Jesse M. Fried

Dane Professor of Law

Biography

Jesse M. Fried is a Professor of Law at Harvard Law School. Before joining the Harvard faculty in 2009, Fried was a Professor of Law and Faculty Co-Director of the Berkeley Center for Law, Business and the Economy (BCLBE) at the University of California Berkeley. Fried has also been a visiting professor at Columbia University Law School, Duisenberg School of Finance, IDC Herzilya, and Tel Aviv University. He holds an A.B. and A.M in Economics from Harvard University, and a J.D. magna cum laude from Harvard Law School. His well-known book Pay without Performance: the Unfulfilled Promise of Executive Compensation, co-authored with Lucian Bebchuk, has been widely acclaimed by both academics and practitioners and translated into Arabic, Chinese, Japanese, and Italian. Fried has served as a consultant and expert witness in litigation involving executive compensation and corporate governance issues. He also serves on the Research Advisory Council of proxy advisor Glass, Lewis & Co.

Areas of Interest

Jesse M. Fried, The Uneasy Case for Favoring Long-Term Shareholders, 124 Yale L.J. 1554 (2015).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Fiduciary Law
,
Commercial Law
,
Venture Capital
,
Corporate Governance
,
Business Organizations
,
Fiduciaries
,
Shareholders
,
Corporate Law
Type: Article
Abstract
This Article challenges a persistent and pervasive view in corporate law and corporate governance: that a firm’s managers should favor long-term shareholders over short-term shareholders, and maximize long-term shareholders’ returns rather than the short-term stock price. Underlying this view is a strongly held intuition that taking steps to increase long-term shareholder returns will generate a larger economic pie over time. I show, however, that this intuition is flawed. Long-term shareholders, like short-term shareholders, can benefit from managers’ destroying value—even when the firm’s only residual claimants are its shareholders. Indeed, managers serving long-term shareholders may well destroy more value than managers serving short-term shareholders. Favoring the interests of long-term shareholders could thus reduce, rather than increase, the value generated by a firm over time.
Jesse M. Fried, Insider Trading via the Corporation, 164 U. Pa. L. Rev. 801 (2014).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
,
Corporate Governance
,
Corporate Law
,
Securities Law & Regulation
,
Fiduciaries
,
Business Organizations
Type: Article
Abstract
A U.S. firm buying and selling its own shares in the open market can trade on inside information more easily than its own insiders because it is subject to less stringent trade disclosure rules. Not surprisingly, insiders exploit these relatively lax rules to engage in indirect insider trading: they have the firm buy and sell shares at favorable prices to boost the value of their own equity. Such indirect insider trading imposes substantial costs on public investors in two ways: by systematically diverting value to insiders and by inducing insiders to take steps that destroy economic value. To reduce these costs, I put forward a simple proposal: subject firms to the same trade-disclosure rules that are imposed on their insiders.
Jesse M. Fried & Charles C.Y. Wang, Short-Termism and Capital Flows (Harvard Bus. Sch. Accounting & Mgmt. Unit Working Paper No. 17-062, European Corp. Governance Inst. (ECGI) - Law Working Paper No. 342/2017, Feb. 9, 2017).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Shareholders
Type: Article
Abstract
During the period 2005-2014, S&P 500 firms distributed to shareholders more than $3.95 trillion via stock buybacks and $2.45 trillion via dividends — $6.4 trillion in total. These shareholder payouts amounted to over 93% of the firms' net income. Academics, corporate lawyers, asset managers, and politicians point to such shareholder-payout figures as compelling evidence that “short-termism" and “quarterly capitalism" are impairing firms' ability to invest, innovate, and provide good wages. We explain why S&P 500 shareholder-payout figures provide a misleadingly incomplete picture of corporate capital flows and the financial capacity of U.S. public firms. Most importantly, they fail to account for offsetting equity issuances by firms. We show that, taking into account issuances, net shareholder payouts by all U.S. public firms during the period 2005-2014 were in fact only about $2.50 trillion, or 33% of their net income. Moreover, much of these net shareholder payouts were offset by net debt issuances, and thus effectively recapitalizations rather than firm-shrinking distributions. After excluding marginal debt capital inflows, net shareholder payouts by public firms during the period 2005-2014 were only about 22% of their net income. In short, S&P 500 shareholder-payout figures are not indicative of actual capital flows in public firms, and thus cannot provide much basis for the claim that short-termism is starving public firms of needed capital. We also offer three other reasons why corporate capital flows are unlikely to pose a problem for the economy. A prior version of this paper was circulated under the title “Short-Termism and Shareholder Payouts: Getting Corporate Capital Flows Right."
Jesse M. Fried, Rationalizing the Dodd-Frank Clawback (European Corp. Governance Inst. (ECGI) - Law Working Paper No. 314/2016, Sept. 26, 2016).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Financial Reform
,
Corporate Law
,
Corporate Governance
,
Executive Compensation
Type: Article
Abstract
On July 1, 2015, the Securities and Exchange Commission (SEC) proposed an excess-pay clawback rule to implement the provisions of Section 954 of the Dodd-Frank Act. I explain why the SEC’s proposed Dodd-Frank clawback, while reducing executives’ incentives to misreport, is overbroad. The economy and investors would be better served by a more narrowly targeted “smart” excess-pay clawback that focuses on fewer issuers, executives, and compensation arrangements.
John C. Coates, IV, Jesse M. Fried, & Kathryn E. Spier, What Courses Should Law Students Take? Lessons from Harvard’s Big Law Survey, 64 J. Legal Educ. 443 (2015).
Categories:
Corporate Law & Securities
,
Legal Profession
,
Banking & Finance
Sub-Categories:
Finance
,
Legal Education
,
Legal Services
Type: Article
Abstract
We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.
Brian J. Broughman, Jesse M. Fried & Darian M. Ibrahim, Delaware Law as Lingua Franca: Theory and Evidence, 57 J.L. & Econ. 865 (2014).
Categories:
Corporate Law & Securities
,
Government & Politics
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Governance
,
Corporate Law
,
Business Organizations
,
Empirical Legal Studies
,
State & Local Government
Type: Article
Abstract
Why would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law, as well as the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a “lingua franca” for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 VC-backed startups, we find evidence consistent with this lingua-franca explanation. Indeed, the lingua-franca effect appears to be more important than other factors that have been shown to influence corporate domicile, such as corporate-law flexibility and the quality of a state’s judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware’s continued dominance is in part due to investors’ familiarity with its corporate law.
Brian B. Broughman & Jesse M. Fried, Carrots and Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, 98 Cornell L. Rev. 1319 (2013).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
,
Banking & Finance
Sub-Categories:
Venture Capital
,
Corporate Governance
,
Corporate Law
,
Fiduciaries
,
Business Organizations
,
Securities Law & Regulation
,
Empirical Legal Studies
Type: Article
Abstract
Venture capitalists (VCs) usually exit from their investments in a startup via a trade sale. But the startup's entrepreneurial team-the startup's founder, other executives, and common shareholders-may resist a trade sale. Such resistance is likely to be particularly intense when the sale price is low relative to the VCs' liquidation preferences. Using a hand-collected dataset of Silicon Valley firms, we investigate how VCs overcome such resistance. We find, in our sample, that VCs give bribes (carrots) to the entrepreneurial team in 45 % of trade sales; in these sales, carrots total an average of 9% of deal value. The overt use of coercive tools (sticks) occurs, but only rarely. Our study sheds light on important but underexplored aspects of corporate governance in VC-backed startups and the venture capital ecosystem.
Brian B. Broughman & Jesse M. Fried, Do VCs Use Inside Rounds to Dilute Founders? Some Evidence From Silicon Valley, 18 J. Corp. Fin. 1104 (2012).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Finance
,
Venture Capital
,
Fiduciary Law
,
Corporate Law
,
Corporate Governance
,
Business Organizations
,
Empirical Legal Studies
Type: Article
Abstract
In the bank-borrower setting, a firm’s existing lender may exploit its positional advantage to extract rents from the firm in subsequent financings. Analogously, a startup’s existing venture capital investors (VCs) may dilute the founder through a follow-on financing from these same VCs (an “inside” round) at an artificially low valuation. Using a hand-collected dataset of Silicon Valley startup firms, we find little evidence that VCs use inside rounds to dilute founders. Instead, our findings suggest that inside rounds are generally used as “backstop financing” for startups that cannot attract new money, and these rounds are conducted at relatively high valuations (perhaps to reduce litigation risk).
Jesse M. Fried, Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, 89 Tex. L. Rev. 1113 (2011).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Banking
,
Finance
,
Fiduciary Law
,
Venture Capital
,
Corporate Governance
,
Corporate Law
,
Business Organizations
,
Fiduciaries
,
Shareholders
Type: Article
Abstract
This Article identifies a cost to public investors of tying executive pay to the future value of a firm’s stock - even its long-term value. In particular, such an arrangement can incentivize executives to engage in share repurchases (when the current stock price is low) and equity issuances (when the current stock price is high) that reduce “aggregate shareholder value,” the amount of value flowing to all the firm’s shareholders over time. The Article also puts forward a mechanism that ties executive pay to aggregate shareholder value and thereby eliminates the identified distortions.
Jesse M. Fried & Nitzan Shilon, Excess-Pay Clawbacks, 36 J. Corp. L. 722 (2011).
Categories:
Corporate Law & Securities
,
Labor & Employment
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Law
,
Corporate Governance
,
Securities Law & Regulation
,
Executive Compensation
Type: Article
Abstract
We explain why firms should have a policy requiring directors to recover “excess pay” – payouts to executives resulting from an error in compensation metrics (such as inflated earnings). We then analyze the clawback policies voluntarily adopted by S&P 500 firms as of 2010 and find that only a small fraction had such a policy. Our findings suggest that the Dodd-Frank Act, which requires firms to adopt a clawback policy for certain types of excess pay, will improve compensation arrangements at most firms. We also suggest how the types of excess pay not reached by Dodd-Frank should be addressed.
Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: Overview of the Issues, in The History of Modern U.S. Corporate Governance (Brian Cheffins ed., 2011).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Shareholders
,
Executive Compensation
Type: Book
Lucian A. Bebchuk & Jesse M. Fried, Paying For Long-Term Performance, 158 U. Pa. L. Rev. 1915 (2010).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Corporate Law
,
Shareholders
,
Executive Compensation
Type: Article
Abstract
Firms, investors, and regulators around the world are now seeking to ensure that the compensation of public company executives is tied to long-term results, in part to avoid incentives for excessive risk taking. This Article examines how best to achieve this objective. Focusing on equity-based compensation, the primary component of executive pay, we identify how such compensation should best be structured to tie pay to long-term performance. We consider the optimal design of limitations on the unwinding of equity incentives, putting forward a proposal that firms adopt both grant-based and aggregate limitations on unwinding. We also analyze how equity compensation should be designed to prevent the gaming of equity grants at the front end and the gaming of equity dispositions at the back end. Finally, we emphasize the need for widespread adoption of limitations on executives’ use of hedging and derivative transactions that weaken the tie between executive payoffs and the long-term stock price that well-designed equity compensation is intended to produce.
Jesse M. Fried & Brian Broughman, Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms, 95 J. Fin. Econ. 384 (2010).
Categories:
Banking & Finance
,
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Contracts
,
Commercial Law
,
Finance
,
Venture Capital
,
Business Organizations
,
Corporate Law
,
Corporate Governance
,
Shareholders
,
Fiduciaries
,
Empirical Legal Studies
Type: Article
Abstract
Incomplete contracting theory suggests that venture capitalist (VC) cash flow rights, including liquidation preferences, could be subject to renegotiation. Using a hand-collected data set of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs’ liquidation preferences are satisfied. However, such deviations from VCs’ cash flow rights tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm’s choice of corporate law, give common shareholders more power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.
Lucian A. Bebchuk & Jesse M. Fried, How to Tie Equity Compensation to Long-Term Results, 22 J. Applied Corp. Fin. 99 (2010).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Law
,
Executive Compensation
Type: Article
Abstract
Companies, investors, and regulators around the world are now seeking to tie executives’ payoffs to long-term results and avoid rewarding executives for short-term gains. Focusing on equity-based compensation, the primary component of top executives’ pay, the authors analyze how such compensation should best be structured to provide executives with incentives to focus on long-term value creation. To improve the link between equity compensation and long-term results, the authors recommend that executives be prevented from unwinding their equity incentives for a significant time period after vesting. At the same time, however, the authors suggest that it would be counterproductive to require that executives hold their equity incentives until retirement, as some have proposed. Instead, the authors recommend that companies adopt a combination of “grant-based” and “aggregate” limitations on the unwinding of equity incentives. Grant-based limitations would allow executives to unwind the equity incentives associated with a particular grant only gradually after vesting, according to a fixed, pre-specified schedule put in place at the time of the grant. Aggregate limitations on unwinding would prevent an executive from unloading more than a specified fraction of the executive’s freely disposable equity incentives in any given year. Finally, the authors emphasize the need for effective limitations on executives’ use of hedging and derivative transactions that would weaken the connection between executive payoffs and long-term stock values that a well-designed equity arrangement should produce.
Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: Overview of the Issues, in Foundations of Corporate Law 437 (Roberta Romano ed., 2nd ed. 2010).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Shareholders
,
Executive Compensation
Type: Book
Jesse M. Fried, Firms Gone Dark, 76 U. Chi. L. Rev. 135 (2009).
Categories:
Corporate Law & Securities
Sub-Categories:
Shareholders
,
Securities Law & Regulation
,
Corporate Law
Type: Article
Abstract
The securities laws currently permit certain firms to exit the mandatory disclosure system even though their shares are held by hundreds (or even thousands) of investors and continue to be publicly traded. Such exiting firms are said to "go dark" because they subsequently provide little information to public investors. This paper addresses the going-dark phenomenon and its implications for the debate over mandatory disclosure. Mandatory disclosure's critics contend that insiders of publicly traded firms will always voluntarily provide adequate information to investors. The disclosure choices of gone-dark firms raise doubts about this claim. The paper also puts forward a new approach to regulating going-dark firms: giving public shareholders a veto right over exits from mandatory disclosure. Such an approach, it shows, will prevent undesirable exits from mandatory disclosure while preserving firms' ability to engage in value-increasing exits.
Jesse M. Fried, Option Backdating and its Implications, 65 Wash. & Lee L. Rev. 853 (2008).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Law
,
Corporate Governance
,
Shareholders
,
Executive Compensation
Type: Article
Jesse M. Fried, Hands-Off Options, 61 Vand. L. Rev. 453 (2008).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Shareholders
,
Corporate Law
,
Securities Law & Regulation
,
Executive Compensation
Type: Article
Abstract
Despite recent reforms, public company executives can still use inside information to time their stock sales, secretly boosting their pay. They can also still inflate the stock price before selling. Such insider trading and price manipulation imposes large costs on shareholders. This paper suggests that executives' options be cashed out according to a pre-specified, gradual schedule. These hands-off options would substantially reduce the costs associated with current equity arrangements while imposing little burden on executives.
Jesse M. Fried & Mira Ganor, Agency Costs of Venture Capitalist Control in Startups, 81 N.Y.U. L. Rev.. 967 (2006).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Venture Capital
,
Finance
,
Fiduciary Law
,
Corporate Governance
,
Shareholders
,
Corporate Law
Type: Article
Abstract
Venture capitalists investing in U.S. startups typically receive preferred stock and extensive control rights. Various explanations for each of these arrangements have been offered. However, scholars have failed to notice that when combined these arrangements result in a highly unusual corporate governance structure: one in which preferred shareholders, not common shareholders, control the board and the firm. The purpose of this Article is threefold: (1) to highlight the unusual governance structure of these VC-backed startups; (2) to show that preferred shareholder control can give rise to potentially large agency costs, and (3) to suggest legal reforms that may help VCs and entrepreneurs reduce these agency costs and improve corporate governance in startups.
Lucian A. Bebchuk & Jesse M. Fried, Pay without Performance: Overview of the Issues, 20 Acad. Mgmt. Persp. 5 (2006).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Shareholders
,
Executive Compensation
Type: Article
Jesse M. Fried, Informed Trading and False Signaling with Open Market Repurchases, 93 Calif. L. Rev. 1326 (2005).
Categories:
Corporate Law & Securities
Sub-Categories:
Shareholders
,
Corporate Governance
,
Securities Law & Regulation
Type: Article
Abstract
Public companies in the United States and elsewhere increasingly use open market stock buybacks, rather than dividends, to distribute cash to shareholders. Academic commentators have emphasized the possible benefits of such repurchases for shareholders. However, little attention has been paid to their potential drawbacks. This Article shows that managers use open market repurchases to indirectly buy stock for themselves at a bargain price. Managers also boost stock prices by announcing repurchase programs they do not intend to execute, enabling them to unload their own shares at a higher price. Such bargain repurchases and inflated-price sales systematically transfer significant amounts of value from public investors to managers, as well as distort managers' payout decisions. The Article concludes by proposing a new approach to regulating open market repurchases: requiring firms to disclose specific details of their buy orders in advance. This pre-repurchase disclosure rule, the Article shows, would undermine managers' ability to use repurchases for informed trading and false signaling, thereby reducing the resulting distortions and costs to shareholders. Moreoever, it would achieve these objectives without eroding any of the potential benefits of repurchases.
Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: Overview of the Issues, 17 J. Applied Corp. Fin. 8 (2005).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Shareholders
,
Executive Compensation
Type: Article
Lucian A. Bebchuk & Jesse M. Fried, Executive Compensation at Fannie Mae: A Case Study of Perverse Incentives, Nonperformance Pay, and Camouflage, 30 J. Corp. L. 807 (2005).
Categories:
Labor & Employment
,
Corporate Law & Securities
Sub-Categories:
Corporate Governance
,
Securities Law & Regulation
,
Shareholders
,
Executive Compensation
Type: Article
Abstract
This paper is a case study of Fannie Mae's executive compensation arrangements during the period 2000-2004. We identify and analyze four problems with these arrangements: - First, by richly rewarding executives for reporting higher earnings, without requiring return of the compensation if earnings turned out to be misstated, Fannie Mae's arrangement provided perverse incentives to inflate earnings. - Second, Fannie Mae's arrangements provided soft landings to executives who were pushed out by the board for failure; expectation of such outcome adversely affected ex ante incentives. - Third, even if the executives had retired after years of unblemished service, the value of their retirement packages would have been largely unrelated to their own performance. - Fourth, both when promising retirement payments to executives and when making theses payments, Fannie Mae's disclosures obscured rather than made transparent the total values of the executives' retirement packages. Because many other companies have practices similar to Fannie Mae's, our case study highlights some general problems with existing pay practices and the need for reform.
Lucian A. Bebchuk & Jesse M. Fried, Pay Without Performance: Overview of the Issues, 30 J. Corp. L. 647 (2005).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Corporate Governance
,
Shareholders
,
Executive Compensation
Type: Article
Abstract
In a recent book, Pay without Performance: The Unfulfilled Promise of executive Compensation, we critique existing executive pay arrangements and the corporate governance processes producing them, and put forward proposals for improving both executive pay and corporate governance. This paper provides an overview of the main elements of our critique and proposals. We show that, under current legal arrangements, boards cannot be expected to contract at arm's length with the executives whose pay they set. We discuss how managers' influence can explain many features of the executive compensation landscape, including ones that researchers subscribing to the arm's length contracting view have long viewed as puzzling. We also explain how managerial influence can lead to inefficient arrangements that generate weak or even perverse incentives, as well as to arrangements that make the amount and performance-insensitivity of pay less transparent. Finally, we outline our proposals for improving the transparency of executive pay, the connection between pay and performance, and the accountability of corporate boards.
Lucian A. Bebchuk & Jesse M. Fried, Stealth Compensation via Retirement Benefits, 1 Berkeley Bus. L.J. 293 (2004).
Categories:
Labor & Employment
,
Corporate Law & Securities
Sub-Categories:
Securities Law & Regulation
,
Executive Compensation
,
Retirement Benefits & Social Security
Type: Article
Abstract
This paper analyzes an important form of "stealth compensation" provided to managers of public companies. We show how boards have been able to camouflage large amount of executive compensation through the use of retirement benefits and payments. Our study highlights the significant role that camouflage and stealth compensation play in the design of compensation arrangements. Our study also highlights the significance of whether information about compensation arrangements is not merely publicly available but also communicated in a way that is transparent and accessible to outsiders.
Jesse M. Fried, Insider Abstention, 13 Yale L.J. 455 (2003).
Categories:
Corporate Law & Securities
Sub-Categories:
Securities Law & Regulation
Type: Article
Abstract
According to conventional wisdom, insiders' use of private information to abstain from trading raises the same policy concerns as insider trading. This widely held perception has dominated much of the academic debate over the regulation of insider trading. I show that this view is flatly incorrect: as long as insiders cannot trade while in possession of nonpublic information, their ability to use nonpublic information to abstain from trading does not make them better off than public shareholders. I then explain why insider abstention cannot give rise to the same type of economic distortions that might be associated with insider trading. I conclude by analyzing the implications of my findings for a number of issues in insider trading regulation, including the use vs. possession debate and the Rule 10b5-1 safe harbor.
Lucian A. Bebchuk, Jesse Fried & David Walker, Managerial Power and Rent Extraction in the Design of Executive Compensation, 69 U. Chi. L. Rev. 751 (2002).
Categories:
Corporate Law & Securities
,
Disciplinary Perspectives & Law
Sub-Categories:
Corporate Law
,
Corporate Governance
,
Empirical Legal Studies
Type: Article
Jesse M. Fried & Alon Chaver, Managers' Fiduciary Duty Upon the Firm's Insolvency: Accounting for Performance Creditors, 55 Vand. L. Rev. 1813 (2002).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Bankruptcy & Reorganization
,
Corporate Governance
,
Fiduciaries
,
Shareholders
Type: Article
Abstract
The leading view among corporate law scholars is that an insolvent firm's managers should maximize the sum of the values of all financial claims - both those held by shareholders and those held by creditors - against the firm. This Article points out a previously unrecognized problem with this financial value maximization (FVM) approach. What FVM proponents have overlooked is that an insolvent firm is likely to have two types of creditors: (1) payment creditors - parties owed cash, who hold financial claims against the firm; and (2) performance creditors - parties owed contractual performance, who hold claims for performance against the firm. The FVM approach requires managers to take into account the effect of their actions on payment creditors but not on performance creditors. We show that FVM's failure to account for performance creditors might cause an insolvent firm's managers to act in a way that harms performance creditors more than it benefits those with financial claims against the firm and, therefore, is inefficient. Our analysis indicates that an insolvent firm's managers should be obligated to maximize the sum of the values of all claims (both cash and performance) against the firm. This approach, we show, would eliminate the distortions associated with the FVM approach and make shareholders better off ex ante.
Lucian A. Bebchuk & Jesse Fried, A New Approach to Valuing Secured Claims in Bankruptcy, 114 Harv. L. Rev. 2386 (2001).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Secured Transactions
,
Corporate Law
,
Corporate Bankruptcy & Reorganization
Type: Article
Jesse M. Fried, Open Market Repurchases: Signaling or Managerial Opportunism?, 2 Theoretical Inquiries L. 865 (2001).
Categories:
Corporate Law & Securities
Sub-Categories:
Shareholders
,
Securities Law & Regulation
,
Corporate Governance
Type: Article
Abstract
Managers conduct open market repurchases (“OMRs”) for many different reasons, including to distribute excess cash. However, the most widely discussed explanation for OMRs is the “signaling theory:” that managers announce OMRs to signal that the stock is underpriced. The first purpose of this paper is to show that the signaling theory is theoretically problematic—in part because it assumes managers deliberately sacrifice their own wealth to increase that of shareholders—as well as inconsistent with much of the empirical evidence. The second purpose of the paper is to put forward an alternative explanation for managers’ use of OMRs: the managerial-opportunism theory. This theory, which assumes that managers seek to maximize their own wealth, predicts that managers announce OMRs both when the stock is underpriced and when it is not. When the stock is underpriced, managers may announce and conduct an OMR to transfer value to themselves and other remaining shareholders. When managers wish to sell a large portion of their shares, they announce an OMR to boost the stock price before selling their shares. The paper shows that managerial opportunism is not only a more plausible motive for OMRs than is signaling, it is also more consistent with the empirical data. The paper concludes by describing some testable predictions of the theory.
Jesse M. Fried, Insider Signaling and Insider Trading with Repurchase Tender Offers, 67 U. Chi. L. Rev. 421 (2000).
Categories:
Corporate Law & Securities
Sub-Categories:
Shareholders
,
Securities Law & Regulation
,
Corporate Governance
Type: Article
Abstract
Cash distributed to public shareholders is distributed through three mechanisms: dividends, open market repurchases (OMRs), and repurchase tender offers (RTOs). The leading explanation for why a corporation would distribute cash through an RTO rathe than an OMR or a dividend is the signaling theory: that managers use RTOs to signal that the stock is underpriced. The Article has three main purposes: (1) to challenge the signaling theory, by exposing a flaw in one of its key assumptions and presenting empirical data suggesting that the theory cannot account for most RTOs; (2) to show that the same empirical data are consistent with insiders using RTOs to engage in insider trading with public shareholders; and (3) to propose that insiders be (a) required to disclose their tendering decision before the close of the RTO and (b) forbidden from selling stock outside of the RTO until six months after the announcement date. The Article explains how this disclose/delay rule would substantially reduce insiders' ability to use RTOs for insider trading, without interfering with the use of RTOs for any other purpose (including signaling).
Jesse M. Fried, Reducing the Profitability of Corporate Insider Trading Through Pretrading Disclosure, 71 S. Cal. L. Rev. 303 (1998).
Categories:
Corporate Law & Securities
,
Labor & Employment
Sub-Categories:
Securities Law & Regulation
,
Corporate Governance
,
Executive Compensation
Type: Article
Abstract
Over the last six decades, the federal government has constructed an extensive system of civil and criminal laws designed to reduce the ability of corporate insiders to make profits trading on inside information. During the 1980s, the government sought to increase the system's effectiveness by increasing penalties and devoting more resources to enforcement. However, both the volume of trading by corporate insiders and the profits these insiders make from corporate insider trading have increased dramatically since these measures were put into effect. In fact, I calculate that corporate insiders make almost $5 billion per year in insider trading profits. After surveying the evidence that corporate insiders trade on inside information, this Article explains why insiders are able to engage in such trading. The Article then puts forward a simple method for reducing insiders' ability to make profits trading on inside information: requiring insiders to disclose publicly their intended trades shortly before submitting orders to their brokers. The Article shows that this pretrading disclosure rule could substantially reduce aggregate corporate insider trading profits. The Article also explains how adopting a pretrading disclosure rule would enable the government to eliminate some of the existing restrictions on insiders' trading and thereby reduce the overall regulatory burden on insiders.
Lucian A. Bebchuk & Jesse Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy: Further Thoughts and a Reply to Critics, 82 Cornell L. Rev. 1279 (1997).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Secured Transactions
,
Corporate Bankruptcy & Reorganization
Type: Article
Jesse M. Fried, Taking the Economic Costs of Priority Seriously, 51 Consumer Fin. L. Q. Rep. 328 (1997).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Secured Transactions
,
Corporate Bankruptcy & Reorganization
Type: Article
Lucian A. Bebchuk & Jesse Fried, The Uneasy Case for the Priority of Secured Claims in Bankruptcy, 105 Yale L.J. 857 (1996).
Categories:
Corporate Law & Securities
,
Banking & Finance
Sub-Categories:
Secured Transactions
,
Corporate Bankruptcy & Reorganization
Type: Article
Abstract
This paper reexamines a longstanding principle of bankruptcy law: that secured claims are entitled to be paid in full before unsecured claims receive any payment. There is a widespread consensus among legal scholars and economists that according full priority to secured claims is desirable because it promotes economic efficiency. Our analysis, however, demonstrates that full priority actually distorts the arrangements negotiated between commercial borrowers and their creditors, producing various efficiency costs. We show that according only partial priority to secured claims could eliminate or reduce these efficiency costs - and that such an approach might well be superior to the rule of full priority. The analysis also suggests that a mandatory rule of partial priority could be effectively implemented within the framework of existing bankruptcy law, and that such an approach would be consistent with fairness and freedom of contract considerations. We therefore present two different rules of partial priority that should be considered as alternatives to full priority.
Jesse M. Fried, Executory Contracts and Performance Decisions in Bankruptcy, 46 Duke L.J. 51 (1996).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Bankruptcy & Reorganization
Type: Article
Abstract
This paper focuses on the treatment in bankruptcy of a debtor's executory contracts - contracts under which the debtor still owes (or is owed) performance at the time it files for bankruptcy. Under the bankruptcy laws of most countries, including the U.S., the bankruptcy trustee usually disposes of an executory contract in one of two ways: either by (1) assuming and seeking performance of the contract; or by (2) rejecting the contract, in which case any resulting damage claim is treated as a prebankruptcy unsecured claim and receives its ratable share of the assets available to pay unsecured claims. Since such unsecured claims are typically paid only a fraction of their face amount, a party injured by rejection usually receives less than full compensation. This approach is widely supported by U.S. bankruptcy commentators. The paper first explains how this ratable damages rule can give the bankruptcy trustee an incentive to reject contracts when performance would be efficient. It then shows that the manner in which the ratable damages rule is actually applied by U.S. courts tends to worsen the problem. The paper concludes by considering various arrangements for eliminating the distortion.

Current Courses

Course Catalog View