An important and long-standing question in the economics of information is whether voluntary disclosure leads to full disclosure. A compelling and intuitive argument, often described as the “unraveling” argument (see Milgrom, 1981), suggests that the answer is, yes. In brief, the argument is that the firm, or more generally the “sender,” with the most favorable information will voluntarily disclose. So the audience for the disclosure—the “receiver”—will interpret non-disclosure as indicating that the firm does not have the most favorable information. But given this, the firm with the second most favorable information will disclose, and so on. All the firms thus … Read more
We investigate Chinese firms’ use of variable interest entities (VIEs) to evade Chinese regulation on foreign ownership and list in the U.S. We find that the use of VIEs for such ends is widespread, growing, and associated with valuation discounts of as much as 30 percent relative to Chinese non-VIE firms listed in the U.S. The discount varies predictably with events that change the risk of government intervention and managerial malfeasance, and is tempered by better oversight and lower regulatory risk. To protect shareholders, VIE firms are more likely to have these characteristics as well as to curry government favor … Read more
Investigations into potential violations of U.S. and non-U.S. securities laws are often resolved by a settlement requiring the business to make one or more large settlement payments. We have seen settlements paid to the DOJ, the SEC, other U.S. and non-U.S. regulators, and private plaintiffs. An important question is whether the payment will be deductible for tax purposes. Since 1969, the U.S. tax law has denied a deduction for “any fine or similar penalty paid to a government for the violation of any law.” This limitation was significantly changed by the U.S. tax reform law enacted in December of … Read more
The U.S. high-yield and investment-grade debt markets saw significant increases in 2017 over 2016 in dollar volume and number of issuances. The U.S. equity indices reached new highs throughout the year, with the Standard & Poor’s 500 index ending the year up 19.4 percent.
The slow, steady expansion of the economy (one of the longest expansion cycles on record) and the current favorable market conditions, along with the recently enacted reduction in corporate taxes — which could drive earnings expansion — have fueled optimism for robust capital markets activity in 2018. Questions linger, however, about the sustainability of the … Read more
Columbia Law School and Columbia Business School’s Program in the Law and Economics of Capital Markets is now accepting applications for their Post-Doctoral Research Fellow. This position is intended for a person who expects to begin a law school teaching career at the start of the 2020-21 academic year and who desires an interim position that would help the person prepare for such a career by offering the time and facilities needed to do serious research and to develop further expertise. A candidate should have an exceptional academic record from a major law school and have at least three years … Read more
Economic sanctions and anti-money laundering (“AML”) remain at the forefront of U.S. regulatory priorities. Indeed, in 2017, federal and state agencies imposed over $2.5 billion in penalties for sanctions/AML violations. And, despite its generally deregulatory agenda, the Trump administration has taken a rigorous approach in this area, particularly with respect to sanctions. At the state level, the New York Department of Financial Services (“DFS”) continues to take aggressive action on both the regulatory and enforcement fronts. This memorandum surveys major developments and trends in 2017 and provides an outlook for the year ahead. We also provide some practical advice for … Read more
It has become common in Britain to argue about whether those who forcefully suggested that a vote to leave the EU would have a very negative effect on the UK economy were wide of the mark. This argument may be rather pointless and, since the UK has not actually left yet, somewhat premature. It is also an argument that will be very hard to settle, because measurable economic impacts have a wide variety of underlying causes, and to identify an effect is to beg the question, rather than answer it. So this week, when Lord O’Neill – prominent pro-EU campaigner … Read more
Innovation is perhaps the single most important driver of productivity and growth. However, firms do not innovate in isolation but rather within an ecosystem of their technological peers, as many classic studies show. More recent work finds that a given firm’s innovation, productivity, and value increase as a result of technology spillovers from other firms.
Like knowledge spillovers generally, inventions have social value that can far exceed their private value to the inventor. Technological progress can create technologies not just for the inventor firm, but also for its peers. In a virtuous circle, the resulting technological progress of the peer … Read more
June 2018 will mark the 60th anniversary of the publication of Franco Modigliani and Merton Miller’s classic article, The Cost of Capital, Corporation Finance, and the Theory of Investment. Widely hailed as the foundation of modern finance, their article, which purports to demonstrate that a firm’s value is independent of its capital structure, is little known by lawyers, including legal academics. That is unfortunate, because the Modigliani-Miller capital structure irrelevancy proposition (when inverted) provides a simple, but powerful framework that can be extremely useful to legal academics, practicing attorneys, and judges.
Sixty years ago, the field of finance … Read more
In recent years, there has been an increase in the number of firms opting to either forgo the public equity market or exit the market in favor of private financing. Increasingly, financing for private firms comes from private funds, such as private equity, venture capital, and hedge funds. In 2015, private funds owned stakes in over 7,500 firms and had over $4 trillion in capital under management. This amounts to a significant portion of the overall economy relative to the total U.S. market capitalization of $25 trillion.
As the privately-held sector of the economy grows, the financial … Read more
On December 27, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its biennial report on the consumer credit card market (“2017 Report” or “Report”), which summarizes its views on the state of the consumer credit card market over the past two years. The Report is particularly noteworthy because it provides the first insight into the post-Cordray CFPB’s views on the state of the consumer credit card market.
Corporate inversions have captured the imagination of the public and the popular press as well as that of the academic community. The idea is that a little paperwork can convert a U.S. corporation (which pays tax on its worldwide income) into a foreign corporation (which pays tax only on its U.S. source income), and the consensus is that the exploitation of this loophole by multinational corporations is abusive and unfair. Responding to these concerns, Congress and the Treasury Department have attempted to make it more difficult for U.S. multinationals to obtain tax advantages by inverting.
Numerous commentators have argued that … Read more
An often-over-looked aspect of regulation is how agencies are organized. Regulatory agencies for many industries, including banking, pharmaceuticals, mining, and agriculture, rely on a mix of centralized decision-making and delegated monitoring. For instance, in the case of banking, federal agencies design regulations in Washington, D.C. but monitor banks at the local level by utilizing semi-autonomous field offices.
A major advantage of this dispersed presence is that it allows local examiners and supervisors to interact with regulated firms more frequently and to collect “soft information” about firms’ performance that is often imperfectly captured through accounting-based reporting measures. The approach may, however, … Read more
For more than a century, the United States has had a worldwide tax system whereby U.S. taxpayers were subject to federal taxation on all of their income “from whatever source derived.” In what would be a sharp break from longstanding practice, The Tax Cuts and Jobs Act, H.R. 1, would shift the United States from a worldwide to a largely territorial tax system by exempting the foreign source income of U.S. corporations from federal taxation. That change, which has been estimated to reduce U.S. tax revenues by more than $200 billion over 10 years, would more closely align the … Read more
In the movie Office Space, the (pretty) good guys hatch a plan to divert to themselves fractions of cents that their employer, Initech, has apparently been overcharging its customers by rounding billings upward. Had any customer discovered the scam, he might have filed a class action. But chances are customers agreed to arbitrate disputes and waived any right to join a class action when they signed a purchase order or clicked agree. So Initech can settle privately with any customer who complains – maybe even under a nondisclosure agreement – and need not change its billing system.
On October 24, … Read more
Not many people would have predicted that the third quarter of 2017 – a period that ended six months after Britain gave formal notice of its intention to leave the European Union – would see more private equity investments in the UK than at any time since the financial crisis. Nevertheless, as widely reported this week, figures published by Unquote” and SL Capital indicate that €13.7 billion (£12.1bn, or $15.9bn) was invested in UK buyout deals between July and September 2017, the highest quarterly total since 2008.
Whether this news represents a sustained resurgence of UK deals after a disappointing … Read more
In a world of “alternative facts” and political rhetoric crafted to mislead, it is easy to forget that idealized visions can at times illuminate more than they obfuscate. In a book review recently published in Harvard Law Review and available here, I attempt to separate fact from fiction in the debate about how best to regulate short-term debt. Although coming down in favor of pragmatism in financial policymaking, the review recognizes the ways that imaginative alternatives can reveal often-obscured choices and help lay the foundation for a better path forward.
The thought-provoking book that motivates the review is The … Read more
This alert discusses the U.S. Commodity Futures Trading Commission’s (“CFTC”) and European Commission’s (“EC”, together with the CFTC, the “Commissions”) announcements on October 13, 2017 regarding the international harmonization on two key derivatives regulatory requirements. The Commissions first announced that they had separately adopted comparability and equivalence determinations related to their respective uncleared swap margin regulations (“Uncleared Margin Determinations”). The Commissions then announced that they had reached a common plan to recognize each other’s authorized derivatives trading venues as comparable and equivalent (“Common Plan on Trading Venues”).… Read more
Blockchain is the technology that underpins digital currencies such as Bitcoin – but it has far wider applications and is being used in a growing number of areas. The blockchain has the potential drastically to alter the global financial system. Trade finance is one of the areas likely to benefit from the technology first by becoming cheaper, faster and more accessible. However, developers and market participants should be mindful to consider the sanctions implications given the extraordinary reach of sanctions and the magnitude of the penalties for breach.
What is blockchain?
- Blockchain records data. It’s a digital ledger of transactions,
The UK Financial Conduct Authority (the “FCA”) has published changes to the Conduct of Business sourcebook (“COBS”) to boost the transparency of the IPO process and tackle conflicts of interest that may arise from the interaction between an issuer and analysts of the syndicate banks. The changes, published in the FCA’s Policy Statement PS17/23 (the “Policy Statement”) on 26 October 2017, broadly crystallise the FCA’s proposals that were outlined in its consultation paper launched on 1 March 2017 (see our client update, “UK Regulator Proposes Changes to IPO Process”, dated 16 March 2017). The primary goal of the … Read more