The race for the bottom in corporate governance

Virginia Law Review

Volumn 95, Issue 4, 2009, Pages 685-706

  Easterbrook, Frank H ^a  

^a UNIVERSITY OF CHICAGO   (United States)

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EID: 69249147460     PISSN: 00426601     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (55)

1. Department of the Treasury, Blueprint for a Modernized Financial Regulatory Structure 11 (2008).
2. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975);
3. Chiarella v. United States, 445 U.S. 222 (1980).
4. Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 Va. L. Rev. 669 (1984).
5. - 6 J. Legal Stud. 251 (1977).
6. R.H. Coase, The Nature of the Firm, 4 Economica (n.s.) 386 (1937), reprinted in R.H. Coase, The Firm, the Market, and the Law 33 (1988).
7. Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
8. William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 Yale L.J. 663 (1974).
9. Adolph A. Berle, Jr. & Gardiner C. Means, The Modern Corporation and Private Property (1933). See also "Corporations and Private Property," the fiftieth-anniversary conference on that book, in Volume 26 of the Journal of Law & Economics (1983).
10. For just one of the many examples, see Ralph Nader, Mark Green & Joel Seligman, Taming the Giant Corporation (1976).
11. See Roberta Romano, The Genius of American Corporate Law (1993);
12. M. Todd Henderson, Two Visions of Corporate Law (Univ. of Chi., John M. Olin Law & Economics Working Paper No. 449, 2009), available at http://ssrn.com/abstract=1328343.
13. See Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Pol. Econ. 416 (1956).
14. Frank H. Easterbrook, Two Agency-Cost Explanations of Dividends, 74 Am. Econ. Rev. 650 (1984);
15. Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, 76 Am. Econ. Rev. (Papers & Proc.) 323 (1986).
16. This is a major conclusion of my work with Daniel Fischel, much of which is restated in The Economic Structure of Corporate Law (1991). Recent studies of many nations' legal systems support this conclusion by showing that an independent judiciary that enforces contracts and penalizes frauds conduces to growth, while nations that regulate businesses via mandatory rules of organization have lower rates of growth.
17. See Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, The Economic Consequences of Legal Origins, 46 J. Econ. Lit. 285, 291-300 (2008).
18. Romano, supra note 10, collects and discusses much of this work. But see Lucian Bebchuk, Alma Cohen & Allen Ferrell, Does the Evidence Favor State Competition in Corporate Law?, 90 Cal. L. Rev. 1775, 1778-1781 (2002).
19. Paul G. Mahoney & Jianping Mei, Mandatory vs. Contractual Disclosure in Securities Markets: Evidence from the 1930s 28-29 (Univ. of Va. Law Sch. John M. Olin Program in Law & Econ. Working Paper Series, Paper 25, 2006), available at http://law.bepress.com/uvalwps/olin/art25/.
20. See generally Lucian A. Bebchuk & Assaf Hamdani, Federal Corporate Law: Lessons from History, 106 Colum. L. Rev. 1793 (2006).
21. Cf. Lucian Arye Bebchuk & Allen Ferrell, Federalism and Corporate Law: The Race to Protect Managers from Takeovers, 99 Colum. L. Rev. 1168 (1999).
22. John C. Coates IV, The Goals and Promise of the Sarbanes-Oxley Act, 21 J. Econ. Persp. 91 (2007), provides an accessible description of the Act.
23. - 114 Yale L.J. 1521 (2005).
24. Id. at 1526-29. Empirical work after Sarbanes-Oxley ("SOX") vindicates these conclusions.
25. See, e.g., Eitan Goldman & Steve L. Slezak, An equilibrium model of incentive contracts in the presence of information manipulation, 80 J. Fin. Econ. 603 (2006);
26. Kate Litvak, Sarbanes-Oxley and the Cross-Listing Premium, 105 Mich. L. Rev. 1857 (2007);
27. Ivy Xiying Zhang, Economic consequences of the Sarbanes-Oxley Act of 2002, 44 J. Acct. & Econ. 74 (2007);
28. Kate Litvak, Defensive Management: Does the Sarbanes-Oxley Act Discourage Corporate Risk-Taking? (Univ. of Tex. Sch. of Law, Law & Econ. Research Paper No. 108, 2008), available at http://ssrn.com/abstract=994584. There is also one event study suggesting that SOX is beneficial. Haidan Li, Morton Pincus & Sonja Olhoft Rego, Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management, 51 J.L. & Econ. 111 (2008).
29. Harold Demsetz & Kenneth Lehn, The Structure of Corporate Ownership: Causes and Consequences, 93 J. Pol. Econ. 1155, 1161 (1985).
30. Lucian Bebchuk, Alma Cohen & Allen Ferrell, What Matters in Corporate Governance?, 22 Rev. Fin. Stud. 783 (2009).
31. Robert Charles Clark, Corporate Governance Changes in the Wake of the Sarbanes-Oxley Act: A Morality Tale for Policymakers Too, 22 Ga. St. U. L. Rev. 251, 292-93 (2005);
32. see also Michael W. Maher & Dan Weiss, Costs of Complying with the Sarbanes-Oxley Act (UC Davis Graduate Sch. of Mgmt., Research Paper No. 10-08, Nov. 25, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id= 1313214.
33. Arthur Andersen LLP v. United States, 544 U.S. 696 (2005). The prosecution elected not to retry the case after the Supreme Court's decision.
34. Theodore Eisenberg & Jonathan R. Macey, Was Arthur Andersen Different? An Empirical Examination of Major Accounting Firm Audits of Large Clients, 1 J. Empirical Legal Stud. 263, 277 (2004).
35. See Paul M. Healy & Krishna G. Palepu, The Fall of Enron, 17 J. Econ. Persp. 3, 14 (2003).
36. See, e.g., United States v. Black, 530 F.3d 596 (7th Cir. 2008).
37. This is Stephen J. Choi and Andrew T. Guzman's suggestion in National Laws, International Money: Regulation in a Global Capital Market, 65 Fordham L. Rev. 1855, 1897-98 (1997).
38. Cf. James D. Cox, Coping in a Global Marketplace: Survival Strategies for a 75-Year-Old SEC, 95 Va. L. Rev. 941, 984-85 (2009) ("The fact that the regulatory gap has narrowed, whether a lot or just somewhat, between U.S. markets and major foreign markets provides an easier ground for mutual recognition to occur....").
39. Mancur Olson, Jr., The Logic of Collective Action: Public Goods and the Theory of Groups (1965).
40. See, in addition to Olson, any of the many economic analyses of interest group politics reflecting the influence of his work, along with James M. Buchanan and Gordon Tullock's The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962). E.g., Gary S. Becker, A Theory of Competition Among Pressure Groups for Political Influence, 98 Q.J. Econ. 371 (1983);
41. Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & Econ. 211 (1976);
42. Richard A. Posner, Theories of Economic Regulation, 5 Bell J. Econ. & Mgmt. Sci. 335 (1974);
43. George J. Stigler, The Economists' Traditional Theory of the Economic Functions of the State, in The Citizen and the State 103 (1975).
44. See Bruce A. Ackerman, Beyond Carolene Products, 98 Harv. L. Rev. 713, 744-46 (1985), for a rare example of a scholar appreciating that, once able to vote, "discrete and insular minorities" hold disproportionately large political power.
45. See Easterbrook & Fischel, supra note 13, at 66-67.
46. See Charles E. McLure, Jr., Incidence Analysis and the Supreme Court: An Examination of Four Cases from the 1980 Term, 1 Sup. Ct. Econ. Rev. 69, 82 (1982).
47. See President's Advisory Panel on Fed. Tax Reform, Simple, Fair, and ProGrowth: Proposals to Fix America's Tax System 99-102 (2005);
48. Alvin C. Warren, Jr., Am. Law Inst., Federal Income Tax Project: Reporter's Study of Corporate Tax Integration 40-46 (1993).
49. Clark, supra note 23, at 293-94.
50. Larry E. Ribstein, The Rise of the Uncorporation (Univ. of Ill. Coll. of Law, Ill. Law & Econ. Research Papers Series, Research Paper No. LE07-026, 2007), available at http://ssrn.com/abstract=1003790.
51. The Committee on Capital Markets Regulation stressed the declining competitiveness of U.S. markets in The Competitive Position of the U.S. Public Equity Market (2007).
52. Frank H. Easterbrook, Derivative Securities and Corporate Governance, 69 U. Chi. L. Rev. 733 (2002).
53. See Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 74 (2006);
54. Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005).
55. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S. Ct. 2499, 2510 (2007).