This paper explores the effects of the over-confidence and over-optimism biases in the stock markets. These biases strike at the root of why people trade and often, why people incur losses on the stock market. It suggests legal and other responses that would mitigate these biases. In Part I, the author elaborates on the meaning and presence of the over-confidence and over-optimism biases amongst players in the stock markets and notes their continued presence amongst investors. In Part II, the author observes the key effects of these biases and estimates the economic costs incurred as a result of these biases. She concludes that they are substantially high and recommends efforts to minimize these biases amongst investors in the stock markets. In Part III, the author explores ways in which legal policy can help limit these biases effectively.
{"title":"Countering Over-Confidence and Over-Optimism By Creating Awareness and Experiential Learning Amongst Stock Market Players","authors":"Gauri Manglik","doi":"10.2139/ssrn.954861","DOIUrl":"https://doi.org/10.2139/ssrn.954861","url":null,"abstract":"This paper explores the effects of the over-confidence and over-optimism biases in the stock markets. These biases strike at the root of why people trade and often, why people incur losses on the stock market. It suggests legal and other responses that would mitigate these biases. In Part I, the author elaborates on the meaning and presence of the over-confidence and over-optimism biases amongst players in the stock markets and notes their continued presence amongst investors. In Part II, the author observes the key effects of these biases and estimates the economic costs incurred as a result of these biases. She concludes that they are substantially high and recommends efforts to minimize these biases amongst investors in the stock markets. In Part III, the author explores ways in which legal policy can help limit these biases effectively.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"56 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2006-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83284710","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This chapter argues that much of contemporary state transformation is driven not by socialization, nor by trade liberalization in the abstract, but by the particular legal-institutional form of trade liberalization since 1948. Contemporary trade liberalization has been a product of US (and, later, US-European) power, exercised through the creation and operation of the GATT and its successor, the WTO, and reflected in the GATT/WTO's substantive rules. The particular form and processes of trade liberalization have entailed not just the abandonment of certain national policies, but also shifts of authority within the state, the creation of new kinds of state capacities, and new processes of policy-making. European state transformation is part of this story. The changing organization of Western European states and EU institutions can not be fully understood without considering the exigencies of partnering with the United States to govern the institutions of the global trading system. For the EU to join the United States in governing the GATT/WTO required changes in the organization of the European state: shifting authority upward within states and to the Commission, expanding state capacity within states and at the European level, and changing processes of member-state and European trade policy-making. Europe chose to transform along lines that have enabled it to co-govern the world trading system. European-US governance of the world trading system has, in turn, favored changes in the organization of the state in third countries toward a Western industrialized model of the state.
{"title":"The Transformation of European Trading States","authors":"R. Steinberg","doi":"10.2307/j.ctv22jnt4g.14","DOIUrl":"https://doi.org/10.2307/j.ctv22jnt4g.14","url":null,"abstract":"This chapter argues that much of contemporary state transformation is driven not by socialization, nor by trade liberalization in the abstract, but by the particular legal-institutional form of trade liberalization since 1948. Contemporary trade liberalization has been a product of US (and, later, US-European) power, exercised through the creation and operation of the GATT and its successor, the WTO, and reflected in the GATT/WTO's substantive rules. The particular form and processes of trade liberalization have entailed not just the abandonment of certain national policies, but also shifts of authority within the state, the creation of new kinds of state capacities, and new processes of policy-making. European state transformation is part of this story. The changing organization of Western European states and EU institutions can not be fully understood without considering the exigencies of partnering with the United States to govern the institutions of the global trading system. For the EU to join the United States in governing the GATT/WTO required changes in the organization of the European state: shifting authority upward within states and to the Commission, expanding state capacity within states and at the European level, and changing processes of member-state and European trade policy-making. Europe chose to transform along lines that have enabled it to co-govern the world trading system. European-US governance of the world trading system has, in turn, favored changes in the organization of the state in third countries toward a Western industrialized model of the state.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"78 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2006-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81279994","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Government interventions into the life of the family are typically viewed as intrusions - to protect abused or neglected children, to liberate children, or to provide supervision for children who are beyond the control of their parents. But a more important public role is to provide assistance to parents in order to empower them to promote the best interests of their children. This assistance can come in many forms - material resources, information, and control over third parties who otherwise threaten to undermine parental authority. This essay discusses reframing the way we think about children and the state.
{"title":"Framing Public Interventions with Respect to Children as Parent-Empowering","authors":"S. Sugarman","doi":"10.2139/ssrn.925246","DOIUrl":"https://doi.org/10.2139/ssrn.925246","url":null,"abstract":"Government interventions into the life of the family are typically viewed as intrusions - to protect abused or neglected children, to liberate children, or to provide supervision for children who are beyond the control of their parents. But a more important public role is to provide assistance to parents in order to empower them to promote the best interests of their children. This assistance can come in many forms - material resources, information, and control over third parties who otherwise threaten to undermine parental authority. This essay discusses reframing the way we think about children and the state.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"66 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2006-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86226600","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.
{"title":"The Case for Limited Shareholder Voting Rights","authors":"Stephen M. Bainbridge","doi":"10.2139/ssrn.781429","DOIUrl":"https://doi.org/10.2139/ssrn.781429","url":null,"abstract":"Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions. As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"20 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2005-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78757933","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article presents the findings of an empirical study of professional fee and expense awards by United States Bankruptcy Courts in 48 large public company bankruptcy cases concluded from 1998 through the first half of 2002. Data was gathered from fee applications and orders in the courts files. Using that data together with case and company data from the Bankruptcy Research Database, the authors constructed regression models of the determinants of (1) the amounts of professional fees and expenses awarded by case and (2) the amounts of debtor-in-possession bankruptcy attorneys fees awarded by case. Two determinants dominate both models: the value of the reorganizing firm's assets and the length of time the case remains pending. Two additional factors contribute to determining the amount of professional fees and expenses, but not debtor in possession bankruptcy attorneys fees: the number of professional firms working in the bankruptcy case and whether the case was in the Delaware bankruptcy court. The ratio of fees and expenses to firm size was subject to a scale effect. As the size of the case increased, the ratio of fees to expenses declined. For the 48 cases studied, total fees and expenses were 1.4% of assets reported on the bankruptcy petition. The average ratio of fees and expenses to assets was 2.2%, but removal of a single outlier reduced it to 1.9%. Controlling for firm size, case duration, and the number of professional firms working, fees were 32% higher in Delaware cases. But controlling only for firm size, the significance of this finding disappeared. Fee cuts were generally small - exceeding 4% of the amounts applied for in only 11% of the cases. The mean fee cut varied significantly by court. Delaware cuts averaged 0.7%, New York 4.5%, and Other Courts 2.3%. The differences in fee cuts among courts was significant, but fees were not significantly lower in cases with larger fee cuts. Based on a comparison of the data gathered in this study with the data gathered by Weiss, inflation-adjusted professional fees and expenses awarded in large, public company reorganizations have fallen by about 57% since the 1980s. Controlling only for firm size, the difference is statistically significant. The decline in fees appears to be associated with the decline in case duration that occurred during the period.
{"title":"The Determinants of Professional Fees in Large Bankruptcy Reorganization Cases","authors":"Lynn M. LoPucki, Joseph W. Doherty","doi":"10.2139/ssrn.419280","DOIUrl":"https://doi.org/10.2139/ssrn.419280","url":null,"abstract":"This article presents the findings of an empirical study of professional fee and expense awards by United States Bankruptcy Courts in 48 large public company bankruptcy cases concluded from 1998 through the first half of 2002. Data was gathered from fee applications and orders in the courts files. Using that data together with case and company data from the Bankruptcy Research Database, the authors constructed regression models of the determinants of (1) the amounts of professional fees and expenses awarded by case and (2) the amounts of debtor-in-possession bankruptcy attorneys fees awarded by case. Two determinants dominate both models: the value of the reorganizing firm's assets and the length of time the case remains pending. Two additional factors contribute to determining the amount of professional fees and expenses, but not debtor in possession bankruptcy attorneys fees: the number of professional firms working in the bankruptcy case and whether the case was in the Delaware bankruptcy court. The ratio of fees and expenses to firm size was subject to a scale effect. As the size of the case increased, the ratio of fees to expenses declined. For the 48 cases studied, total fees and expenses were 1.4% of assets reported on the bankruptcy petition. The average ratio of fees and expenses to assets was 2.2%, but removal of a single outlier reduced it to 1.9%. Controlling for firm size, case duration, and the number of professional firms working, fees were 32% higher in Delaware cases. But controlling only for firm size, the significance of this finding disappeared. Fee cuts were generally small - exceeding 4% of the amounts applied for in only 11% of the cases. The mean fee cut varied significantly by court. Delaware cuts averaged 0.7%, New York 4.5%, and Other Courts 2.3%. The differences in fee cuts among courts was significant, but fees were not significantly lower in cases with larger fee cuts. Based on a comparison of the data gathered in this study with the data gathered by Weiss, inflation-adjusted professional fees and expenses awarded in large, public company reorganizations have fallen by about 57% since the 1980s. Controlling only for firm size, the difference is statistically significant. The decline in fees appears to be associated with the decline in case duration that occurred during the period.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"2006 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2004-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86592616","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This essay argues that the decline of public identities over the past three decades, combined with increasing secrecy in the process of identification, is the root cause of the burgeoning problem of identity theft. Identity theft is easy because impersonation increasingly takes place in private transactions that are invisible to the victim. The essay compares two proposed solutions: Professor Daniel Soloves' architectural approach and the author's Public Identity System. Both would make the identification process transparent to the person identified, put imposters at risk by requiring personal appearances, and ban the use of social security numbers as passwords. But the two writers take opposing positions with respect to continued secrecy of the information used to identify consumers. Solove would maintain the link between identification information (name and social security number) and personal information (information descriptive of the consumer or the consumer's circumstances) and seek to impose better security to keep all of it from thieves. The author would sever the link between the two kinds of information, make identification information - which is harmless - public, and allow consumers to use it to create public, thief-proof identities. The essay explains the operation of the Public Identity System the author proposed in Human Identification Theory and the Identity Theft Problem, 80 Texas Law Review 89 (2001) and addresses Solove's objections related to the public display of social security numbers, consumer profiling, stalking, marketing abuse, and other aspects of the proposed System.
这篇文章认为，在过去的三十年里，公共身份的衰落，加上身份识别过程中的日益保密，是身份盗窃问题日益严重的根本原因。身份盗窃很容易，因为冒充越来越多地发生在受害者看不见的私人交易中。本文比较了两种提出的解决方案:Daniel Soloves教授的建筑方法和作者的公共身份系统。两者都将使识别过程对被识别的人透明，通过要求个人露面使冒名顶替者面临风险，并禁止使用社会安全号码作为密码。但两位作者在继续保密用于识别消费者的信息方面持相反的立场。Solove将保持身份信息(姓名和社会安全号码)和个人信息(描述消费者或消费者情况的信息)之间的联系，并寻求实施更好的安全措施，以防止所有这些信息被窃贼窃取。作者将切断这两种信息之间的联系，使无害的身份信息公开，并允许消费者使用它来创建公开的、防盗的身份。本文解释了作者在《人类身份识别理论和身份盗窃问题》(80 Texas Law Review 89, 2001)中提出的公共身份系统的运作，并解决了Solove对公开显示社会安全号码、消费者分析、跟踪、营销滥用和拟议系统的其他方面的反对意见。
{"title":"Did Privacy Cause Identity Theft?","authors":"Lynn M. LoPucki","doi":"10.2139/SSRN.386881","DOIUrl":"https://doi.org/10.2139/SSRN.386881","url":null,"abstract":"This essay argues that the decline of public identities over the past three decades, combined with increasing secrecy in the process of identification, is the root cause of the burgeoning problem of identity theft. Identity theft is easy because impersonation increasingly takes place in private transactions that are invisible to the victim. The essay compares two proposed solutions: Professor Daniel Soloves' architectural approach and the author's Public Identity System. Both would make the identification process transparent to the person identified, put imposters at risk by requiring personal appearances, and ban the use of social security numbers as passwords. But the two writers take opposing positions with respect to continued secrecy of the information used to identify consumers. Solove would maintain the link between identification information (name and social security number) and personal information (information descriptive of the consumer or the consumer's circumstances) and seek to impose better security to keep all of it from thieves. The author would sever the link between the two kinds of information, make identification information - which is harmless - public, and allow consumers to use it to create public, thief-proof identities. The essay explains the operation of the Public Identity System the author proposed in Human Identification Theory and the Identity Theft Problem, 80 Texas Law Review 89 (2001) and addresses Solove's objections related to the public display of social security numbers, consumer profiling, stalking, marketing abuse, and other aspects of the proposed System.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"4 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2003-03-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79048791","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Although social networks exist in every society, they are widely believed to play a different and more prominent role in Asian societies, especially those with a Confucian heritage, than in Western states, particularly Western states with mature capitalist economies, liberal democratic political systems with robust civil societies, and well developed legal systems characterized by rule of law and a modern bureaucratic administrative system. This chapter article examines the role of social networks along two dimensions: political reform and the implementation and consolidation of democracy; and legal reforms aimed at establishing rule of law and a modern technocratic administrative system. Clearly there are wide variations in the nature and role of social networks in Asia, which is to be expected given the wide diversity in Asian societies in terms of religious and cultural practices, political systems, levels of economic development and legal systems. Rather than attempting a broad comparison of social networks throughout Asia, my main focus will be on China, with reference to the experiences of other countries where relevant. In some Western states such as Poland and other former Soviet Union republics, social groups in the form of civil society played a central role in the transition to democracy; in more established liberal democracies, civil society serves important functions in monitoring the state, holding government officials accountable and counterbalancing state power. Buoyed by the experiences of the former Soviet republics, a number of China scholars turned their attention in the early to mid 1990s to the topic of civil society and whether the proliferation of social organizations in China would lead to democracy. Many scholars cautioned that the concept of civil society as understood in the West may not be applicable to China; some pointed out that civil society was mainly a topic among foreign scholars and Chinese living in exile, and that the idea of civil society has not become part of popular discourse in China; still others argued that state-society relations are better understood in corporatist terms, and that the corporatist nature of social groups in China may serve to bolster the authoritarian regime rather than lead to democracy. I consider whether the concept of civil society is applicable to China and how civil society is best theorized given the differences between the liberal democratic social-political philosophies dominant in the West and alternative conceptions of the relations between the state, society and individual in China. To that end I develop four models for state-society relations: liberal democratic, statist socialist, neo-authoritarian and communitarian. These models combine social political philosophies with a corresponding set of institutions, practices and rules, thus redressing the relative neglect to date in theoretical treatments of civil society in China of the institutional basis of civil society, a
{"title":"Social Networks, Civil Society, Democracy and Rule of Law: A New Conceptual Framework","authors":"R. Peerenboom","doi":"10.2139/ssrn.372680","DOIUrl":"https://doi.org/10.2139/ssrn.372680","url":null,"abstract":"Although social networks exist in every society, they are widely believed to play a different and more prominent role in Asian societies, especially those with a Confucian heritage, than in Western states, particularly Western states with mature capitalist economies, liberal democratic political systems with robust civil societies, and well developed legal systems characterized by rule of law and a modern bureaucratic administrative system. This chapter article examines the role of social networks along two dimensions: political reform and the implementation and consolidation of democracy; and legal reforms aimed at establishing rule of law and a modern technocratic administrative system. Clearly there are wide variations in the nature and role of social networks in Asia, which is to be expected given the wide diversity in Asian societies in terms of religious and cultural practices, political systems, levels of economic development and legal systems. Rather than attempting a broad comparison of social networks throughout Asia, my main focus will be on China, with reference to the experiences of other countries where relevant. In some Western states such as Poland and other former Soviet Union republics, social groups in the form of civil society played a central role in the transition to democracy; in more established liberal democracies, civil society serves important functions in monitoring the state, holding government officials accountable and counterbalancing state power. Buoyed by the experiences of the former Soviet republics, a number of China scholars turned their attention in the early to mid 1990s to the topic of civil society and whether the proliferation of social organizations in China would lead to democracy. Many scholars cautioned that the concept of civil society as understood in the West may not be applicable to China; some pointed out that civil society was mainly a topic among foreign scholars and Chinese living in exile, and that the idea of civil society has not become part of popular discourse in China; still others argued that state-society relations are better understood in corporatist terms, and that the corporatist nature of social groups in China may serve to bolster the authoritarian regime rather than lead to democracy. I consider whether the concept of civil society is applicable to China and how civil society is best theorized given the differences between the liberal democratic social-political philosophies dominant in the West and alternative conceptions of the relations between the state, society and individual in China. To that end I develop four models for state-society relations: liberal democratic, statist socialist, neo-authoritarian and communitarian. These models combine social political philosophies with a corresponding set of institutions, practices and rules, thus redressing the relative neglect to date in theoretical treatments of civil society in China of the institutional basis of civil society, a","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2003-01-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89774032","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
According to conventional wisdom, insiders' use of private information to abstain from trading raises the same policy concerns as insider trading. This widely held perception has dominated much of the academic debate over the regulation of insider trading. I show that this view is flatly incorrect: as long as insiders cannot trade while in possession of nonpublic information, their ability to use nonpublic information to abstain from trading does not make them better off than public shareholders. I then explain why insider abstention cannot give rise to the same type of economic distortions that might be associated with insider trading. I conclude by analyzing the implications of my findings for a number of issues in insider trading regulation, including the use vs. possession debate and the Rule 10b5-1 safe harbor. Key Words:
{"title":"Insider Abstention","authors":"J. Fried","doi":"10.2139/ssrn.330520","DOIUrl":"https://doi.org/10.2139/ssrn.330520","url":null,"abstract":"According to conventional wisdom, insiders' use of private information to abstain from trading raises the same policy concerns as insider trading. This widely held perception has dominated much of the academic debate over the regulation of insider trading. I show that this view is flatly incorrect: as long as insiders cannot trade while in possession of nonpublic information, their ability to use nonpublic information to abstain from trading does not make them better off than public shareholders. I then explain why insider abstention cannot give rise to the same type of economic distortions that might be associated with insider trading. I conclude by analyzing the implications of my findings for a number of issues in insider trading regulation, including the use vs. possession debate and the Rule 10b5-1 safe harbor. Key Words:","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"63 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2003-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84776516","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Since the public corporation first evolved as a business form, there has been a lively debate over whether its proper purpose always is to maximize shareholder wealth, or whether directors sometimes can consider the interests of creditors, employees, and other corporate stakeholders. This article reviews why two of the arguments traditionally used to justify strict shareholder primacy - that shareholders own the corporation, and that shareholders are the sole residual claimants of corporations - are bad arguments, in the sense that they are demonstrably incorrect from both an economic and a legal perspective. The article then explores a third and better argument for shareholder primacy: that requiring corporate directors to serve only shareholders is the best way to keep directors from imposing excessive agency costs on firms. This agency cost argument recognizes that in an ideal world, directors would take account of the interests of both shareholders and other stakeholders. Indeed, allowing this can provide ex ante benefits to shareholders by encouraging nonshareholder groups to make firm-specific commitments to corporate team production. Nevertheless (the argument goes), a rule of strict shareholder primacy remains preferable, because it permits corporations to monitor and reward director performance according to a single easily-observed metric: stock price. While plausible in theory, the agency cost argument for strict shareholder primacy suffers from a serious weakness. In practice, the business world displays a strong revealed preference for corporate governance rules that grant directors discretion to serve stakeholder groups, even at shareholders' ex post expense. What's more, this pattern is observed when firms are first incorporated and brought public, a time when corporate promoters have every incentive to cater to shareholder interests. Such observations suggest that business participants believe the ex ante benefits of allowing directors to consider stakeholder interests outweigh the ex post harms in terms of greater agency costs. They also raise serious questions about the empirical strength of the agency cost argument for ex post shareholder primacy.
{"title":"Bad and Not-so-Bad Arguments for Shareholder Primacy","authors":"Lynn A. Stout","doi":"10.2139/ssrn.331464","DOIUrl":"https://doi.org/10.2139/ssrn.331464","url":null,"abstract":"Since the public corporation first evolved as a business form, there has been a lively debate over whether its proper purpose always is to maximize shareholder wealth, or whether directors sometimes can consider the interests of creditors, employees, and other corporate stakeholders. This article reviews why two of the arguments traditionally used to justify strict shareholder primacy - that shareholders own the corporation, and that shareholders are the sole residual claimants of corporations - are bad arguments, in the sense that they are demonstrably incorrect from both an economic and a legal perspective. The article then explores a third and better argument for shareholder primacy: that requiring corporate directors to serve only shareholders is the best way to keep directors from imposing excessive agency costs on firms. This agency cost argument recognizes that in an ideal world, directors would take account of the interests of both shareholders and other stakeholders. Indeed, allowing this can provide ex ante benefits to shareholders by encouraging nonshareholder groups to make firm-specific commitments to corporate team production. Nevertheless (the argument goes), a rule of strict shareholder primacy remains preferable, because it permits corporations to monitor and reward director performance according to a single easily-observed metric: stock price. While plausible in theory, the agency cost argument for strict shareholder primacy suffers from a serious weakness. In practice, the business world displays a strong revealed preference for corporate governance rules that grant directors discretion to serve stakeholder groups, even at shareholders' ex post expense. What's more, this pattern is observed when firms are first incorporated and brought public, a time when corporate promoters have every incentive to cater to shareholder interests. Such observations suggest that business participants believe the ex ante benefits of allowing directors to consider stakeholder interests outweigh the ex post harms in terms of greater agency costs. They also raise serious questions about the empirical strength of the agency cost argument for ex post shareholder primacy.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"37 2 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2002-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76204540","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recent reports of massive accounting frauds at some of the nation's largest and most respected companies have provoked calls from policymakers and business leaders for market reforms to shore up investor confidence. Nevertheless, the phenomenon of investor confidence has received relatively little formal study. Current legal scholarship tends to assume, with little discussion, that investors have "confidence" when they have information that assures them that the incentives provided by the law and by the markets are adequate to constrain corporate insiders and securities professionals from shirking, stealing, and other forms of opportunistic behavior. This "rational expectations" approach also implies that, in the absence of such assurance, investors protect themselves from others' opportunism by refusing to invest in the market in the first place. This article argues that the phenomenon of investor confidence can be understood far better if we assume not that investors have rational expectations, but that they have what economists call "adaptive expectations". Individuals with rational expectations predict others' behavior by focusing on their external incentives and constraints. In contrast, individuals with adaptive expectations predict others' behavior (including possibly the behavior of such an abstract "other" as the stock market) by extrapolating from the past. Adaptive expectations consequently permit trust, meaning a belief that another will behave in a cooperative and trustworthy fashion simply because he or she has behaved trustworthily and cooperatively in the past. The article argues that there is substantial reason to believe that adaptive expectations-based trust is essential to a well-developed public securities market. It reviews experimental studies that shed light on how trust can be developed and how it can be destroyed. Finally, it considers some of the policy implications that flow from an adaptive expectations model of investor confidence. One of the most important is that trust may be subject to "history effects." If an individual or institution has behaved cooperatively in the past, trusting investors tend to assume that that institution or individual will behave cooperatively in the future - even if incentives change so that cooperation is no longer advantageous. Conversely, trust that has been abused tends to disappear, and it can be slow to return even when the problems that led to its abuse have been corrected. This second observation carries pessimistic implications for lawmakers' ability to restore investor confidence quickly through legal reforms after that confidence has been eroded.
{"title":"The Investor Confidence Game","authors":"Lynn A. Stout","doi":"10.2139/SSRN.322301","DOIUrl":"https://doi.org/10.2139/SSRN.322301","url":null,"abstract":"Recent reports of massive accounting frauds at some of the nation's largest and most respected companies have provoked calls from policymakers and business leaders for market reforms to shore up investor confidence. Nevertheless, the phenomenon of investor confidence has received relatively little formal study. Current legal scholarship tends to assume, with little discussion, that investors have \"confidence\" when they have information that assures them that the incentives provided by the law and by the markets are adequate to constrain corporate insiders and securities professionals from shirking, stealing, and other forms of opportunistic behavior. This \"rational expectations\" approach also implies that, in the absence of such assurance, investors protect themselves from others' opportunism by refusing to invest in the market in the first place. This article argues that the phenomenon of investor confidence can be understood far better if we assume not that investors have rational expectations, but that they have what economists call \"adaptive expectations\". Individuals with rational expectations predict others' behavior by focusing on their external incentives and constraints. In contrast, individuals with adaptive expectations predict others' behavior (including possibly the behavior of such an abstract \"other\" as the stock market) by extrapolating from the past. Adaptive expectations consequently permit trust, meaning a belief that another will behave in a cooperative and trustworthy fashion simply because he or she has behaved trustworthily and cooperatively in the past. The article argues that there is substantial reason to believe that adaptive expectations-based trust is essential to a well-developed public securities market. It reviews experimental studies that shed light on how trust can be developed and how it can be destroyed. Finally, it considers some of the policy implications that flow from an adaptive expectations model of investor confidence. One of the most important is that trust may be subject to \"history effects.\" If an individual or institution has behaved cooperatively in the past, trusting investors tend to assume that that institution or individual will behave cooperatively in the future - even if incentives change so that cooperation is no longer advantageous. Conversely, trust that has been abused tends to disappear, and it can be slow to return even when the problems that led to its abuse have been corrected. This second observation carries pessimistic implications for lawmakers' ability to restore investor confidence quickly through legal reforms after that confidence has been eroded.","PeriodicalId":83406,"journal":{"name":"University of California, Davis law review","volume":"21 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2002-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81432054","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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