Blue Sky 2020–2021

Restructuring vs. Bankruptcy

• Ed Morrison, Charles Evans Gerber Professor of Law, Columbia Law School
• Co-authors: Jason R. Donaldson, Giorgia Piacentino, Xiabo Yu

Location: Virtual session

Abstract: 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 priority rule).

Common Ownership: Shareholders Win and Employees Lose

• Zohar Goshen, Jerome L. Greene Professor of Transactional Law, Columbia Law School
• Co-author: Doron Levit

Location: Virtual session

Abstract:

In the last forty years, wages in the United States have stalled and income inequality has increased, despite a tripling of the gross domestic product. During the same period, corporate America’s equity markets have gone through a compositional shift. The once-prevalent “dispersed ownership” of corporations by retail investors was replaced by “common ownership:" a few powerful institutional investors holding large stakes in most U.S. corporations. It is not a coincidence that at the same time American workers got a new set of bosses, their wages stopped growing and shareholders’ returns went up. This Article argues that common owners are a driving force behind stalled wages and increasing income inequality.

Powerful institutional investors’ policy of pushing public corporations to adopt strong corporate governance has an inherent, painful tradeoff. While strong governance can improve corporate efficiency—by reducing management agency costs—it can also reduce social welfare—by reducing investment and depressing the labor market. Indeed, common owners create a labor monopsony that increases the return on capital at the expense of reduced return on labor, thereby increasing income inequality. Importantly, common owners exert labor monopsony power not by exercising control in a certain way (as existing literature argues) but rather by allocating control to shareholders—pushing toward strong governance—which can then be exercised by other shareholders, such as activist hedge funds.

If policymakers wish to restore the equilibrium that existed before common ownership dominated the market, they should break up institutional investors along type (separating active from passive investments) and size (limiting assets under management).

Passive Exit

• Josh Mitts, Associate Professor of Law and Milton Handler Fellow
• Co-author: Doron Levit

Location: Virtual session

Abstract:

Share lending allows passive investors to generate revenue from a decline in portfolio value. When an active mutual fund exits a portfolio firm, passive index funds belonging to the same fund family raise the cost of borrowing the firm's shares for short selling. To identify supply-side shifts, I exploit changes in the identity of active managers exogenous to within-portfolio variation in the informational sensitivity of share lending costs. The exercise of market power is pronounced in value lending programs targeting hard-to-borrow securities. Share lenders with market power capture most of the surplus arising from the price decline.

Making Outcomes Matter: An Immodest Proposal for a New Consumer Financial Regulatory Paradigm

• Todd Baker, Senior Fellow, Richard Paul Richman Center for Business, Law & Public Policy, Columbia Law School & Columbia Business School
• Corey Stone, Entrepreneur in Residence, Financial Health Network

Location: Virtual session

Abstract:

American consumers today access financial services in fragmented, product-specific marketplaces where each provider optimizes its consumer relationships based on profitability. Providers regularly exploit information advantages, geographical proximity, behavioral biases, high “shopping costs” and other asymmetries. Consumers, under pressure to make quick personal decisions, frequently make suboptimal or affirmatively damaging choices that benefit the provider and constrain the consumers’ options in follow-on decisions. The responsibility for managing outcomes in consumer financial services is—absent the most egregious abuse—left in the hands of the individual consumer. These practices arguably have led to suboptimal outcomes for all consumers and high levels of financial insecurity among the most vulnerable populations.

In the face of these problems, state and federal governments have, over time, adopted a variety of statutory and regulatory regimes intended to protect consumers. The resulting system of consumer financial regulation inconsistently advances the interests of consumers, particularly more vulnerable lower-income consumers, despite the existence of large bodies of law and regulation and an enormous investment in regulatory compliance by financial services providers. The system has historically operated in a data vacuum where regulators relied on disclosure-based regimes intended to inform consumer choice about product pricing and terms, narrow proscriptions regarding provider practices that impede informed decision making and limited interventions in prices and fees instead of insights about the real-world consequences of product usage.

This situation has begun to change. Digitization and the ongoing “big data” revolution, coupled with the emergence of new measures of “financial health” outcomes, now make it possible to analyze the impact on individuals of the use of financial services. This, in turn, may allow historic regulatory regimes to be reimagined using these new data capabilities.

Drawing from experiences with outcome-based regulation in the health care industry, we advance a three-stage proposal to better align financial services provider interests with improved customer outcomes through data analysis, public disclosure and market-based regulatory intervention. The proposal introduces a form of “outcomes-based regulation” to the financial services marketplace that has been advanced elsewhere. Implementation of the new framework would not be an immediate substitute for existing consumer financial protection law. But by generating an empirical basis for identifying harms and benefits correlated with particular practices or product features, it would for the first time allow policymakers to measure the impact of statutory and regulatory interventions, tailor policies to remedy harms incurred by users of particular products and providers and potentially determine product/practice “appropriateness” for particular consumer circumstances. When fully tested and implemented, the three-stage process should shift provider incentives meaningfully towards improved consumer outcomes, leading to a gradual shift away from prescriptive and disclosure-based regulation to a principles-based, data-driven, transparent “learning” system that leverages market mechanisms to deliver improved consumer financial health.

Federal Corporate Law and the Business of Banking

• Lev Menand, Academic Fellow and Lecturer in Law, Columbia Law School
• Morgan Ricks, Professor of Law, Vanderbilt Law School

Location: Virtual session

Abstract:

The only profit-seeking business enterprises chartered by a federal government agency are banks. Yet, there is barely any scholarship justifying this exception to state primacy in American corporate law.

This Article addresses that gap. It reinterprets the National Bank Act (NBA)—the organic statute governing national banks, the heavyweights of the financial sector—as a corporation law and recovers the reasons why Congress wrote this law: not to catalyze private wealth creation or to regulate an existing industry, but to solve an economic governance problem. National banks are federal instrumentalities charged with augmenting the money supply—a delegated sovereign privilege. Congress recruited private shareholders and managers to run these instrumentalities as a check on monetary overissue and to prevent politicized asset allocation by government officials—a form of premodern agency independence.

Viewing the NBA as a corporation law yields surprising dividends. First, it exposes a major flaw at the heart of U.S. banking jurisprudence. In recent decades, the Supreme Court has deferred to the Office of the Comptroller of the Currency (OCC), the chartering authority for national banks, to interpret national banks’ corporate powers, allowing them to enter a vast range of new business lines. But the corporate powers provision of the NBA is not a “regulatory” statute to which courts should apply Chevron deference, nor is it part of the OCC’s enabling act. It is part of the corporate charters of national banks. Accordingly, the opposite, settled rule of construction applies; ambiguity is construed strictly against the corporation. Second, it reveals that the OCC’s current campaign to unhitch national bank charters from the deposit business lacks a statutory basis and threatens an unprecedented colonization of American enterprise law by a federal government agency.

Augmented Lawyering

• John Armour, Hogan Lovells Professor of Law and Finance, Law Faculty, Oxford University
• Mari Sako, Professor of Management Studies, Saïd Business School, Professorial Fellow, New College, Oxford University
• Richard Parnham, Postdoctoral Research Fellow, Said Business School, Oxford University

Location: Virtual session

Abstract:

How will artificial intelligence (AI) and associated digital technologies reshape the work of lawyers and structure of law firms? Legal services are traditionally provided by highly-skilled humans—that is, lawyers. Dramatic recent progress in AI has triggered speculation about the extent to which automated systems may come to replace humans in legal services. A related debate is whether the legal profession’s adherence to the partnership form inhibits capital-raising necessary to invest in new technology. This Article presents what is to our knowledge the most comprehensive empirical study yet conducted into the implementation of AI in legal services, encompassing interview-based case studies and survey data. We focus on two inter-related issues: how the nature of legal services work will change, and how the firms that co-ordinate this work will be organized. A central theme is that prior debate focusing on the “human vs technology” aspect of change overlooks the way in which technology is transforming the human dimensions of legal services.

Our analysis of the impact of AI on legal services work suggests that while it will replace humans in some tasks, it will also change the work of those who are not replaced. It will augment the capabilities of human lawyers who use AI-enabled services as inputs to their work and generate new roles for legal experts in producing these AI-enabled services. We document these new roles being clustered in multidisciplinary teams (“MDTs”) that mix legal with a range of other disciplinary inputs to augment the operation of technical systems. We identify challenges for traditional law firm partnerships in implementing AI. Contrary to prior debate, these do not flow from constraints on finance to invest in technical assets. Rather, the central problems have to do with human capital: making necessary strategic decisions; recruiting, coordination and motivation the necessary MDTs; and adjusting professional boundaries. These findings have important implications for lawyers, law firms and the legal profession.

The Index-Fund Dilemma: An Empirical Study of the Lending-Voting Tradeoff

• Josh Mitts, Associate Professor of Law and Milton Handler Fellow, Columbia Law School

Location: Virtual session

Abstract:

Institutional investors' role in shareholder voting is among the most hotly debated subjects in corporate governance. Some argue that institutions lack adequate incentives to effectively monitor managers; others contend that the largest institutions have developed analytical resources that produce informed votes. But little attention has been paid to the tradeoff these institutions face between voting their shares and earning profits--both for themselves and for the ultimate beneficiary of institutional funds--by lending those shares.

Using a unique dataset and a recent change in SEC rules as an empirical setting, we document a substantial increase in the degree to which large institutions lend shares rather than cast votes in corporate elections. We show that, after the SEC clarified funds' power to lend shares rather than vote them at shareholder meetings, institutions supplied 58% more shares for lending immediately prior to those meetings. The change is concentrated in stocks with high index fund ownership; a difference-in-differences approach shows that supply increases from 15.6% to 22.3% in those stocks. Even when it comes to proxy fights, we show, stocks with high index ownership see a marked increase in shares available for lending immediately prior to the meeting. Overall, we show that loosening the legal constraints on institutional share lending has had significant implications for how index funds balance the lending-voting tradeoff.

Paper: Forthcoming

• Sarath Sanga, Associate Professor of Law, Pritzker School of Law, Northwestern University & Associate Professor in the Strategy Department, Kellogg School of Management, Northwestern University

Location: Virtual session

Abstract: Forthcoming

Paper: Forthcoming

• Alex Rashkolnikov, Wilbur H. Friedman Professor of Tax Law, Columbia Law School

Location: Virtual session

Abstract: Forthcoming

Paper: Forthcoming

• Talia Gillis, Associate Professor of Law, Columbia Law School

Location: Virtual session

Abstract: Forthcoming