Faculty Bibliography

Approaches to calculating fraud on the market 10b-5 damages have evolved substantially from the 1970s to the present. In this Essay I discuss the various approaches used over this span of time, including the rise of the event study approach.

Corporations pay out large settlements to their shareholders and other plaintiffs as compensation for corporate governance failures. Hired to achieve and improve settlements, plaintiff law firms can play a central role in litigation outcomes. We provide first systematic evidence of their performance. In our novel comprehensive dataset, top plaintiff law firms (“stars”) capture 48% larger settlements. Defendant corporations’ litigation insurance coverage is also 39% larger, suggesting assortative matching of stars with lawsuits that have ex-ante large expected payoffs. Stars’ visibility and information advantage vis-à-vis less sophisticated plaintiffs help sustain their market share.

This chapter reviews the benefits and costs of using indices, in particular the G- and E-indices, in empirical corporate governance research. As with corporate governance itself, the widespread use of corporate governance indices have both costs and benefits. The literature has identified a number of concerns with the use of these indices including concerns over measurement error, endogeneity, reverse causation, omitted variables and proper identification of the actual mechanisms by which corporate governance might matter. On the other hand, these indices enjoy several important benefits that explain their continued and widespread use. It concludes that event study methodology and the utilization of legal shocks/regulatory discontinuities for identification will likely play an ever greater role in future research.

This essay, written for the Conference on the New Special Study of Securities Markets at Columbia Law School, identifies the key regulatory challenges posed by institutional intermediaries in America’s capital markets. We survey existing legal and economic research and suggest new areas for regulatory reform and scholarly inquiry. We cover registered investment companies (such as mutual funds), private investment funds (such as hedge funds and private equity funds), credit-rating agencies, and broker-dealers.

The Supreme Court decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), reaffirmed the availability of the fraud-on-the-market presumption of “reliance” for purposes of a Rule 10b-5 class certification. At the same time, the Court held that defendants could rebut the presumption if they could provide “direct evidence” that the alleged misrepresentations did not in fact impact the price of the security (i.e., a lack of price impact). In this Article we discuss various issues that have arisen in lower court rulings that have addressed Halliburton price impact arguments. These issues include the relationship between materiality and price impact, the distinction between hypothetical versus actual changes in the total mix of information made available to the market, the use of event studies, and some lower courts’ refusal to consider certain types of economic evidence in the context of price impact arguments.

In this paper we will present and discuss four different methodologies for calculating ERISA damages — what we will label the “best-performing fund,” “portfolio redistribution,” “most similar fund,” and “10b-5 style” ERISA damage methods. For purposes of demonstrating how these ERISA damage methods work in practice we will use facts and data from an actual ERISA litigation matter. These different ERISA methods can result in strikingly different damage estimates. In the ERISA matter we analyze, for instance, aggregate damages can range from less than U.S.$3 million, using the “most similar fund” approach, to well over U.S.$2 billion using the “best-performing fund” ERISA damage method.

This paper explores the robustness of the positive association between shareholder rights and abnormal stock returns (using the Fama-French-Cahart four factor model) and potential explanations thereof. Utilizing hand-collected shareholder rights data for the 1978-1989 period in conjunction with the existing post-1990 RiskMetrics data, we document that: (1) over the 1978-2007, the association is generally robust to a variety of controls and estimating abnormal returns at the portfolio or firm-level; (2) this association co-varies with merger and acquisition (M&A) waves; (3) while being acquired and making acquisitions are both strongly associated with abnormal stock returns, these effects do not explain the positive association; and (4) once the four factor model is supplemented with the Cremers, Nair & John (2009) takeover factor – which captures risk associated with time-varying investment opportunities and thus relates to the state of the M&A market – the association disappears.

Using the traditional event study approach in the context of securities litigation, the determination of the "materiality" of a firm disclosure hinges on the statistical significance of the abnormal share price change (i.e., return) on the disclosure day. To estimate per share damages, the abnormal return is then transformed to an abnormal dollar impact. It is often assumed that if the abnormal return on a disclosure day is statistically significant, so is the abnormal dollar effect. We demonstrate - first analytically and then through an empirical example - that need not be the case. We derive the proper t-statistic if one wishes to determine the statistical significance of an abnormal dollar effect. This has obvious implications for liability and damages in securities litigation matters.

The prices charged retail customers by broker-dealers for less-liquid, lower-priced securities have been of long-standing regulatory concern. In particular, the National Association of Securities Dealers (succeeded now by the Financial Industry Regulatory Authority) has long had regulations prohibiting broker-dealers from charging excessive “mark-ups” and “mark-downs.” This paper, using a unique dataset generously provided by the National Association of Securities Dealers tracking some 161,635 equity transactions involving fourteen broker-dealers and retail customers in largely less liquid, lower-priced securities over the course of the 2003-2005 period, provides the first comprehensive analysis of the determinants of the mark-ups and mark-downs charged by broker-dealers. In particular, the effect of broker-dealer solicitation, broker-dealer participation in the trade as a principal, stock price volatility, stock price level, trade volume and the bid-ask spread are examined on the size of mark-ups and mark-downs charged. This analysis is placed in the context of the law on mark-ups and mark-downs.

This paper addresses one of the key issues – the foreseeability of the housing market downturn that began in September of 2007 and intensified in the fourth quarter of 2007 – that must be addressed in assessing the extensive securities class action litigation that has been filed against financial institutions (and others) seeking to recover damages for investor losses arising out of the credit market crisis. We begin our analysis of this issue by first discussing the legal centrality of this issue to much of this litigation. We then turn to answer the question of when the housing market downturn became foreseeable by analyzing housing prices (regional and nationwide), housing sales, housing future contracts, and various market spreads such as the ABX triple A indexes. We conclude that these data are consistent with the view that the housing market downturn was in fact not foreseen by the market prior to the fourth quarter of 2007.

We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990-2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.

This paper explores the economic and legal causes and consequences of the 2007-2008 credit crisis. We provide basic descriptive statistics and institutional details on the mortgage origination process, mortgage-backed securities (MBS), and collateralized debt obligations (CDOs). We examine a number of aspects of these markets, including the identity of MBS and CDO sponsors, CDO trustees, CDO liquidations, MBS insured and registered amounts, the evolution of MBS tranche structure over time, mortgage originations, underwriting quality of mortgage originations, and writedowns of the commercial and investment banks. We discuss the financial difficulties faced by investment and commercial banks. In light of this discussion, the paper then addresses questions as to whether these difficulties might have been foreseen, and some of the main legal issues that will play an important role in the extensive litigation (summarized in the paper) that is underway, including the Rule 10b-5 class-action lawsuits that have already been filed against the banks, pending ERISA litigation, the causes-of-action available to MBS and CDO purchasers, and litigation against the rating agencies. In the course of this discussion, the paper discusses three principles that will likely prove central in the resolution of the securities class-action litigation: (1) "no fraud by hindsight"; (2) "truth on the market"; and (3) "loss causation."

One of the most important changes in modern finance over the last three decades is the increased understanding and use of financial derivatives. These contracts, which include options, futures, and swaps, are created by financial firms for corporate issuers who seek to tailor their liability claims and lower their costs of capital. ...

In order to have recoverable damages in a Rule 10b-5 action, plaintiffs must establish loss causation, i.e. that the actionable misconduct was the cause of economic losses to the plaintiffs. The requirement of loss causation has come to the fore as the result of the Supreme Court's landmark decision in Dura Pharmaceuticals v. Broudo. We address in this paper a number of loss causation issues in light of the Dura decision, including issues surrounding the proper use of event studies to establish recoverable damages, the requirement that there be a corrective disclosure, what types of disclosure should count as a corrective disclosure, post-corrective disclosure stock price movements, the distinction between the class period and the damage period, collateral damage caused by a corrective disclosure, and forward-casting estimates of recoverable damages.

The widely studied phenomenon of underpricing of new issues of common stock can be explained by underwriters' payoff asymmetry. Under uncertain investors' demand for a new issue, the underwriter's downside risk if he overestimates demand can be significantly larger than the upside potential when he underestimates demand. To protect himself from the large downside risk of overestimating demand, the underwriter rationally chooses a lower offer price than he would have in the absence of demand uncertainty.

Mandated disclosure requirements placed on publicly-traded firms constitute the core of U.S. securities regulation. Despite their importance, few empirical studies have been done on the impact of mandated disclosure requirements on the capital markets. Using a unique database created for this study, this paper examines the impact the 1964 imposition of mandated disclosure requirements had on the over-the-counter market in terms of stock returns, volatility and stock price synchronicity. Despite this being the only fundamental change in the scope of mandated disclosure in the U.S. in the twentieth century - with the exception of the initial securities acts of the 1930s - this regulatory change has never been examined. This study finds that there was a dramatic reduction in the volatility of OTC stock returns associated with the imposition of mandated disclosure. At the same time, there was no change stock price synchronicity associated with mandated disclosure. The evidence on stock returns is consistent with a positive abnormal return associated with the imposition of mandatory disclosure.

The desirability of mandatory disclosure requirements in securities regulation has been the subject of a longstanding debate among corporate law scholars and economists. The debate has largely focused on the desirability of mandatory disclosure requirements in the United States, a country characterized by dispersed ownership structures. This article argues that there are strong theoretical reasons to believe that mandatory disclosure requirements can play a socially useful role in countries with concentrated ownership structures. Controlling shareholders will tend to prefer poor firm transparency, to protect their private benefits of control, even if the presence of a demanding disclosure regime would have the socially desirable effect of increasing competition in the capital and product markets and reducing the agency costs associated with concentrated ownership structures. Recent empirical work is consistent with mandatory disclosure requirements fulfilling the valuable role of enhancing competition and reducing agency costs.

Recently there has been a dramatic change in the organizational structure of exchanges as they have demutualized and converted into for-profit entities. This has been accompanied by a public listing of shares on the exchange itself. These changes have been driven by technological and competitive forces and have resulted in a new paradigm for the governance of exchanges. The new organizational structure has raised several regulatory issues. At the same time that exchanges have themselves become public companies, there have also been major changes in the governance requirements of listed companies that trade on exchanges. Many of these changes have been prompted by the Sarbanes-Oxley legislation, new exchange regulations, and changes mandated by the SEC. The new requirements have impacted the capital raising process globally and the choice of listing venue. These developments have in turn intensified competition among exchanges and may lead to a wave of cross-border consolidations. Globalization of exchanges will create challenges for nation-based regulation and we offer some suggestions for resolving the regulatory impediments.

This paper addresses the following question in the context of considering the recommendations of the High Level Group of Company Law Experts on Takeover Bids: Why does Continental European takeover law matter given the concentrated ownership structure of most Continental European firms? In answering this question, the paper discusses the interaction between takeover rules and ownership structure and the possible lessons that can be drawn from the British and American experience with takeover regulation. While a ban on the use of defensive tactics without shareholder approval (possibly in conjunction with a mandatory bid rule) can theoretically have the effect of either encouraging or discouraging the adoption of dispersed-ownership structures, the empirical evidence suggests that the former would be the more likely result. Moreover, the British and American experience highlights the importance of adopting a takeover regime earlier rather than later in time.

Despite the considerable research that has occurred over the twenty years following the publication of Ronald Gilson's and Reinier Kraakman's article, The Mechanisms of Market Efficiency, there still remains a fundamental puzzle concerning the price fluctuations of securities. The explanatory power - the R squared - of various models used by financial economists to explain security price fluctuations is quite low, in the range of .20 to .30. What accounts for the other 70% to 80% of price fluctuations? This paper explores the challenges this puzzle poses to our understanding of security markets, the role played by mechanisms of market inefficiency (noise traders) as well as various mechanisms of market efficiency (information revelation via trading; the firm as arbitrageur) and the impact of legal institutions and practices on the operation of security markets.

Focuses on the payment for order flow practice in which prices securities markets offer payments to brokers in exchange for brokers routing orders of investors to them. Ways to restructure a securities market represented by auction and dealers market; Inefficiencies in broker routing of investors' orders to securities market; Discussion on the regulatory structures that have been developed by the Securities and Exchange Commission.

An issue that has increasingly occupied the attention of the Securities and Exchange Commission is “payment for order flow.” This is the practice whereby securities markets compete for orders placed by brokers by providing side payments to brokers in return for brokers promising to send them investors’ orders. Does this create inefficient nonprice competition between securities markets? This Article argues that it does, that all the proposed solutions (including the SEC’s disclosure requirements) miss the mark, and that the problem is really a result of the SEC’s regulation of the prices at which investors’ orders must be filled. As this paper will show, permitting brokers to credit investors’ orders with the National Best Bid or Offer (NBBO) price regardless of any price improvement realized on these orders would ensure an efficient allocation of investors’ orders across securities markets.

An issue that has increasingly occupied the attention of the Securities and Exchange Commission is "payment for order flow." This is the practice whereby securities markets compete for orders placed by brokers by providing side payments to brokers in return for brokers promising to send them investors' orders. Does this create inefficient nonprice competition between securities markets? The paper argues that it does, that all the proposed solutions (including the SEC's disclosure requirements) miss the mark, and that the problem is really a result of the SEC's regulation of the prices at which investors' orders must be filled. Remove this regulatory bar (with a few wrinkles) and the problem would be resolved without the need for the current cumbersome and expensive regulatory apparatus.