Sustainability, Andrew Johnston, Jeroen Veldman, Robert G. Eccles, Simon Deakin, Jerry Davis, Marie-Laure Djelic, Katharina Pistor, Blanche Segrestin, William M. Gentry, Cynthia A. Williams, David Millon, Paddy Ireland, Beate Sjåfjell, Christopher M. Bruner, Lorraine E. Talbot, Hugh Christopher Willmott, Charlotte Villiers, Carol Liao, Bertrand Valiorgue, Jason Glynos, Todd L. Sayre, Bronwen Morgan, Rick Wartzman, Prem Sikka, Filip Gregor, David Carroll Jacobs, Roger Gill, Roger Brown, Vincenzo Bavoso, Neil Lancastle, Julie Matthaei, Scott Taylor, Ulf Larsson-Olaison, Jay Cullen, Alan J. Dignam, Thomas Wuil Joo, Ciarán O'Kelly, Con Keating, Roman Tomasic, Simon Lilley, Kevin Tennent, Keith Robson, Willy Maley, Iris H-Y Chiu, Ewan Mcgaughey, Chris Rees, Nina Boeger, Adam Leaver, Marc T. Moore, Leen Paape, Alan D. Meyer, Marcello Palazzi, Nitasha Kaul, Juan Felipe Espinosa-Cristia, Timothy Kuhn, David J. Cooper, Susanne Soederberg, Andreas Jansson, Susan Watson, Ofer Sitbon, Joan Loughrey, David Collison, Maureen Mcculloch, Navajyoti Samanta, Daniel J.H. Greenwood, Grahame F. Thompson, Andrew R. Keay, Alessia Contu, Andreas Rühmkorf, Richard Hull, Irene-Marie Esser, Nihel Chabrak

Faculty Scholarship

The current model of corporate governance needs reform. There is mounting evidence that the practices of shareholder primacy drive company directors and executives to adopt the same short time horizon as financial markets. Pressure to meet the demands of the financial markets drives stock buybacks, excessive dividends and a failure to invest in productive capabilities. The result is a ‘tragedy of the horizon’, with corporations and their shareholders failing to consider environmental, social or even their own, long-term, economic sustainability.

With less than a decade left to address the threat of climate change, and with consensus emerging that businesses need …

Big Data And Discrimination, Talia B. Gillis, Jan L. Speiss

Faculty Scholarship

The ability to distinguish between people in setting the price of credit is often constrained by legal rules that aim to prevent discrimination. These legal requirements have developed focusing on human decision-making contexts, and so their effectiveness is challenged as pricing increasingly relies on intelligent algorithms that extract information from big data. In this Essay, we bring together existing legal requirements with the structure of machine-learning decision-making in order to identify tensions between old law and new methods and lay the ground for legal solutions. We argue that, while automated pricing rules provide increased transparency, their complexity also limits the …

Money That Costs Too Much: Regulating Financial Incentives, Kristen Underhill

Faculty Scholarship

Money may not corrupt. But should we worry if it corrodes? Legal scholars in a range of fields have expressed concern about “motivational crowding-out,” a process by which offering financial rewards for good behavior may undermine laudable social motivations, like professionalism or civic duty. Disquiet about the motivational impacts of incentives has now extended to health law, employment law, tax, torts, contracts, criminal law, property, and beyond. In some cases, the fear of crowding-out has inspired concrete opposition to innovative policies that marshal incentives to change individual behavior. But to date, our fears about crowding-out have been unfocused and amorphous; …

Why Do Auditors Fail? What Might Work? What Won't?, John C. Coffee Jr.

Faculty Scholarship

Auditing failures and scandals have become commonplace. In response, reformers (including the Kingman Review in the U.K. and a recent report of the U.K.’s Competition and Market Authority) have proposed a variety of remedies, including prophylactic bans on auditors providing consulting services to their clients in the belief that this will minimize the conflicts of interest that produce auditing failures. Although useful, such reforms are already in place to a considerable degree and may have reached the point of diminishing returns. Moreover, this strategy does not address the deeper problem that clients (or their managements) may not want aggressive auditing, …

Guarantor Of Last Resort, Kathryn Judge

Faculty Scholarship

The optimal response to a financial crisis entails addressing two, often conflicting, demands: stopping the panic and starting the clock. When short-term depositors flee, banks can be forced to sell assets at fire-sale prices, causing credit to contract and real economic activity to decline. To reduce these adverse spillover effects, policymakers routinely intervene to stop systemic runs. All too often, however, policymakers deploy stopgap measures that allow the underlying problems to fester. To promote long-term economic health, they must also ferret out the underlying problems and allocate the losses that cannot be avoided. A well-designed guarantor of last resort can …

The Core Corporate Governance Puzzle: Contextualizing The Link To Performance, Merritt B. Fox, Ronald J. Gilson, Darius Palia

Faculty Scholarship

There is a puzzle at the core of corporate governance theory. Prior scholarship reports a strong relationship between firms best at creating shareholder value and those rated highly by the established corporate governance indices. Little work explores why, however. We hypothesize that the link between governance and performance depends centrally on context. We illustrate the importance of context by exploring circumstances when a firm's governance structure can operate as a signal of the quality of its management. The idea is that better managers are on average more likely to choose a highly rated governance structure than are bad managers because …

Fiduciary Law In Financial Regulation, Howell E. Jackson, Talia B. Gillis

Faculty Scholarship

This chapter explores the application of fiduciary duties to regulated financial firms and financial services. At first blush, the need for such a chapter might strike some as surprising in that fiduciary duties and systems of financial regulation can be conceptualized as governing distinctive and nonoverlapping spheres: fiduciary duties police private activity through open-ended, judicially defined standards imposed on an ex post basis, whereas financial regulations set largely mandatory, ex ante obligations for regulated entities under supervisory systems established in legislation and implemented through expert administrative agencies. Yet, as the chapter documents, fiduciary duties often do overlap with systems of …

Regulating Financial Markets – An Ltf Perspective, Katharina Pistor

Faculty Scholarship

This chapter applies the “Legal Theory of Finance” (LTF) I developed in a paper, which was published in the Journal of Comparative Economics in 2013. Together with other research projects, conferences, and workshops conducted in the intervening period, this chapter illustrates the explanatory powers of the theory and its ramifications for the regulation of financial systems. I am grateful for the conference and this volume, and to the other authors in it who have tested LTF in application to new circumstances as they offer a good opportunity to step back and ask more basic questions about LTF:

1. What is the …

Reliable Perfection Of Security Interests In Crypto-Currency, Ronald J. Mann

Faculty Scholarship

As you all know, the organizers of this event chose a topic of burning interest when they selected crypto-currency as the focus of this year’s panel. Fortunately, unlike most of the similar events at which the author has been asked to speak, we have not been asked to talk about Bitcoin as the currency of the future; my doubts about the ability of Bitcoin to succeed as a currency of routine use – as opposed to a speculative investment vehicle – dampen my interest in talking repeatedly about that subject. The task they have set for the speakers is one …

The Wealth Gap And The Racial Disparities In The Startup Ecosystem, Lynnise E. Pantin

Faculty Scholarship

Although much attention has been given to structural inequality as it manifests in the criminal justice context, little has been said about economic inequality as it relates to the startup ecosystem. This Article details how the historic creation of the wealth gap affects entrepreneurship, highlighting how the wealth gap adversely impacts entrepreneurs of color. Entrepreneurship is a compelling solution to wealth inequality, but wealth inequality can be an impediment to success in entrepreneurship. This Article explains how the United States’ history of bolstering wealth creation for some, while inhibiting wealth creation for people of color, matters for understanding the startup …

How Investors Can (And Can't) Create Social Value, Paul Brest, Ronald J. Gilson, Mark A. Wolfson

Faculty Scholarship

Most investors throughout the world have a single goal: to earn the highest risk- adjusted financial returns. They would not accept a lower financial return from an investment that also produced social benefits.

More recently, an increasing number of socially-motivated investors have goals beyond maximizing returns. They also seek to align their investments with their social values (value alignment), and some also seek to cause the companies in which they invest to create more social value as a result of their investment (social value creation). We show in this essay that while it is relatively easy to achieve value alignment, …

Informed Trading And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Faculty Scholarship

Informed trading – trading on information not yet reflected in a stock’s price – drives the stock market. Such informational advantages can arise from astute analysis of varied pieces of public news, from just released public information, or from confidential information from inside a firm. We argue that these disparate types of trading are all better regulated as part of the broader phenomenon of informed trading. Informed trading makes share prices more accurate, enhancing the allocation of capital, but also makes markets less liquid, which is costly to the efficiency of trade. Informed trading thus poses a fundamental trade-off in …

Expectations As Property: Histories, Contexualizations, Critiques, Freya Irani, Katharina Pistor

Faculty Scholarship

The last four decades have seen an enormous expansion in the number of international investment treaties (particularly bilateral investment treaties) and in investment treaty-based arbitrations and awards. Traditionally made between capital-exporters and capital-importing states (that is, along a North-South axis), such treaties generally assure investors of one signatory state (the "home state") protection on the basis of pre-determined standards in the other signatory state or states (the "host state"). Such treaties also provide for compensation in case of breaches of these standards, and give investors recourse to arbitration in case of disputes. Given these provisions alongside arbitral treaties themselves, in …

Regulation And Deregulation: The Baseline Challenge, Kathryn Judge

Faculty Scholarship

What does it mean to deregulate? Is deregulation just about the repeal of existing rules? In a closed and static system, this definition seems apt. But what if the bounds are porous? Or the internal workings of the system are dynamic? Once a system is structured to allow the option set to change, do the proscriptions embedded in law at Time A remain the appropriate baseline? Or should the baseline evolve, recreating the balance struck at Time A given the option set that exists at Time B? What if the reasons for the balance struck at Time A are myriad, …

The Origins Of A Capital Market Union In The United States, Jeffrey N. Gordon, Kathryn Judge

Faculty Scholarship

EU policy-makers have focused on the creation of a “Capital Market Union” to advance the economic vitality of the EU in the aftermath of the Global Financial Crisis of 2007-09 and the Eurozone crisis of 2011-13. The hope is that EU-wide capital markets will help remedy the limitations in the EU’s pattern of bank-centered finance, which, despite the launch of the Banking Union, remains tied to Member States. Capital market development will provide alternative channels for finance, which will facilitate greater resiliency, more economic integration within the EU, and more choices for savers and firms. This chapter uses the origins …

Too Big To Supervise: The Rise Of Financial Conglomerates And The Decline Of Discretionary Oversight In Banking, Lev Menand

Faculty Scholarship

The authority of government officials to define and elimi­nate “unsafe and unsound” banking practices is one of the oldest and broadest powers in U.S. banking law. But this authority has been neglected in the recent literature, in part because of a movement in the 1990s to convert many supervi­sory judgments about “safety and soundness” into bright-line rules. This movement did not entirely do away with discre­tionary oversight, but it refocused supervisors on compliance, risk management, and governance – in other words, on inter­nal bank processes.

Drawing on the rules versus standards debate, this Arti­cle develops a taxonomy for parsing the …

Naked Open Market Manipulation And Its Effects, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Faculty Scholarship

More than 80 years after US federal law first addressed stock market manipulation, there is still dispute about manipulation law’s foundational principles; this chapter aims to provide clarity by offering an analytical framework for understanding a specific manipulation. There has been a sharp split among the federal circuits concerning manipulation law’s central question: Can trading activity alone ever be considered illegal manipulation? Economists and legal scholars do not agree on whether manipulation is possible in principle, let alone on how to address it properly in practice. The framework offered by this chapter aims to help clarify federal law and may …

The Importance Of "Money", Kathryn Judge

Faculty Scholarship

In a provocative new book, The Money Problem: Rethinking Financial Regulation, Professor Morgan Ricks argues that the government should reclaim control over money creation. Money, Ricks argues, is not just the cash in your pocket or the balance in your checking account. Instead, at least for purposes of financial stability policy, money is best equated with short-term debt. For most of the twentieth century, such debt was issued primarily by regulated commercial banks and insured by the Federal Deposit Insurance Corporation (FDIC), resulting in a fairly stable financial system. As a result of financial innovation, however, much of today's short-term …

Information Gaps And Shadow Banking, Kathryn Judge

Faculty Scholarship

This Article argues that information gaps – pockets of information that are pertinent and knowable but not currently known – are a byproduct of shadow banking and a meaningful source of systemic risk. It lays the foundation for this claim by juxtaposing the regulatory regime governing the shadow banking system with the incentives of the market participants who populate that system. Like banks, shadow banks rely heavily on short-term debt claims designed to obviate the need for the holder to engage in any meaningful information gathering or analysis. The securities laws that prevail in the capital markets, however, both presume …

Investor-Driven Financial Innovation, Kathryn Judge

Faculty Scholarship

Financial regulations often encourage or require market participants to hold particular types of financial assets. One unintended consequence of this form of regulation is that it can spur innovation to increase the effective supply of favored assets. This Article examines when and how changes in the law prompt the spread of “investor-driven financial innovations.” Weaving together theory, recent empirical findings, and illustrations, this Article provides an overview of why investors prefer certain types of financial assets to others, how markets respond, and how the spread of investor-driven innovations can transform the structure of the financial system. This examination suggests that …

From Territorial To Monetary Sovereignty, Katharina Pistor

Faculty Scholarship

State sovereignty is closely intertwined with, but not limited to, control over territory and people. It has long been recognized that control over monetary affairs is a critical part of genuine sovereignty. In this Article, I go a step further and argue that the relevance and importance of territorial versus monetary sovereignty has shifted in favor of the latter. This shift goes hand in hand with the rise of credit-based financial systems. Such systems depend, in the last instance, on backstopping by an entity with control over its own money supply and no binding survival constraints. Only states with monetary …