Blue Sky 2016-2017

• Richard Holden, Professor of Economics, University of New South Wales Business School, Sydney, Australia

Location: JG 502

Topic: Peer Effects on the United States Supreme Court

Discussion: Using data on essentially every US Supreme Court decision since 1946, we estimate a model of peer effects on the Court. We consider both the impact of justice ideology and justice votes on the votes of their peers. To identify these peer effects we use two instruments. The first is based on the composition of the Court, determined by which justices sit on which cases due to recusals or health reasons for not sitting. The second utilizes the fact that many justices previously sat on Federal Circuit Courts and are empirically much more likely to affirm decisions from their “home” court. We find large peer effects. Replacing a single justice with one who votes in a conservative direction 10 percentage points more frequently increases the probability that each other justice votes conservative by 1.63 percentage points. In terms of votes, a 10 percentage point increase in the probability that a single justice votes conservative leads to a 1.1 percentage increase in the probability that each other justice votes conservative. Finally, a single justice becoming 10% more likely to vote conservative increases the share of cases with a conservative outcome by 3.6 percentage points–excluding the direct effect of that justice–and reduces the share with a liberal outcome by 3.2 percentage points. In general, the indirect effect of a justice’s vote on the outcome through the votes of their peers is typically several times larger than the direct mechanical effect of the justice’s own vote.

• ​Wojciech Kopczuk, Department of Economics, Columbia University

Location: JG 602

Topic: Measurement and evidence on income and wealth inequality

Discussion: Forthcoming

Click here for other papers by Prof. Kopczuk.

• Naomi Lamoreaux, Stanley B. Resor Professor of Economics & History, Yale University; Chair, Yale History Department
• William Novak, Charles F. and Edith J. Clyne Professor of Law, University of Michigan Law School

Location: Jerome Greene Hall Room 102A

Topic: Corporations and American Democracy (Harvard University Press, forthcoming May 2017)

Discussion: The Center for Law & Economic Studies and Prof. Richard Brooks, as part of his Corporations & Constitutions Seminar, are jointly sponsoring a presentation by Naomi Lamoreaux and William Novak about their forthcoming book, Corporations and American Democracy.

Mini-Workshop: Legal Infrastructure of Securities Markets

Location: Case Lounge

Markets are complex institutional infrastructures. They may take the form of informal clubs, private or public trading platforms or complex networks of parties and counter parties with or without clearing houses or sophisticated information technology linking market participants to each other. Yet, little attention is paid to how the organization of markets affects outcomes, including the distribution of power and wealth.

Delphine Nougayrede and David Donald will present their recent work on the legal infrastructure of securities markets. Delphine will tackle the transparency of ownership in securities markets; David places the advance of computer, and in particular blockchain technology, into a broader historical perspective of market transformations.

The event is co-sponsored by the Center on Global Legal Transformation and the Center for Law and Economic Studies (the Blue Sky Lunch series).

Speakers:

• Delphine Nougayrede, Lecturer in Law, Columbia Law School

Topic: Towards a Global Financial Register? Account Segregation in Central Securities Depositories and the Challenge of Transparent Securities Ownership in Advanced Economies

Abstract: In their recent books, economists Thomas Piketty and Gabriel Zucman called for the creation of a global financial register (GFR) that would map the individual ownership of financial assets, including securities, in order to monitor and combat the rise of inequality. Zucman's proposal is to build this register using the databases of the large Western central securities depositories (CSDs), such as DTC, Euroclear and Clearstream. This Article examines the viability of these proposals in light of the technical reality of securities account structure within CSDs. It explains that because they are predominantly based on "street name" registration or "omnibus" accounts, their model is not prima facie conducive to the creation of a GFR identifying end-investors. The model evolved in that way because of the depth of the intermediation chain and continuing legal and regulatory fragmentation along national lines. Ownership information at present is located within intermediaries that have little incentive to change the model. Yet counter-examples within the emerging world (China) and in smaller Western economies (Norway) point to the possibility of more transparent CSDs. Increased transparency in these institutions would also help achieve other goals in addition to a GFR, such as improved corporate governance, better protection of corporate issuer and shareholder rights, and greater effectiveness of regulations combatting unlawful uses of the financial system. The viability of the Piketty/Zucman proposal should therefore be acknowledged, and the idea of increased transparency within financial infrastructure like CSDs given proper consideration, at a policy level that would be wider than that of financial industry circles.

• David C. Donald, Professor, Faculty of Law, Chinese University of Hong Kong

Topic: Blocklords to Blockchain: A Brief History of Securities Dealers' Organizational Strategies

Abstract: Nearly all securities trading occurs among brokers or dealers. For about 1000 years, merchant firms of varying size and specialization have traded securities among themselves. For most of this time, trades were effected directly and during the two centuries from roughly 1800 to 2000 through quasi-public organizations called “exchanges.” Around 2000, the largest broker-dealers began to re-internalize trading into their own proprietary matching platforms.

Although securities exchanges were first established to create monopoly conditions, they also brought efficiency: private ordering among members reduced risks from both counterparties and issuers through vetting and disclosure. Within the exchange, regular operations and transparent protocols democratized the market among broker-dealers, small and large. From the 1930s, these private institutions were brought within formal securities law, so that securities trading was made quite level, with all broker-dealers engaging each other within a transparent arena on which oversight focused. At the turn of the 21st century, however, technology and regulatory reform allowed the largest broker-dealers to escape the transparent egalitarianism that exchanges had become and create their own proprietary trade matching venues.

The story of securities trading has been an evolution from firm to market and back to firm (Coase 1937) in conjunction with varying combinations of formal and informal institutions (North 1990). This evolution has been shaped by law and technology, but driven in its entirety by broker-dealer self-interest. As we approach the end of the era of concentrated trading in highly regulated securities exchanges, this article gives evidence of what we are losing and why. The dismantling of securities exchanges, often understood as embracing innovative technology to stimulate competition and lower prices, is the result of a rational desire of the largest broker-dealers to escape the transparency and democratizing function of regulated securities exchanges so as to return trading to a model in which leading broker-dealers control the nature and direction of the market.

• Aaron Dhir, Justin D'Atri Visiting Professor of Law, Business and Society at Columbia Law School (Spring 2017), Associate Professor, Osgoode Hall Law School, York University (Toronto)

Location: Jerome Greene Hall, room 646

Topic: Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity (Cambridge University Press)

Chapter 1: Introduction: Homogeneous Corporate Governance Cultures

Chapter 4: Norway's Socio-Legal Journey: A Qualitative Study of Norway's Boardroom Diversity Quotas

Abstract: The lack of gender parity in the governance of business corporations has ignited a heated global debate leading policymakers to wrestle with difficult questions that lie at the intersection of market activity and social identity politics. Drawing on semi-structured interviews with corporate board directors in Norway and documentary content analysis of corporate securities filings in the United States, Challenging Boardroom Homogeneity(Cambridge University Press) investigates two distinct regulatory models designed to address diversity in the boardroom: quotas and disclosure. The author's study of the Norwegian quota model demonstrates the role that gender diversity can play in corporate governance, while also revealing the challenges diversity mandates pose. His analysis of the U.S. regime shows how a disclosure model has led corporations to establish a vocabulary of “diversity.” At the same time, the analysis highlights the downsides of affording firms too much discretion in defining that concept.

• Bruno Salama, Visiting Professor of Law at Columbia Law School (Spring 2017); Professor of Law at the São Paulo School of Law at the Fundação Getulio Vargas (FGV); Director of the Center for Law, Economics, and Governance (at FGV)

Location: Case Lounge (Jerome Greene Hall room 701)

Topic: Contingent Judicial Deference - Theory and Application to Usury Laws

Abstract: Legislation that seems unreasonable to courts is less likely to be followed. Building on this premise, we propose a model and obtain two main results. First, the enactment of legislation prohibiting something raises the probability that courts will allow related things not expressly forbidden. In particular, the imposition of an interest rate ceiling can make it more likely that courts will validate contracts with interest rates below the legislated cap. Second, legal uncertainty is greater with legislation that commands little deference from courts than with legislation that commands none. We discuss examples of effects of legislated prohibitions (and, in particular, usury laws) that are consistent with the model.

• Mariana Pargendler, Professor of Law at Fundação Getulio Vargas (FGV) Law School in São Paulo; Director of the Center for Law, Economics, and Governance (at FGV)

Location: Case Lounge (Jerome Greene Hall room 701)

Topic: How Universal is the Corporate Form?: Reflections on the Dwindling of Corporate Attributes in Brazil

Abstract: The standard history of the business corporation is one of continued success and inevitable expansion to different contexts. This Article seeks to complicate this view by showing how recent legal developments in Brazil have significantly watered down the canonical elements of the corporate form, namely (i) legal personality and capital lock-in, (ii) limited liability, (iii) delegated management, (iv) transferable shares, and (v) investor ownership. It then examines these developments in view of efficiency and distribution considerations. In particular, it explores whether “decorporatization” of enterprise in Brazil may constitute a second-best response to a deficient institutional environment.

• Assaf Hamdani, Visiting Professor of Law at Columbia Law School; Associate Professor at the Hebrew University of Jerusalem,

Location: Case Lounge (Jerome Greene Hall room 701)

Topic: Freezeout Tender Offers: Can Minority Investors Protect Themselves? (with Yvgeny Mugerman; Hebrew University Business School)

Abstract: The quest for an optimal regime to govern freezeout transactions has long occupied academics, courts, and lawmakers around the world. In this project, we use hand-collected data on freezeout transactions that took place in Israel between 2004-2015 to shed light on the effectiveness of specific pieces of the regime governing freezeout transactions. Legal scholarship views freezeouts structured as tender offers as ill-suited for containing controller opportunism. The tender offer mechanism requires controllers to induce a sufficiently large fraction of minority investors to tender their shares. Yet, the absence of judicial review and a board-level negotiation structure, so the argument goes, enables controllers to exploit their informational advantage by offering a premium that would merely “clear the market.” Under the Israeli regime governing freezeout tender offers, controllers have a remarkably simple path for taking companies private: controllers have no specific disclosure requirements, boards neither negotiate with controllers nor opine on the transaction’s fairness, and courts do not subject these transactions to judicial review. In our sample of 274 freezeout tender offers, however, we find that only 60% of tender offer succeed. Moreover, failed offers tend to be associated with a higher premium and often lead to follow-on offers with a higher premium. We evaluate the factors that may predict a freezeout tender offer’s failure and the implications for designing optimal freezeout regimes.

• Eric Posner, Joseph F. Cunningham Visiting Professor of Commercial and Insurance Law, Columbia Law School; Kirkland and Ellis Distinguished Service Professor of Law, University of Chicago

Location: Case Lounge (Jerome Greene Hall room 701)

Topic: A Proposal to Limit the Anti-Competitive Power of Institutional Investors

Abstract: Recent scholarship has shown that mutual funds and other institutional investors may cause softer competition among product market rivals because of their significant ownership stakes in competing firms in concentrated industries. While recent calls for litigation against them under Section 7 of the Clayton Act are understandable, private or indiscriminate government litigation could also cause significant disruption to equity markets because of its inherent unpredictability and would fail to eliminate most of the harms from common ownership. To minimize this disruption while achieving competitive conditions in oligopolistic markets, the Department of Justice and the Federal Trade Commission should take the lead by adopting a public enforcement policy of the Clayton Act against institutional investors - as the original authors of the Act intended it to be used. We outline such a policy in this article. Investors in firms in well-defined oligopolistic industries must choose either to limit their holdings of an industry to a small stake (no more than 1% of the total size of the industry) or to hold the shares of only a single “effective firm.” Investors that violate this rule face government litigation. Using simulations based on empirical evidence, we show that under broad assumptions this rule would generate large competitive gains while having very limited negative effects on diversification and other values. The rule would also improve corporate governance by institutional investors.

• Lorenzo Stanghellini, Full Professor of Business Law, Faculty of Law, University of Florence

Location: Jerome Greene Hall room 304

Topic: The transition costs of bank bail-ins: Italy as the eye of a perfect storm for the Eurozone?

A paper will not be presented. However, as background reading, the speaker provides: The Implementation of the BRRD in Italy and its First Test: Policy Implications

Abstract: Bank bail-ins are a rational response to bank failures. At their very essence, they make investors in the bank pay for the bank’s failure, according to the statutory and contractual hierarchy of their respective claims. Bail-ins, therefore, aim at aligning banks with non-financial firms with respect to the allocation of losses in case of bankruptcy. However, banks and non-bank firms are not fully alike as to the risk and the consequences of insolvency, and surely banks have long not been perceived by the general public and by investors as exposed to such a risk. This implies that applying bail-ins prospectively, but on existing claims against banks, may entail significant transition costs. In the European Union, such retroactive imposition of costs has raised issues of a regulatory taking, but in the landmark Kotnik decision (ECJ July 19, 2016, case C-526/14) the European Court of Justice ruled that the imposition of a bail-in regime did not violate investors’ rights.

The rules on bank supervision and resolution set forth by the European Union in the last three years do not give much flexibility to banks and regulators. Banks may be forced to raise capital, in the context of a very weak market, as a result of stress tests based on hypothetical adverse scenarios. In turn, even in cases of lack of sufficient capital following a negative stress test assessment, EU law conditions the provision of state aid to banks by Member States upon the bail-in of (at least) the share capital and subordinated bonds, although it may (and most probably will often) be applied also to unsecured bank liabilities, possibly including non-insured deposits.

The implementation of the new rules on supervision and resolution, coupled with a long-lasting economic recession in the Eurozone, restrict the options available for dealing with the problems of the Italian banking system (and possibly, some German banks), and pose a significant threat for the stability of the banking system and, potentially, of the Eurozone itself. Recent decisions by the European Central Bank on how Italian banks must deal with the problem of non-performing loans illustrate the problem and may add fuel to the fire.

During the seminar, we will critically review the main factors and choices that have led to the present situation, and explore its possible evolution.

• Michal Gal, Professor of Law, University of Haifa

Location: Case Lounge (Jerome Greene Hall room 701

Topic: Algorithmic Consumers (Michal Gal and Niva Elkin-Korren)

Abstract: The next generation of e-commerce will be (at least partly) conducted by digital agents, based on algorithms that will not only make purchase recommendations, but will also predict what we want, make purchase decisions, negotiate and execute the transaction for the consumers, and even automatically form coalitions of buyers to enjoy better terms, thereby replacing human decision-making. We call them “algorithmic consumers.” As a result of these eminent technological developments, market dynamics may soon change. It is thus no surprise that firms like Apple, Google and Amazon are currently investing significant amounts to further develop this technology. This, in turn, has significant implications for regulation, which should be adjusted to a reality of consumers making (at least some of) their purchase decisions via algorithms. Despite this challenge, most of the literature on algorithms has focused on supply algorithms. This paper seeks to fill this void It explores the potential benefits and costs of algorithmic consumers, and how these advances affect the competitive dynamic in the market. Such an exploration is essential to understand the changes brought about by this new technology. It then analyzes the implications of such technological advances on regulation, with a special focus on antitrust. In particular, we identify three main challenges that arise when algorithmic consumers are employed.

• Robert Austin, formerly a Judge of the Supreme Court of New South Wales; currently a Barrister, Level 22 Chambers, Sydney, Australia

Location: Case Lounge (Jerome Greene Hall room 701)

Topic: "Do the directors of a business corporation (still) have a duty to maximize shareholder welfare?"
No paper available as the speaker is considering developing the topic into an article.

Abstract: Last year, writing extra-curially, Chief Justice Leo Strine re-asserted corporate law orthodoxy stemming from Dodge v Ford Motor Co, answering this question with an emphatic "yes." But currents in civil discourse are eroding the orthodox position, in the United States and elsewhere. In addition to the corporate social responsibility movement generally, and passionate concern about the environment in particular, reactions to corporate misconduct have led UK and Australian regulators to rely upon the idea of a "social license to operate," not only for banks and financial services corporations but for corporations generally. For corporate lawyers, an important question is about the legal framework within which these pressures will be either resisted or accommodated. This presentation will explore three legal frameworks within which the directors' fundamental duty is located, namely the legal frameworks provided by Delaware law, United Kingdom statute and the Australian blended approach. The question will be posed, which legal framework will optimize clear articulation of the basic duty and effective enforcement?

• Sir John Vickers, Warden of All Souls College & Professor of Economics, Oxford University

Location: Jerome Greene Hall room 304

Topic: How Much Equity Capital Should Banks Have?

Abstract: One of the main lessons of the financial crisis was that banks had too little capital in relation to their exposures. But how much should they be required to have? On this fundamental economic policy question the views of practitioners (regulators and banks) and academics tend to be far apart, with many of the latter regarding post-crisis reforms as positive but inadequate. The talk will review the economic issues in the debate, including by reference to the May 2016 policy decision of the Bank of England.

The talk will draw from The Systemic Risk Buffer for UK Banks: A Response to the Bank of England’s Consultation Paper, Journal of Financial Regulation, July 2016.

Note on the speaker: Prof. Vickers, the Warden of All Souls College, Oxford, was Chairman of the Independent Commission on Banking, the so-called “Vickers Commission.” The ICB report, which called for structural reform of UK banking, has largely been implemented through legislative and administrative action.

• Sharon Hannes, Professor of Law, Tel Aviv University

Location: Jerome Greene Hall Room 304

Topic: Does Law Matter? Private Benefits of the Controlling Shareholder Following Legal Reform

Abstract: The Israeli capital market has two prominent characteristics. First, it is a market dominated by concentrated ownership, in the sense that most publicly traded companies have a controlling shareholder. Second, business groups control a large share of the companies traded on the Tel-Aviv Stock Exchange, as well as other closely held business enterprises. These two features, combined, create an increased potential for self-dealing transactions and other manifestations of conflict of interest. Common measures for the extent of this agency problem, and in particular the average size of the control premium paid in the sale of control blocks, indicated in the past that Israel indeed suffers from a pervasive challenge. In response, during the past 15 years, the Israeli system went through major legal reforms, aimed explicitly at tackling this very problem. Does Law matter? In this study, we assess the current extent of the agency problem by measuring private benefits of control in Israel following the reform, and juxtapose it with the measures derived by previous studies. The preliminary results are remarkable. The average premium has plunged to a rate of only 4.6%. This might mean that at least in this context – law matters.