A central goal of corporate law is to prevent managers from putting their own interests ahead of those of shareholders. Such self-serving behavior can take many forms, ranging from illegal self-dealing transactions to self-entrenchment in the face of hostile takeover attempts. Moreover, while the law may prohibit such conduct, the relevant norms are often notoriously vague and fact-intensive, which makes them difficult for courts to apply.
Against this background, high-quality courts should improve firm performance in at least two ways. First, such courts should make it easier to police transactions designed to transfer wealth from firms to managers. Second, by … Read more