Jesse M. Fried

Dane Professor of Law

Griswold 506

617-384-8158

Assistant: Lauren Semrau / 617-384-9814

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, 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, Pay without Performance: Overview of the Issues, 20 Acad. Mgmt. Persp. 5 (2006).
Categories:
Corporate Law & Securities
Sub-Categories:
Corporate Law
,
Corporate Governance
,
Securities Law & Regulation
,
Shareholders
Type: Article
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
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
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
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.

Current Courses

Course Catalog View

Griswold 506

617-384-8158

Assistant: Lauren Semrau / 617-384-9814