Wulf Kaal

Blockchain-Based Corporate Governance

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Corporate governance is characterized by agency constructs. The agency relationship in modern finance and corporate governance is characterized by attempts to optimize incentives between principals and agents, control costs, minimize information asymmetries, control adverse selection and moral hazard, optimize risk preferences between principals and agents, and engage in monitoring.  The corporate form remains the most popular form of a governance mechanism, despite the unresolved substantive agency problems associated with the division of ownership (shareholders) and control (agent) and the incomplete and suboptimal rules that govern such conflicts.

Shareholder value maximization has emerged as the dominant corporate governance solution for the … Read more

Blockchain Solutions for Agency Problems in Corporate Governance

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As a foundational technology, blockchain creates the infrastructure for decentralized networked governance that, over time, creates the environment that enables the removal of internal and external monitoring mechanisms previously necessitated by agency problems in corporate governance. Blockchain technology facilitates a substantial increase in efficiency in the agency relationship and lowers agency costs by orders of magnitude.

Agency theory is still today the leading theory for governance conflicts between shareholders, corporate managers, and debt holders. A vast literature attempts to explain the nature of the agency conflicts in corporate governance and possible ways to resolve such conflicts. However, the core agency … Read more

The New Corporate Governance of Today’s Successful Companies

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Most successful companies share several characteristics. In particular, they focus on building and maintaining relevance in a digitized and networked marketplace. This requires them to design and re-design their products or services to constantly improve consumer satisfaction. In order to achieve this goal, the most competitive companies embrace what can be thought of as unmediated and technology-driven corporate governance.

The leaders of these companies understand that we are moving from a centralized to a decentralized, unmediated, and interconnected world; from a world of vertical hierarchies to one of horizontal, open, and autonomous networks. This transition was initiated and is increasingly … Read more

What Happens When Technology Is Faster Than the Law?

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Designing a regulatory framework that ensures the safety of users and the public while facilitating the commercial use and consumer enjoyment of disruptive innovation is a challenging undertaking. This is particularly true in contemporary settings, where innovation is quicker and the global dissemination of that technology is much faster. The so-called “pacing problem” between innovation and regulation suggests that innovation driven by science and technology is accelerating, yet, simultaneously, federal and state agencies’ regulatory processes have slowed down as I discuss here. Given the intensifying pacing problem between regulation and innovation, regulators often struggle to keep up. The last … Read more

The History of Hedge Fund Regulation in the United States

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The hedge fund industry in the United States has evolved from a niche market participant in the early 1950s to a major industry operating in international financial markets today. Hedge funds in the United States were originally privately-held, privately-managed investment funds, unregistered and exempt from federal securities regulation. With increasing investor demand for hedge funds and significant growth of the hedge fund industry came a tectonic shift in the regulatory framework applicable to the industry.

Several core features characterize the hedge fund industry. A hedge fund’s goal is to earn for its investors a high rate of return on their … Read more

Implications of Mutual and Private Fund Convergence

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Mutual funds are becoming more like hedge funds as a matter of investment strategy while hedge funds are becoming more like mutual funds as a matter of the regulatory framework. The growth of the private fund industry and the proliferation of retail alternative funds in combination with the fundamental regulatory reform of the private fund industry through the Dodd-Frank Act and the JOBS Act make the convergence of mutual and private funds possible. Such convergence has large implications for the evolution of the private fund industry and the growth of the retail alternative fund market.

For most of their history, … Read more

Private fund Performance After the Dodd-Frank Act – Evidence from 2010 to 2015

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Does the Dodd-Frank Act lower the earnings of the private fund industry? For much of its history, the private fund industry has viewed private fund adviser registration and the disclosure of proprietary information as a threat to its profitability. Title IV of the Dodd-Frank Act introduced the most significant regulatory change in the history of the private fund industry in the United States – requiring mandatory registration for private fund managers with over $150 million in assets under management and increasing the disclosure requirements pertaining to confidential and proprietary information. Implemented under Title IV, the controversial disclosure obligations in Form … Read more

What Drives Dodd-Frank Act Compliance Cost for Private Funds?

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Are Dodd-Frank Act compliance costs forcing smaller private investment fund advisers out of the market?  Several policy makers have suggested that Dodd-Frank Act compliance costs affect smaller firms more than larger firms and many financial studies have shown that an inverse relationship exists between the size of a regulated firm and the per-unit cost of compliance. If the administrative and compliance costs created by Title IV of the Dodd-Frank Act should disproportionally affect smaller private fund advisers, it is conceivable that over time smaller fund advisers could get forced out of the market or merge with other funds. Private fund … Read more

Stock Price Response to Non- and Deferred Prosecution Agreements

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In response to perceived corporate governance shortcomings in major U.S. corporations, the U.S. Department of Justice, starting in 2002, substantially increased the execution of non- and deferred prosecution agreements (N/DPAs). High profile N/DPAs and plea agreements executed in 2012 and 2014 suggest that the DOJ – not judges or the legislature – through its targeting of certain industries, is effectuating large-scale corporate governance changes. The companies subject to NDPAs are among the largest domestically and worldwide, including Johnson & Johnson, KPMG, HSBC, JPMorgan Chase, Deutsche Bank, ABN Amro Bank, Barclays Bank, Credit Suisse, Fannie Mae, Freddie Mac, General Reinsurance, … Read more

Hedge Fund Advisers’ Systemic Risk Disclosures in Bankruptcy

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Hedge funds’ distressed and default debt investments in the United States have increased dramatically in the last two decades (from around $70 billion in 1998 to around $867 billion in 2007) and hedge funds with strategies that focus on distressed investing continue to proliferate. The proliferation of distressed-focused hedge funds resulted in hedge funds’ market share of around one quarter of the total distressed-debt market and established the distressed-focused strategy as the fifth-largest hedge fund strategy.

The significant increase of hedge fund participation in the bankruptcy process, among other factors, resulted in an increased emphasis in the literature on the … Read more

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Addressing the Regulatory Sine Curve

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A common denominator of regulatory responses to crises is the use of stable and presumptively optimal rules. The term “stable and presumptively optimal rules” refers to rules that, once in place, do not change other than through other rules and Acts of Congress. Congress, financial regulators, and the literature on financial regulation rely almost exclusively on such rules. However, the economic conditions and the corresponding requirements for optimal and stable rules are constantly evolving, suggesting that different sets of rules could be optimal – in contrast with previous expectations. This has played out in the reaction to the financial crisis.  … Read more