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We analyze a principal‐agent model in which an effort‐averse agent can manipulate a publicly observable performance report. The principal cannot observe the agent's cost of effort, her effort choice, and whether she manipulated the report. An optimal contract links compensation to the realized output and the (possibly manipulated) report. Manipulation can be beneficial to the principal because it can make the report more informative about the agent's effort choice, thereby reducing the agent's information rent. This is achieved through a contract that incentivizes the agent to selectively engage in manipulation based on her effort choice. [ABSTRACT FROM AUTHOR]

Does antitakeover harm shareholders? Encumbered by a multitude of theoretical perspectives, the legality of antitakeover remains a shared intellectual inquiry that the A-share market has yet to fully address. This paper constructs a governance index for the A-share market based on a manually collected and hand-coded research dataset (C-index). This dataset, comprising 4251 historical firm-level profiles of Antitakeover Provisions (ATPs), is meticulously sampled from companies listed in China from 2001 to 2017. The study investigates the logical correlation between antitakeover strength, financial performance, and the governance attributes of the company by leveraging the index's economic utility. Additionally, this paper explores the firm-level factors that prompt corporate directors to integrate ATPs. From an empirical standpoint, it provides evidence that the governance index of firm-level strength of ATPs is positively correlated with share liquidity, institutional shareholding, private ownership, and the company's commitment to achieving specific financial performance. [ABSTRACT FROM AUTHOR]

Fifteen years after the largest financial scandal and economic crisis in a century, discussion of the problem of corporate crime too often borders on cliché. Endless calls from Congress, the media, the public, many scholars, and even the Justice Department itself, to recommit, over and over, to locking up more managers and executives to deter corporate wrongdoing portray the problem as relatively straightforward and blame legislative and executive failure of will. Through examination of the litigation record from over 100 prosecutions spanning the period from the 2008 financial crisis to the present, this Article presents evidence that relying on individual prosecutions to deter the most significant corporate crimes, especially those involving fraud in the financial sector, is less promising than believed. Structural features of crimes in the largest corporate organizations have made securing individual convictions and imprisonment, especially at senior levels, a chancy project for prosecutors. The Article further argues that its evidence relating both to failure rates and causes of those failures should point policymakers and enforcers beyond hackneyed calls for perp walks and prison and toward deeper thinking about a full suite of preventive tools, especially regulatory design. [ABSTRACT FROM AUTHOR]

We document that the relation between firm value and the use of takeover defenses is positive for young firms but becomes negative as firms age. This value reversal pattern reflects specific changes in the costs and benefits of takeover defenses as firms age and arises because defenses are sticky and rarely removed. Firms can attenuate the value reversal by removing defenses, but do so only when the defenses become very costly and adjustment costs are low. The value reversal explains previous mixed evidence about takeover defenses and implies that firm age proxies for takeover defenses' heterogeneous impacts on firm value. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

Corporations prefer to avoid guilty pleas in favor of more lenient resolutions, partly due to the greater reputational damage supposedly associated with a guilty plea. When possible, some corporations also prefer sanctions against their employees over sanctions against corporate entities themselves, similarly due to reputational reasons. However, it is unclear whether the form of the final resolution and the entity under investigation actually affect public perceptions of a corporation accused of criminal misconduct. Using a series of public opinion survey experiments, this study finds that in the United States, (1) a guilty plea and a non-prosecution agreement similarly affect public perceptions of corporations, but (2) corporate misconduct has a larger negative effect on public perceptions of a corporation than individual misconduct by corporate executives. However, in South Korea, such factors regarding U.S. criminal sanctions make little difference in consumer perceptions of a corporation. These findings suggest that a corporation under investigation by U.S. authorities should attempt to resolve the investigation by shifting criminal liability to its employees to reduce the domestic reputational cost, but it should not be as concerned about the reputational impact of U.S. criminal sanctions on East Asian consumers. [ABSTRACT FROM AUTHOR]

How should courts address class action securities cases arising from non-accounting related fraud, e.g., catastrophic events or illegal conduct? A recent article published in this journal proposed creating a different model for “event-driven” cases, essentially compelling plaintiffs to not just plead, but to statistically demonstrate at the pleading stage the materiality of misconduct; and to do so by determining what would have been the stock price impact had defendant remained silent rather than spoken deceptively. In further support of this model, the authors propose jettisoning altogether the “half-truth” and “price maintenance” doctrines. This article critiques this paradigm-shifting model, and seeks to demonstrate not only that it is contrary to well-reasoned case law, but that it also ignores the significant impact a company’s “reputation” for integrity and reliability has upon its stock price. Empirical studies have shown that reputation contributes at least 50 percent to a company’s stock price, and that damage to reputation causes upwards of 66 percent of stock price declines upon revelation of wrongdoing. As such, “reputation” should be considered in any analysis of materiality, causation, and damages. [ABSTRACT FROM AUTHOR]

Shareholder perks are in-kind gifts or purchase discounts that disproportionately reward small shareholders. Data from Japanese firms indicate that firms initiating perk programs attract individual retail shareholders and experience increases in share values. We find support for three channels by which perks increase firm value: an increase in share liquidity, a decrease in the equity cost of capital, and signaling to investors. A fourth channel, by which perks help to market the firm’s products to consumers, receives mixed support. We do not find evidence that perk programs work to entrench managers. [ABSTRACT FROM AUTHOR]

Today's corporate governance debates are replete with discussion of how best to operationalize so-called stakeholder capitalism--that is, a version of capitalism that considers the interests of employees, communities, suppliers, and the environment alongside (if not before) a company's shareholders. So much focus has been dedicated to the question of capitalism's reform that few have questioned a key underlying premise of stakeholder capitalism: that is, that competitive capitalism does not serve these various constituencies and groups. This Essay presents a different view and argues that capitalism is, in fact, the ultimate form of stakeholderism. As such, the Essay urges that the best way to elevate the welfare of all stakeholders in a society is to maximally free markets, leaving the State with limited responsibilities in the marketplace--namely, to calibrate incentives for pro-social innovation, regulate evident market-failures, and occasionally provide for public goods. [ABSTRACT FROM AUTHOR]

The agency problem is corporate law's most enduring challenge: when corporate managers spend investors' money, how does the law protect investors from reckless management? Scholars of law, fnance, and accounting have suggested that in one corner of corporate law--corporate debt--a powerful tool exists to mitigate the agency problem. Specifcally, through loan covenants, lenders can force borrowers to comply with lenders' preferences, thereby mitigating the agency problem in lending. But loan covenants are disappearing. Over the last decade, loan covenants have become fewer and skinnier, and so called "covenant-lite" or "cov-lite" loans have become dominant. If loan covenants do such a good job of mitigating agency costs, why have lenders willingly parted with them? This Article attempts to unravel the puzzle of disappearing covenants, and makes three contributions to literatures in law, fnance, and accounting. First, using an original, hand-collected, and hand-coded dataset of 7,638 loan agreements spanning the last decade, this Article shows for the frst time that fnancial covenants--the focus of most existing research--are not the only covenants disappearing. Rather, governance covenants, such as those that might give lenders the right to engage with the borrower's board of directors, are also disappearing. This Article coins the term "gov-lite" to describe loans that have few governance covenants and shows, for the frst time, how prevalent gov-lite loans have become, even in ways that sometimes diverge from the covlite trend. Second, this Article draws from original interviews with lawyers working in corporate lending to explain the source and importance of this trend. This qualitative empirical evidence shows that regulation, the structure of the loan industry, and the rise of shadow banking have all contributed to the cov-lite and gov-lite trends. Finally, this Article explores the important theoretical and practical implications of the covlite and gov-lite trends. It discusses how the disappearance of covenants exacerbates the agency problem for lenders and shareholders, and how can stakeholders use covenants to advance social interests. [ABSTRACT FROM AUTHOR]

The development of environmental law starting in the mid-20th century involved constant tension with private property. Attempts to protect the dwindling natural resources, extinct species of animals, and ecosystems at risk have often encountered obstacles when they demanded interference with private property. Although the theoretical roots of private property do not justify its transformation into an environmental obstacle and, to a large extent, attach importance to environmental values in justifying private property rights, it was private property that stood at the forefront of legal conflicts that revolved around attempts to expand the environmental protection of natural resources. The reason for turning private property into an obstacle to a proper environmental policy stems from adopting a concept according to which private property protects only human interests and values. In contrast, environmental interests that cannot be converted into human terms remain outside private property boundaries. This either–or concept, or as William Baxter termed it in 1974, “peoples or penguins,” harms the ability of courts and other decision-makers to implement a proper and effective environmental policy because it prioritizes human interests over those of nature and its resources. This Article claims there is no reason for the decision-makers to be forced to choose between people and penguins since the interests of both humans and nature can normatively, and practically should, find expression in private property. Private property as a legal institution is an arena for value discussion as well as for making balances between values that are perceived as necessary for society. The exclusion of environmental values from the value clarification conducted to define the scope of property rights is not only a normative failure but also harms the ability to deal effectively and adequately with pressing environmental challenges. The internalization of environmental values into private property, along with human (owner freedom) and social values (such as efficiency and shared welfare), will enable a proper definition of property rights and will provide courts and other decision-makers with the means to formulate, and implement, a proper environmental policy. [ABSTRACT FROM AUTHOR]

The agency problem is corporate law's most enduring challenge: when corporate managers spend investors' money, how does the law protect investors from reckless management? Scholars of law, finance, and accounting have suggested that in one corner of corporate law--corporate debt--a powerful tool exists to mitigate the agency problem. Specifically, through loan covenants, lenders can force borrowers to comply with lenders' preferences, thereby mitigating the agency problem in lending. But loan covenants are disappearing. Over the last decade, loan covenants have become fewer and skinnier, and so called "covenant-lite" or "cov-lite" loans have become dominant. If loan covenants do such a good job of mitigating agency costs, why have lenders willingly parted with them? This Article attempts to unravel the puzzle of disappearing covenants, and makes three contributions to literatures in law, finance, and accounting. First, using an original, hand-collected, and hand-coded dataset of 7,638 loan agreements spanning the last decade, this Article shows for the first time that financial covenants--the focus of most existing research--are not the only covenants disappearing. Rather, governance covenants, such as those that might give lenders the right to engage with the borrower's board of directors, are also disappearing. This Article coins the term "gov-lite" to describe loans that have few governance covenants and shows, for the first time, how prevalent gov-lite loans have become, even in ways that sometimes diverge from the covlite trend. Second, this Article draws from original interviews with lawyers working in corporate lending to explain the source and importance of this trend. This qualitative empirical evidence shows that regulation, the structure of the loan industry, and the rise of shadow banking have all contributed to the cov-lite and gov-lite trends. Finally, this Article explores the important theoretical and practical implications of the covlite and gov-lite trends. It discusses how the disappearance of covenants exacerbates the agency problem for lenders and shareholders, and how can stakeholders use covenants to advance social interests. [ABSTRACT FROM AUTHOR]

Larger-than-life corporate leaders, who can move fast and disrupt entrenched players, are often perceived as having the vision, superior leadership, or other exceptional qualities that make them uniquely valuable to their corporation. While the business press, management experts, and financial economists have long studied these "superstar" CEOs, the legal literature has largely overlooked this phenomenon. In this Article we develop a framework to explore the challenges that superstar CEOs pose for corporate law doctrine and scholarship. We show that, even in the present era of increasingly powerful shareholders, superstar CEOs have significant power over boards of directors. The power of superstar CEOs arises not from their formal influence over director nomination, shareholders' rational apathy, or other sources of directors' agency costs. Rather, it is based on the widespread belief that a CEO, and only this individual CEO, has what it takes to produce superior returns for shareholders. Consequently, superstar CEOs' power is limited in both duration and scope: it is likely to vanish when markets lose faith in their star qualities, and it cannot be abused if its harm to the company exceeds the value of the CEO's unique contribution. This framework, we show, explains Elon Musk's continuous entanglement with Delaware courts, board failure at Uber and WeWork, the puzzling jurisprudence regarding management buyouts, and the failure of governance reforms to contain CEO misconduct. It also cautions against reliance on existing governance arrangements to induce companies to advance stakeholder interests. [ABSTRACT FROM AUTHOR]

This Article examines the rationales and justifications for regulatory climate shaming--a nascent approach to climate policy involving the governmental publication of information regarding corporate contributions to climate change, with the aim of generating public pressure on companies to comply with climate change norms. Regulatory climate shaming is employed by national and subnational regulators inside and outside the United States through tools such as naming-and-shaming lists and rankings, environmental databases, climate labels, and corporate disclosure obligations. Generally, regulation by shaming is considered controversial, as it involves public condemnation and targets corporate reputation. However, this Article's main argument is that regulatory climate shaming is an important tool that can and should be utilized by regulators not only for inducing compliance with climate change norms but also for fighting crucial meta-regulation problems like corporate climate obstruction. Building on regulatory shaming theory and climate obstruction scholarship, this Article offers a normative theory of regulatory climate shaming and discusses the ways in which shaming can fight climate denial, climate washing, and other climate obstruction practices employed by the fossil fuel industry and other industries. [ABSTRACT FROM AUTHOR]

This Article examines how the two blind spots of economics--markets and the interior of firms--combined over the past 40 years to create the modern corporate governance regime. The focus of corporate law reformers over the past four decades on achieving ex-post welfare outcomes ignored the traditional centrality of supporting ex-ante market behaviors in corporate law. Corporate law was originally designed from the bottom up to promote the activities of bargaining, experimentation, and competition. None of these activities are currently much in evidence around the governance of public companies. The current corporate governance regime has not succeeded, even on its own terms, and it has seriously damaged the relevant markets. This Article joins a trend in recent legal scholarship of pointing out the intrinsic social value of market activities and their importance in making sense of legal doctrine. Economic efficiency arises from market activities like bargaining and experimentation that are, themselves, inefficient. The modern corporate governance regime has forgotten this fact. [ABSTRACT FROM AUTHOR]

The United States (U.S.) Constitution provides few limitations on endowing the Executive Branch with powers to govern foreign trade, which was initially granted to the Legislature. In a world where global trade dominates, the power over foreign trade can be more important than the power over domestic matters. Leaving unrestrained trade authority to the Executive Branch may cause hazards for Americans and foreigners alike. Russia's war in Ukraine demonstrates the flaws in permitting the Executive Branch to unilaterally sanction foreign states. This Article demonstrates how reactive Executive Branch policies infringed on the welfare and safety of American citizens and foreigners alike. [ABSTRACT FROM AUTHOR]

Fraud in the reward-based crowdfunding market has been of concern to regulators, but it is arguably of greater importance to the nascent industry itself. Despite its significance for entrepreneurial finance, our knowledge of the occurrence, determinants, and consequences of fraud in this market, as well as the implications for the business ethics literature, remain limited. In this study, we conduct an exhaustive search of all media reports on Kickstarter campaign fraud allegations from 2010 through 2015. We then follow up until 2018 to assess the ultimate outcome of each allegedly fraudulent campaign. First, we construct a sample of 193 fraud cases, and categorize them into detected vs. suspected fraud, based on a set of well-defined criteria. Next, using multiple matched samples of non-fraudulent campaigns, we determine which features are associated with a higher probability of fraudulent behavior. Second, we document the short-term negative consequences of possible breaches of trust in the market, using a sample of more than 270,000 crowdfunding campaigns from 2010 through 2018 on Kickstarter. Our results show that crowdfunding projects launched around the public announcement of a late and significant misconduct detection (resulting in suspension) tend to have a lower probability of success, raise less funds, and attract fewer backers. [ABSTRACT FROM AUTHOR]

The article focuses on the appointment of independent directors as a mechanism to reduce the threat of resource diversion and transfer of value from minority shareholders in companies controlled by a dominant shareholder. Topics discussed include the correlation between corporate value and the fraction of the board made up of independent directors; and the ability of independent directors to monitor the actions of controlling shareholders.

Corporate sustainability has gone mainstream, and many companies have taken meaningful steps to improve their own environmental performance. But while corporate political actions such as lobbying can have a greater impact on environmental quality, they are ignored in most current sustainability metrics. It is time for these metrics to be expanded to critically assess firms based on the sustainability impacts of their public policy positions. To enable such assessments, firms must become as transparent about their corporate political responsibility (CPR) as their corporate social responsibility (CSR). For their part, rating systems must demand such information from firms and include evaluations of corporate political activity in their assessments of corporate environmental responsibility. [ABSTRACT FROM AUTHOR]

Event-driven securities suits—ones that arise after an issuer has experienced some kind of disaster—have become increasingly prevalent in recent years. These suits are based on the fraud-on-the-market doctrine, a doctrine that ultimately gives rise to the bulk of the damages paid out in settlements and judgments pursuant to private litigation under the U.S. securities laws. The theory behind fraud-on-the-market cases is that when an issuer’s share price has been inflated by a Rule-10b-5-violating misstatement, investors who purchased shares at the inflated price have suffered a compensable injury if they still hold the shares after the inflation is gone. Although these event-driven suits differ in important ways from their more traditional cousins based on the same doctrine, they constitute a kind of stress test for the overall doctrine. The growth of event-driven cases thus provides a unique opportunity to reconceptualize the overall system of adjudicating fraud-on-the-market suits more generally. In this Article, we identify the basic logic behind this cause of action and consider what that logic implies as to when liability should and should not be imposed from a social welfare perspective. The result suggests ways we can both solve the challenges posed by event-driven litigation and improve fraud-on-the-market jurisprudence more generally. In an event-driven case, the plaintiff points to a pre-disaster statement that allegedly underplayed the likelihood that the disaster would occur and argues that the disaster announcement was the corrective disclosure. But in these cases, the price drop on the day of the disaster announcement is almost never a reasonable measure of the misstatement’s share price inflation. By focusing on the price drop at the time of a corrective disclosure, as courts generally do in fraud-on-the-market suits, they have lost track of the real issue: whether the misstatement inflated the share price by a meaningful amount in the first place. More often, the answer to that question is better indicated by the price change back at the time of the misstatement. For all fraud-on-the-market suits where the plaintiff can establish a misstatement made with scienter, we argue that liability should be imposed where the misstatement’s price impact appears to be at least as great as an inflation threshold chosen to trade off the costs and benefits of adjudicating securities class actions. Liability should not be imposed where both the misstatement’s price impact appears to be smaller than this inflation threshold, and the market would not have drawn negative inferences had the issuer stayed silent instead of making the misstatement. Where the misstatement’s price impact is less than the inflation threshold, but the market would have drawn negative inferences from issuer silence, liability should be imposed if and only if both the corrective disclosure’s price impact is a reliable proxy for how much the misstatement inflated the share price and this impact appears to be at least as great as the inflation threshold. [ABSTRACT FROM AUTHOR]

Short attacks are not always successful. They can be total busts, or they can instill even greater investor confidence, giving the target company a boost. It is difficult to predict how investors will react. This paper presents three cases of short attack that have very different outcomes. Short sellers successfully exposed the fraudulent nature of Luckin Coffee, causing its stock to plummet and be delisted from NASDAQ. GSX not only survived the short attacks, its stock price soared to all-time highs. Kasen International Holdings stock price recovered from the initial 90% slump and surged 472% the next day after Kasen published its rebuttal. Since the ultimate objective of short sellers is to cause stock price to fall and profit from it, their interest may not be aligned with those of shareholders. Their reports may not be independent, unbiased, or even accurate. It is up to readers to interpret their findings. [ABSTRACT FROM AUTHOR]

Financial fraud arises from the exaggeration of business interests, and an accurate detection or prediction is a useful tool for both corporate management and capital market systems. A collection of computer technologies has been made on this problem so far, and one of the most important solutions is unsupervised learning algorithms. Among them, most approaches work by analysing the internal relations in financial data and finding a new description of non‐fraud firms. However, current studies focus a lot on the geometry attribute of financial data, while overlooking the obvious behaviour patterns and peer effects among firms. This has limited the accuracy of representation and furthermore the detection performance. In this work, a very general class of functions is allowed to represent firms, constraining them by peer effects between firms and presenting an error‐distribution‐based financial fraud firm detection approach. Experimental results have shown great performance of the proposed approach. [ABSTRACT FROM AUTHOR]

Many researchers use the G-index or E-index to measure firms' takeover defenses. Others argue that these indices are not related to firms' takeover likelihoods. We find that, unlike their raw values, the instrumented versions of these indices are significantly and negatively related to acquisition likelihood. The difference between the raw and instrumented results indicates that the G-index and E-index include an endogenous component and highlights the importance of accounting for endogeneity in tests that use takeover indices to measure takeover deterrence. We provide data on new instruments that researchers can use to address these issues. [ABSTRACT FROM AUTHOR]

A criminal injustice system cannot rediscover its promise for justice without invigorating corporate criminal responsibility. However, maximizing corporate punishment is not a path to justice because policymakers must make choices about how much to invest in increased detection of corporate crime, warnings, persuading voluntary commitment to repair harm to victims, deferred prosecution agreements, in addition to increased prosecutions. Funding can shift from carceral punishment of crimes of the powerless to support all these forms of intervention.1Ultimately, such transformation might be self-funded by improved tax compliance and reduced corporate sabotage of economic futures by the destruction of ecosystems. When all this is done as a coherent mix, corporate criminal responsibility can contribute profoundly to a good society. This Article develops the idea of minimally sufficient deterrence by building on Brent Fisse's accountability principle for corporate offenders-all who are responsible should be held to account-whether they are individual executives, sub-units of corporations, auditors, ratings agencies, corporations that are criminal actors, or other implicated firms upstream or downstream. [ABSTRACT FROM AUTHOR]

The article attempts to spur discussion and thought by regulating corporate wrongdoing in the absence of corporate criminal law. Topics discussed include the suite of liability regimes that would still be in place if there is no corporate criminal liability, the blaming and message-sending functions of corporate criminal law and what can be gained if there were no corporate criminal liability.

The debate over corporate criminal liability has long involved a fight between proponents who argue that corporate liability is necessary for effective deterrence and opponents who claim that it "punishes the innocent." This Article agrees and disagrees with both sides. Corporate criminal liability could play a critical role in establishing an effective deterrent to organizational misconduct, but today it largely fails. Currently, we have a system that combines Deferred Prosecution Agreements, Non-Prosecution Agreements, and extraordinarily generous sentencing credits for compliance plans that have failed, and the result is a system that is more carrots than sticks. The evidence seems clear that corporate fines seldom affect the company's stock price (even when they are record penalties), that companies rarely self-report their misconduct (despite legal incentives to do so), and that courts impose penalties that can be easily absorbed as a cost of doing business. This analysis leads many to favor a system that focuses only on corporate executives and dispenses with the corporation as a target of the criminal law. Unfortunately, that approach has even higher costs. Although executives are deterrable, high-ranking corporate executives are much harder to identify and prosecute for a variety of reasons. In this light, the critical role of corporate criminal liability is that it gives the corporation a stronger incentive to self-report, monitor its employees, and turn in those responsible. But this requires that we extend leniency only for objective conduct that generates deterrence. A principal goal of this Article is to provide a roadmap for how we can make the punishment fit the corporation. Leniency can be used as a tool but should not be extended gratuitously. To curb corporate misconduct, society has long faced a choice between either vicarious liability for executives (which is contrary to our legal tradition and would shock civil libertarians) and vicarious liability for shareholders (which has existed for over a century but is always bounded by the ceiling of limited liability). Either choice has its costs, and this Article suggests some possible alternatives. [ABSTRACT FROM AUTHOR]

This Article, for a collection in which authors were asked to "imagine a world without corporate criminal liability," specifies the material questions that should be addressed if debate about the doctrine is to progress past longstanding and oft-repeated assertions. The strongest case for corporate criminal liability is based on the potential for its unique reputational effects to contribute to the prevention and deterrence of crime within corporations. Further research should take up a variety of unanswered questions about those effects having to do with mechanisms and audiences. The relevant inquiries are both theoretical and empirical. Answers will lie in further understanding of organizational and individual behavior more than in familiar models of the firm and deterrence that have largely shaped the literature to date. [ABSTRACT FROM AUTHOR]

At the center of a fundamental and heated debate about corporate purpose, an increasingly influential view (which we refer to as "stakeholderism") advocates giving corporate leaders increased discretionary power to serve all stakeholders and not just shareholders. Supporters of stakeholderism argue that its application would address growing concerns about the impact of corporations on society and the environment. By contrast, critics of stakeholderism argue that corporate leaders should not be expected to use expanded discretion to benefit stakeholders. This Article presents novel empirical evidence that can contribute to resolving this key debate. Following a stakeholderist framework, the constituency statutes adopted by more than thirty U.S. states authorize corporate leaders to give weight to stakeholder interests when considering a sale of their company. Using hand-collected data, we study how corporate leaders in fact used their stakeholderist discretion in transactions governed by such statutes in the past two decades. In particular, we provide a detailed analysis of more than one hundred transactions governed by such statutes in which corporate leaders negotiated a company sale to a private equity buyer. We find that corporate leaders used their discretion to obtain gains for shareholders, executives, and directors. However, despite the clear risks that private equity acquisitions often posed for stakeholders, corporate leaders generally did not use their discretion to negotiate for any stakeholder protections. Indeed, in the small minority of cases in which some stakeholder protections were formally included, they were generally cosmetic and practically inconsequential. Beyond the implications of our findings for the long-standing debate on constituency statutes, these findings also provide important lessons for the ongoing debate on stakeholderism. At a minimum, stakeholderists should identify the causes for constituency statutes' failure to deliver stakeholder benefits in the analyzed transactions and examine whether embracing stakeholderism would not similarly fail to produce such benefits. After examining alternative explanations for our findings, we conclude that the most plausible explanation lies in corporate leaders' incentives not to protect stakeholders beyond what would serve shareholder value. Our findings thus indicate that stakeholderism cannot be relied on to produce its purported benefits for stakeholders. Stakeholderism therefore should not be supported as an effective way for protecting stakeholder interests, even by those who deeply care about stakeholders. [ABSTRACT FROM AUTHOR]

Using a difference‐in‐differences approach, we show that relaxation of short‐sale constraints helps to filter out low‐quality borrowers from the bank loan market. Treated firms that can still borrow from banks enjoy a lower loan spread, compared with control firms without this sorting mechanism. The results show that such treated borrowers have improved information asymmetry and credit risk, as well as better nonprice contract terms. Overall, equity short selling has a real effect on the bank loan market by weeding out poor‐quality borrowers, resulting in a lower cost of private debt for remaining borrower firms. [ABSTRACT FROM AUTHOR]

For over two decades, the FTC creatively employed its capacious statute to police against shoddy data practices. Although the FTC’s actions were arguably needed at the time to fill a gap in enforcement, there are reasons to believe that its current approach has outlived its usefulness and is in serious need of updating. In particular, our analysis shows that the FTC’s current approach to data security is unlikely to instill anything close to optimal incentives for data holders. These shortcomings cannot be fixed through changes to the FTC enforcement approach, as they are largely generated by a mismatch between the tools that Congress gave it over a century ago and what it needs to foster firms’ incentives to mimic socially optimal levels of care for the data they hold. Not only does the current framework likely suffer from informational deficiencies attendant to its focus on “reasonable” security that render liability standards uncertain, it also lacks the ability to obtain the type of relief that will force firms to internalize the costs of their data security decisions. We examine the problem of data security enforcement through the lens of the economics of optimal precautions and identify several reasons why a strict liability regime administered by the FTC, under which firms pay for the expected harm from breaches they cause, is likely to be superior to the current framework that revolves around the concept of reasonableness. The benefits of strict liability flow from the likelihood that firms do not fully internalize the costs and benefits of their data security decisions and the relatively large informational burdens associated with measuring actual and optimal care under a negligence regime. We also show why in this informational environment, strict liability is better than negligence for developing a vibrant cyber insurance market, allowing for data security regulation to be de facto outsourced to insurers who will contract with firms for optimal levels of care. Because these private contracts will harness private information on costs and benefits from precautions, they are likely to incentivize more efficient behavior. [ABSTRACT FROM AUTHOR]

The article explores the European Union (EU) and Great Britain's reforms in sustainable finance and the potential of such regulatory initiatives to re-orient investment management practices. Topics discussed include institutional shareholder engagement, unreconciled and contesting narratives that underlie the expectations of shareholder engagement by institutions, and the Stewardship Code 2020 in Great Britain.

The article argues that the increasing share of leveraged and covenant-lite loans in the U.S. may not necessarily evidence undisciplined debt issuance. Topics discussed include traditional bank lending covenants and monitoring, traditional syndicated bank lending, and banking deregulation. Also mentioned are junk bonds and leveraged buyouts, modernizing bank capital, and collateralized loan obligations.

Forensic accounting popularity and application over the decade has intensified immensely though it is not a new concept. Its application is of many importance provided that accounting fraudulent practices are increasing immensely throughout the globe. Forensic accounting is the combination of accounting, auditing and investigative skills. It provides investigative functions and litigation support services to understand the depth and width of the financial scams happening in any economy. This research paper discusses some of well-known global cases of financial fraudulent practices like Worldcom, Krispy Kreme and Enron. The research is based on secondary data collected from published journals, periodicals and books. [ABSTRACT FROM AUTHOR]

Corporate directors, like most people, are social creatures, and their social networks affect their decisions. But directors' social networks remain both understudied and undertheorized by scholars and inconsistently addressed by courts. This Article comprehensively examines the importance of director networks to corporate governance. Using qualitative and quantitative data, the Article uncovers the importance of director networks and the implications that network theory poses for the study of corporate law. In doing so, the Article tackles an understudied corner of corporate decision making at a critical time, when directors have an outsized influence over their companies and, in many cases, the United States economy as a whole. This Article builds on a robust literature in corporate governance and decision making. Much of the existing scholarship has focused on whether directors--especially "busy directors" who serve on multiple boards--are meeting investors' and regulators' expectations. The literature, however, overlooks an important aspect of busyness; that when directors serve on multiple boards, they also build a social network that extends beyond the companies they serve, spanning several degrees of separation. This Article shows how these broader connections affect corporate governance and discusses the legal implications of what it terms as "Social Corporate Governance." This Article makes three contributions to the existing literature. First, the Article identifies the significance of network theory to contemporary corporate governance discourse and develops a theoretical framework to better account for directors' service on multiple boards. Second, it empirically examines the direct impact that director networks have on the governance of public firms. It does so through an original data set that reveals some of the positive effects that director networks have on companies' governance, and further demonstrates how network analysis adds important insights to existing empirical studies regarding director service on multiple boards, at times significantly altering their results. Finally, the Article suggests that the current discourse by regulators, institutional investors, and academics may underestimate the importance that director networks have for companies. It then suggests several policy reforms to address these findings. [ABSTRACT FROM AUTHOR]

"I would prefer not" HERMAN MELVILLE, BARTLEBY THE SCRIVENER: A STORY OF WALL STREET (1853), reprinted in THE PIAZZA TALES 32, 48 (London, Sampson Low, Son & Co. 1856). Scholars have recently challenged the claim in classical deterrence theory that law influences behavior only through the expected sanction imposed. Some go further and argue that law may also "shape preferences," changing people's wants and values. In this Article, we analyze existing claims that criminal and civil law alter preferences and conclude that none suggest that the law shapes preferences. We first clarify this preference-shaping claim by elaborating the structure of rational choice theory generally and "preference" in particular. We then investigate three mechanisms of legal influence suggested by the preference-shaping literature: (1) the "serious harm" mechanism; (2) the "social norm" mechanism; and (3) the "self-improvement" mechanism. We then show that each of these mechanisms operates by changing the agent's beliefs about the attributes or consequences of her choice options rather than by changing her preferences. [ABSTRACT FROM AUTHOR]

Corporations routinely impose externalities on a broad range of non‐shareholders, as illustrated by several unsuccessful lawsuits against corporations involving forced labor, human trafficking, child labor, and environmental harms in global supply chains. Lack of legal accountability subsequently translates into low legal risk for corporate misconduct, which reduces the likelihood of prevention. Corporate misconduct toward non‐shareholders arises from a fundamental inconsistency within contract law regarding the status of third parties: On the one hand, we know that it takes a community to contract. Contracting parties often rely on multiple third parties—not signatories to the contract—to play important roles in facilitating exchange, such as reducing market transaction costs, improving information flows, and decreasing the risk of opportunism. On the other hand, we deny this community protection from the externalities that contracting parties impose on them. This article examines a corporation's duties to others in its role as a contracting party. Normatively, this article proposes an alternative view of contracts as an ecosystem with three attendant principles that result from this view: (a) third‐party protections from negative externalities, (b) contract design obligations of contracting parties, and (c) recourse to legal remedies for third parties. On a policy level, this article proposes the following duty to contract in order to translate theory into practice: Contracting parties are required to take into account negative externalities to third parties when the contracting parties could reasonably foresee that performance of the contract would create a risk of physical harm to these third parties. [ABSTRACT FROM AUTHOR]

Rationales for a stakeholder model of corporate governance are based on enlightened self‐interest, moral imperative, and/or externalities. Of these, the externalities rationale holds the most promise to justify a stakeholder focus. Recent evidence, however, indicates that the benefits of a stakeholder focus are limited because the social costs of many corporate activities already are internalized. Potential benefits also must be weighed against the costs, which include increased potential for conflict, waste, and managerial self‐dealing. I conclude by advocating for the traditional governance model based on shareholder interests, with allowance for managers to deviate from this model in limited circumstances when the external impacts on other stakeholders are large. To constrain managerial opportunism, such deviations should be defended with a new type of double bottom line reporting, which augments traditional financial reporting with a statement of the social benefits of any deviations from shareholder value maximization. [ABSTRACT FROM AUTHOR]

It is the best of times for Canada's public markets, it is the worst of times for Canada's public markets. It is an age when markets have been rewarding public companies with the highest valuations seen in generations. It is an age of a rapid decline in Canadian companies opting to go public. Given that Canada's reliance on public markets is far higher than that of any other country -- double that of the next-highest country -- we should be alarmed that fewer and fewer companies are choosing to go public. Companies that stay private are, on average, less successful, less productive, less likely to grow into national champions, and more likely to be sold to foreign buyers. The current decline of public markets may go to the heart of what is arguably the biggest long-term policy issue in the country: our innovation gap and declining relative productivity growth. There is no shortage of advantages for a company to go public. Public companies grow faster, grow larger, become both more productive and efficient, and have cheaper access to capital. An IPO permits early investors to exit while allowing managers to continue to build the company. What is evidently causing more and more Canadian executives to avoid going public, despite all these advantages, is a regulatory and governance ecosystem that has grown increasingly hostile to and distrustful of corporate leadership. Executives who consider going public face an environment in which their compensation levels will be high; indeed, pay for senior executives at public companies has grown remarkably in recent years. However, because of increasingly onerous regulatory disclosure requirements, earning those rewards comes at the cost of having their pay disclosed to the public, debated by shareholders and scrutinized by the media. Companies that go public also face a growing loss of control over their own governance due to pressure to adhere to an ever-evolving list of so-called universal best practices that can run dozens of pages long. These practices exact costs but don't generally improve results. The result is a dominant one-size-fits-all governance model that does not in fact fit many, or even most companies. The key factor creating this hostile environment is a massive intrusion by outside forces on the powers traditionally exercised by boards and executives. Corporate governance used to arise from the bargaining and experimentation of the private parties that coalesce around corporations. Now governance is frequently imposed ex post on public companies by third parties with their own agendas. Particularly problematic are third-party commercial proxy advisors, ostensibly representing the interests of institutional shareholders. Their short-term, faddish, complex, and value-harming governance practices diverge dangerously from the interests of long-term flesh-andblood investors. The innovations over the past three decades in governance rules were designed to reduce agency costs and improve corporate performance. Those that have proven failures at doing so, and there are several, should be scrapped. Rather than helping Canada's markets become stronger, public markets have grown substantially weaker, and rather than making Canadian companies better, we now face an environment where companies would rather sell to a foreign buyer and leave the country, than go public here. The repercussions can only be adverse for Canada. [ABSTRACT FROM AUTHOR]

Modern-day shareholders influence corporate America more than ever before. From demanding greater accountability of executives, to lobbying for a variety of social and environmental policies, shareholders today have the power to alter how American companies are run. Amazingly, a small group of individual shareholders wields unprecedented power to set corporate agendas and stands at the epicenter of our contemporary corporate governance ecosystem. In fact, the power of these individuals, known as "corporate gadflies," continues to rise. Corporate gadflies present a puzzling reality. Although public corporations in the United States are increasingly owned by large institutional investors, much of their corporate governance agenda has been and is still dominated by a handful of individuals who own tiny slivers of most large companies. How does an economy with corporate equity in the trillions of dollars cede so much governance power to corporate gadflies? More importantly, should it? Surprisingly, scholars have paid little attention to the role of corporate gadflies in this ever-changing governance landscape. This Article is the first to address the giant shadow that corporate gadflies cast on the corporate governance landscape in the United States. The Article makes three contributions to the literature. First, using a comprehensive dataset of all shareholder proposals submitted to the S&P 1500 companies from 2005 to 2018, it offers a detailed empirical account of both the growing power and influence that corporate gadflies wield over major corporate issues and of gadflies' power to set governance agendas. Second, the Article uses the context of corporate gadflies to elucidate a key governance debate over the role of large institutional investors in corporate governance. Specifically, the Article underscores the potential concerns raised by the activity of corporate gadflies and questions the current deference of institutional investors to these gadflies regarding the submission of shareholder proposals. Finally, the Article proposes policy reforms aimed at reframing the current discourse on shareholder proposals and potentially sparking a new line of inquiry regarding the role of investors in corporate governance. [ABSTRACT FROM AUTHOR]

Shareholder proposals attract attention from scholars in finance and economics because they present an opportunity to study both quasidemocratic decision-making at the corporate level and the impact of this decision-making on firm outcomes. These studies capture the effect of various proposals but rarely address whether regulations should allow many of them in the first place due to the possibility of stock price manipulation. Recent changes to shareholder proposal rules, adopted in September 2020, sought to address the potential for exploitation that some proposals create (but ultimately failed to do so). This Article shows the potential for apparently legal stock price manipulation if shareholder proposals remain relatively unregulated. We propose improvements to decrease this risk of stock price manipulation, which should help the government prosecute the offenders. [ABSTRACT FROM AUTHOR]

This reply to For Whom Is the Corporation Managed in 2020? The Debate Over Corporate Purpose by Professor Edward Rock supports his depiction of the current state of corporate law in the United States. But by contrast to Professor Rock, I do not trace the debate over corporate purpose to recent statements by business elites belatedly recognizing that our corporate governance system has failed to work for the many and is contributing to growing inequality. Rather, I source the debate to the work of advocates and scholars who have long been trying to restore fairness to our economy by updating an outdated mid-twentieth century corporate governance system to address evolving market and political developments. Taking a more positive view than Professor Rock, I argue that the most promising corporate governance reform proposals do not involve a revolution, but a restoration. They build on traditional corporate law techniques and restore the balance among stakeholders that characterized governance in the period when the U.S. economy worked best. [ABSTRACT FROM AUTHOR]