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This Article argues that the conventional wisdom about corporate raiders and activist hedge funds—raiders break things and activists fix them—is wrong. Because activists have a higher risk of mistargeting—mistakenly shaking things up at firms that only appear to be underperforming—they are much more likely than raiders to destroy value and, ultimately, social wealth. As corporate outsiders who challenge the incompetence or disloyalty of incumbent management, raiders and activists play similar roles in reducing “agency costs” at target firms. The difference between them comes down to a simple observation about their business models: raiders buy entire companies, while activists take minority stakes. This means that raiders are less likely to mistarget firms underperforming by only a slight margin, and they are less able to shift the costs of their mistakes onto other shareholders. The differences in incentives between raiders and activists only increase after acquiring their stake. Raiders have unrestricted access to nonpublic information after acquiring ownership of a target company, which allows them to look under the hood to determine whether changing the target’s business strategy is truly warranted. Activists, by contrast, have limited information and face structural conflicts of interest that impair their ability to evaluate objectively what’s best for the target company. This insight has profound implications for corporate law and policy. Delaware and federal law alike have focused on keeping raiders outside the gates, but they ignore the real threat: activists that are already inside. This Article proposes reforms to both state and federal law that would equalize the regulation of raiders and activists. [ABSTRACT FROM AUTHOR]

This paper investigates the consequences of removing the requirement from Australian corporate law that dividends can only be paid out of retained earnings. Using a difference‐in‐difference design, I find that firms with negative retained earnings and more volatile earnings increased dividends after the law change, consistent with the arguments of proponents of the law change. However, I further find that the law change is associated with a significant increase in cost of debt, decrease in debt maturity and increased reliance on bank debt. These results are consistent with increased agency costs of debt after the relaxation of dividend restrictions. [ABSTRACT FROM AUTHOR]

The article focuses on the implication of controlling shareholders on corporate governance. Topics mentioned include good law jurisdictions, nonpecuniary private benefits of control, the different types of controlling shareholders, the role of nationalism in the development of corporate law and governance, and the efficiency of corporate governance in reducing agency costs

In recent times, there has been an unprecedented shift in power from managers to shareholders, a shift that realizes the long-held theoretical aspiration of market control of the corporation. This Article subjects the market control paradigm to comprehensive economic examination and finds it wanting. The market control paradigm relies on a narrow economic model that focuses on one problem only: management agency costs. With the rise of shareholder power, we need a wider lens that also takes in market prices, investor incentives, and information asymmetries. General equilibrium (GE) theory provides that lens. Several lessons follow from reference to this higher-order economic theory. First, the presumption that markets can efficiently coordinate the economy is unfounded, unless one relies on heroic assumptions. Second, GE shows that shareholders suffer from misaligned incentives, undercutting any normative program grounded in shareholder empowerment. The third lesson is negative, as there are no economically founded instructions for addressing the tradeoffs between agency costs reduction and market inefficiency implied by the new shareholder corporation. Policy implications also follow. Given the lack of a clear normative template, only private ordering can be counted on to address each corporation's specific tradeoffs between agency costs and market inefficiency. This conclusion leads to an endorsement of Delaware's equitable adjudication system, the flexibility of which is well suited to policing the bargaining process between managers and empowered shareholders. [ABSTRACT FROM AUTHOR]

This paper aims to reassess the dogma of creditor protection in light of the corporate finance principles and theories. To this end, I set forth two methodological premises to reach a substantive conclusion on the optimal creditor protection strategies. First, I draw a double-layered taxonomy of classes of creditors; second, I underscore the importance of legal systems and the statutory allocation of powers and authority on creditor-sensitive corporate decisions. The corporate finance literature shows that (1) debt matters for the firm's value maximization and governance and (2) the optimal capital structure is influenced by various determinants. Creditor protection and debt governance serve as determinants of financial behaviour. Legal strategies can positively or negatively determine the cost of capital. Against this framework, I argue that ex ante corporate law techniques of creditor protection hamper firms' financing maximization, whereas ex ante contractual arrangements bolster optimal capital supply. Ex post creditor protection is applicable only to distressed firms and has positive effects on capital structure when it involves directors, whereas it is rather cumbersome and unjustified when it impinges upon stockholders. Alternative, non-corporate law techniques may efficiently outperform strategies based on unlimited shareholder liability. I conclude that, while creditor protection techniques are a function of the interplay between legal environment and the specific features of each class of creditors, the case against ex ante corporate law, and toward ex ante contractual strategies, is substantial. Corporate finance forces should drive the legal design and assessment of this function. [ABSTRACT FROM AUTHOR]

The problem of managerial agency costs dominates debates in corporate law. Many leading scholars advocate reforms that would reduce agency costs by forcing firms to allocate more control to shareholders. Such proposals disregard the costs that shareholders avoid by delegating control to managers and voluntarily restricting their own control rights. This Essay introduces principal-cost theory, which posits that each firm's optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control. Both principal costs and agent costs can arise from honest mistakes (which generate competence costs) and from disloyal conduct (which generate conflict costs). Because the expected costs of competence and conflict are firm-specific, the optimal division of control is firm-specific as well. Thus, firms rationally select from a range of governance structures that empower shareholders to varying degrees. The empirical predictions produced by principal-cost theory are more accurate than those produced by any theory focused solely on agency costs. Principal-cost theory also suggests different policy prescriptions. Rather than banning some governance features and mandating others, lawmakers should permit each firm to tailor its governance structure based on its firm-specific tradeoff between principal costs and agent costs. [ABSTRACT FROM AUTHOR]

The article discusses the legal aspects of corporations (firms) in America in relation to the U.S. Supreme Court's ruling in the freedom of religion and labor law case Burwell v. Hobby Lobby Stores Inc. American business law and the First Amendment to the U.S. Constitution litigation are examined, along with management fiduciary duties, legal fictions, and an ideological shift in America with respect to corporations, human interests, and technological innovations. Agency costs are assessed.

Corporate derivative lawsuits and securities class actions are two major forms of litigation to protect investors and rectify corporate mismanagement. In Taiwan, both actions historically were rare. Since its establishment in 2003, the quasi-public Investor Protection Center (IPC) has been bringing certain kinds of securities class actions, ostensibly with much success. In light of this success, in 2009, the IPC was further empowered to bring corporate derivative suits. To date, the IPC’s overall performance has been mixed. This article focuses on the agency cost issue that may arise in class actions and derivative suits under a quasi-public enforcement model. This article further explains the social and legal background of Taiwan’s quasi-public enforcement mechanism. This article then evaluates and takes stock of the practices of the IPC and concludes with policy recommendations for it. [ABSTRACT FROM PUBLISHER]

In 2001, Nevada significantly limited the personal legal liability of corporate officers and directors. We use this exogenous shock to implement a differencesin-differences design that examines the impact of officer and director litigation risk on agency costs. We find decreased firm value, especially for firms with lower levels of investor protection and the highest expected agency costs. We also find that managerial incentives are reduced as measured by lower chief executive officers' pay-for-performance sensitivity. Finally, we find an adverse impact on operating performance and increased error-based restatements for Nevada firms subsequent to the change. Our findings emphasize that officer and director litigation risk is an important governance mechanism. [ABSTRACT FROM AUTHOR]

An essay is presented on American corporate law and governance as of June 2013, focusing on contracting at the initial public offering (IPO) stage, state competition, and corporate takeover defenses. The Seventh Annual Conference on Empirical Legal Studies (CELS) is addressed, along with the 1976 article "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure" by Michael Jensen and William Meckling. A positive and normative theory of corporate law is also examined.

The article discusses the reportedly toxic side effects of shareholder primacy in the U.S. as of June 2013, focusing on a response to the articles "The Technology of Creditor Protection" by Barry E. Adler and Marcel Kahan and "Adapting to the New Shareholder-Centric Reality" by Edward B. Rock which appear in the same journal. American corporate law, corporate governance, and agency costs are addressed, along with the theory of managerialism and the relationship between economics and the law.

The article discusses tunneling, or the misappropriation of corporate assets by corporate insiders, as a cause and effect of corporate law practices in the Czech Republic from 1996 to 2006. Topics include the the definition of tunneling, and Czech and Visegrad countries' voucher privatization schemes. It compares decision-making authority for large transactions, conflicted transactions, and alternative and substitute rules.

We apply the paradigm of the firm as a nexus of contracts to the debate on regulatory competition vs. unification of law as an alternative way of regulating the business corporation. This approach views the business corporation as a set of coordinated contracts among different parties. Agency problems and related agency costs are the result of this interaction. The economic analysis of corporate law, securities regulation and bankruptcy law identifies law as a means to minimise such agency costs. In this paper, we develop a model where companies are heterogeneous in their preferences about the legal regulation of contractual relationships. We then compare a regime of regulatory competition with one of single supply of regulation and we analyse their relative costs and benefits. [ABSTRACT FROM AUTHOR]

It has been advocated within corporate governance that institutional investors may discipline management in listed firms and thereby alleviate the free rider problem associated with dispersed ownership. This article tests this hypothesis using a sample of Danish listed firms during 1998–2001 determining, whether ownership by institutional investors impacts performance, measured by Tobin’s q. Using three stage least squares, it is shown that aggregate ownership by institutional investors does not influence firm performance. However, when decomposing the results, it is found that joint ownership by the largest two Danish institutional investors, has a significant negative impact firm performance. Ownership by banks and to a lesser extent insurance companies significantly influences firm performance positively. The results somehow challenge the conventional wisdom, arguing that the black box view of institutional investors should be abandon. Therefore it is suggested that a more careful analysis should be devoted to each institutional investors own legal environment. [ABSTRACT FROM AUTHOR]