Professor Coffee makes the insightful point that if founders receive a lower price for their stock when they retain voting control, it does not seem fair to allow other shareholders to take away that control without compensation. But, Professor Coffee argues, if shareholders can take away founders’ control without compensation, then founders should not receive less when they retain voting control, because such control is largely “illusory” in his words. Of course, this argument may bring back memories of the economist’s admonition not to pick up the (obviously fake) $100 bill on the floor. Clearly, markets can get out of … Read more
Prices convey information. Hayek (1945) put it this way: Prices “coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” Stock prices, in particular, matter a great deal in corporate and securities law. Event studies, which measure statistically significant changes in stock prices, are widely used by investors and courts to infer the effect of an event on the value of a firm (Bhaghat & Romano, 2002b).
In my recent article, I ask a basic question: What can we learn from stock prices? It is a … Read more
Anonymous political speech has a celebrated history (Publius, 1787) and has long enjoyed strong protections under the U.S. Constitution. But there is a dark side to pseudonymity: Fictitious identities can wreak havoc in financial markets. A large literature in economics examines why markets are vulnerable to rumors and information-based manipulation (Benabou & Laroque, 1992; Van Bommel, 2003; Vila, 1989). In a review of this body of work, Putnins (2012) emphasizes the importance of reputation: “if market participants are able to deduce that false information originated from a manipulator, the manipulator will quickly be discredited and the manipulation strategy will … Read more
Last month, we released a new study, How the SEC Helps Speedy Traders, covered here by the Wall Street Journal, revealing that the Securities and Exchange Commission’s systems have been giving certain investors market-moving corporate filings before those same filings are made available to the investing public. In the days after the Journal published its article, the Senate Banking Committee issued a bipartisan letter to the SEC, “urg[ing] the SEC to quickly investigate this timing disparity for company filings and take the necessary steps to eliminate it.” Based on our subsequent research, the Journal later reported that the … Read more
On Friday, January 10th, the Consumer Financial Protection Bureau’s “qualified mortgage” rule went into effect. This rule is designed to put an end to the risky lending practices that led to the financial crisis. But a simpler rule could better assure borrowers’ ability to repay and simultaneously create greater repayment flexibility.
The purpose of the QM rule is to help assure that borrowers have sufficient monthly income to make … Read more
In a recent essay forthcoming in the Delaware Journal of Corporate Law (available on SSRN), we argue that the current controversy over “Don’t Ask, Don’t Waive” standstills in M&A practice highlights the need to apply mechanism design to change-of-control transactions. Mechanism design is a Nobel Prize-winning theory based on incentive compatibility, whereby algorithmic procedures render it in the parties’ interests to be forthcoming, or truthful about their “bottom lines,” rather than relying exclusively on ex-post enforcement.
A. The Tension Between Deal Certainty and Value Maximization in M&A Transactions
In M&A auctions, the board’s duty to maximize … Read more