Faculty Bibliography

The number of public firms in the United States has halved since the beginning of the twenty-first century, causing consternation among corporate and securities law regulators. The dominant explanations, often advanced by Securities and Exchange commissioners when considering policy initiatives, come from over- or under- corporate regulation of the stock market. The central legal explanation is that corporate and securities law has made the cost of being public too high. Conversely, goes the second legal explanation, capital-raising rules for private firms were once very strict but have loosened up. Private firms can now raise capital nearly as well as small- and medium-sized public firms. Either way, these views see legal imperatives as explaining the sharp decline in the public firm.We challenge the implications of this thinking. While the number of firms has halved, public firms’ economic weight has not halved. To the contrary, the public firm sector is bigger by every other measure: total stock market capitalization is up greatly over the past three decades, profits are up, revenues are up, investment is up, and employment is up. Moreover, stock market capitalization, profits, revenues, and investment have not only increased but have all grown faster than the economy.The second challenge we pose is whether the explanation for the changing configuration of the public firm sector lies primarily in legal explanations. In other policy circles—at the Federal Trade Commission or the Justice Department’s Antitrust Division, for example—policymakers ask why American industry is so much more concentrated now, with fewer firms in most industries today than there were at the end of the twentieth century. Yet these policymakers bring forward antitrust and industrial organization explanations, not corporate or securities regulation. Little crossover exists between these two policymaking circles, one focusing on corporate and securities regulation (the SEC) and the other on competition (the FTC). We bring forward real economy changes that could readily explain the reconfiguration of the American public firm sector to one that is more profitable, more valuable, and with bigger but fewer firms. These real economy developments are largely tied to industrial organization via changes in antitrust enforcement or changes in the efficient scope of the firm. In a single article, this explanatory effort can only be exploratory. Multiple researchers in multiple efforts will be needed to explain which real economy forces have an impact and which do not. We begin this effort: There are fewer firms, but the firms are bigger, more profitable and often in more concentrated industries. We show why the legal explanation is unlikely to be the complete story for the package of changes over the past quarter-century and probably not even the most important one. Corporate policymakers should adjust appropriately.

In corporate law policymaking, there is considerable attention to stock market short-termism. Public discourse pins some noticeable part of the blame for climate change, environmental damage, and mistreatment of stakeholders on stock market short-termism. Presidential candidates raise the issue and castigate the stock market for short-termism; and it’s regularly invoked to justify securities regulation proposals and corporate case-law decisions. Here I examine the extant economic empirical work on stock market short-termism to assess whether it supports making stock market short-termism actionable in a major way for policy purposes. I evaluate it in two dimensions: first to see whether a consensus emerges from the work (none does) and second to see whether the work is conceptually structured to reveal its economy-wide severity. The latter conceptual point – the difficulty in scaling much corporate research to ascertain whether there’s an economy-wide problem – affects not just the stock market short-termism inquiry. The typical research effort seeks to measure whether a local treatment induces more local short-termism, not whether the economy-wide impact is severe. But evaluating short-termism’s economy-wide impact is essential for policymaking; policymakers must consider whether the economy is failing to invest or cutting back on R&D because of a stock market afflicted with a truncated time horizon. Local findings (of the impact on a subset of firms with a particular characteristic, such as short-vesting stock options, rapid stock market trading, or hedge fund activism) need not scale to economy-wide results; some local results will do so only serendipitously; and, finally, there are structural reasons why for stock market short-termism one should expect economy-wide results not to match local results. More than most corporate law issues, the short-termism problem faces a high failure-to-scale hurdle.

The primary stock market characteristic driving climate issues is not a truncated time horizon. It’s the corporation’s capacity to externalize environmental and climate harms.

The book shows that blaming short-termism overlooks the real causes of declining investment, R&D cutbacks, environmental deterioration, and workplace conflict.

What precisely is stock market short-termism? For an issue that pervades corporate governance thinking, rhetoric, and policymaking, one would think that we know well what it is. But much that’s called stock market short-termism is not properly categorized as such. This distinction—between true stock-market short-termism and false short-termism—is the focus of this article.

By sharply favoring debt over equity, the U.S. corporate tax does considerable economic damage, writes professors Mark Roe and Michael Troege. Instead, they suggest we take a look at Allowance for Corporate Equity—or ACE—which fixes a tax-deductible cost to equity based on government bond rates.

The large American corporation faces ever-rising pressure to pursue a purpose that’s more than just for shareholder profit. This rising pressure interacts with sharp changes in industrial organization in a way that has not been comprehensively analyzed and is generally ignored. Firms’ capacity to accommodate pressure for a wider purpose is rising as well. Three changes are most relevant: the possibility of declining competition, the counter-possibility that what seems to be a competitive decline is really increasing winner-take-all competition, and the possibility that the ownership of the big firms has concentrated (even if the firms themselves have not) and thereby diluted competitive zeal. Consider competitive decline: In robustly competitive economies, firms cannot deviate much from profit maximization for expensive corporate purpose programs unless expanded purpose bolsters profitability (by branding the firm positively for consumers or by better motivating employees, for example). In economies with slack competition, in contrast, monopolistic and oligopolistic firms can accommodate purpose pressure, sometimes even expensive purpose pressure, from the profits they garner above what a competitive firm requires. In simplistic form, purpose can pressure such firms to redirect their excess profit from shareholders to stakeholders—to customers, employees, or the public good—in ways that firms in strongly competitive industries cannot. By most accounts, competition has been declining in the United States. By some accounts, it has declined precipitously. That decline suggests three possibilities: One—the central thesis of this Article— purpose pressure has greater potential to succeed if competition has declined or rents have otherwise grown; in competitive markets, the profit-oriented purpose-pressured firm has no choice but to refuse the purpose pressure (or to give it only lip service), while in monopolistically-organized industries, the purpose-pressured firm has more room to maneuver. Two, the normative bases undergirding shareholder primacy, although still strong, are less powerful in monopolistic markets. Three, declining corporate competition and rising corporate profits create a lush field for social conflict inside the firm and the polity for shareholders and stakeholders to seek a share of those profits. The result can infuse basic corporate governance with social conflict. This new, or expanded, field for conflict can contribute to and exacerbate our rising political and social instability. Expanding purpose pressure is one manifestation of this conflict.

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly and needed much cash for the just-begun construction of the River Rouge factory, which was said to be the world’s largest when completed. Second, to stymie union organizers and to motivate his new assembly-line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker buy-in. And, third, if Ford explicitly justified his acts as in pursuit of the monopoly profit in the litigation, the Ford brand would have been damaged with both his workforce and the car buyers. The transactions underlying Dodge v. Ford and resulting in the court order that a very large dividend be paid should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly line produced, with Ford’s business requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reconsidered. Ford had a true business purpose to cutting back the dividend—spending on labor and a vertically integrated factory to solidify his monopoly and splitting the monopoly profit with labor—but he would have jeopardized the strategy’s effectiveness by boldly articulating it.The existing main interpretations of the corporate law decision and its realpolitik remain relevant—such as Ford seeking to squeeze out the Dodge brothers by cutting the Ford dividend to deny the Dodge brothers cash for their own car company. But those interpretations must take a back seat, as none fully encompasses the industrial setting—of monopoly, incipient union organizing, and a restless workforce. Without accounting for Ford Motor’s monopoly, the River Rouge construction, and the related labor tensions, we cannot fully understand the Dodge v. Ford controversy. Stakeholder pressure can more readily succeed in a firm having significant economic rents, a setting that seems common today and was true for Ford Motor Company in the 1910s.

The notion of stock-market-driven short-termism relentlessly whittling away at the American economy’s foundations is widely accepted and highly salient. Presidential candidates state as much. Senators introduce bills assuming as much. Corporate interests argue as much to the Securities and Exchange Commission and the corporate law courts. Yet the academic evidence as to the problem’s severity is no more than mixed. What explains this gap between widespread belief and weak evidence? This Article explores the role of narrative power. Some ideas are better at being popular than others. The concept of pernicious stock market short-termism has three strong qualities that make its narrative power formidable: (1) connotation — the words themselves tell us what is good (reliable long-term commitment) and what is not (unreliable short-termism); (2) category confusion — disparate types of corporate misbehavior, such as environmental degradation and employee mistreatment, are mislabeled as being truly and primarily short-termism phenomena emanating from truncated corporate time horizons (when they in fact emanate from other misalignments), thereby making us view short-termism as even more rampant and pernicious than it is; and (3) confirmation — the idea is regularly repeated, because it is easy to communicate, and often boosted by powerful agenda-setters who benefit from its repetition. The Article then highlights the real-world implications of narrative power — powerful narratives can be more certain than the underlying evidence, thereby leading policymakers astray. For example, a favorite remedy for stock-market-driven short-termism is to insulate executives from stock market pressure. If lawmakers believe that short-termism is a primary cause of environmental degradation, anemic research and development, employee mistreatment, and financial crises — as many do — then they are likely to focus on further insulating corporate executives from stock-market accountability. Doing so may, however, do little to alleviate the underlying problems, which would be better handled by, say, stronger environmental regulation and more astute financial regulation. Powerful narratives can drive out good policymaking.

Stock-market short-termism—stemming from rapid trading and activists looking for quick cash—is, a widespread view has it, hurting the American economy. Because stock markets will not support corporate long-term planning, the thinking goes, companies fail to invest enough, do not do enough research and development, and buy back so much of their stock that their coffers are depleted of cash for their future. This widespread view has induced proposals for remedy. One major proposal is for corporate “loyalty shares,” whereby stockholders who own their stock for longer periods would get more voting power than those who trade their stock quickly. That voting boost would, it’s hoped, support stability and sound long-term planning. Venture capitalists have already obtained the go-ahead from the Securities and Exchange Commission to found the “Long-Term Stock-Exchange,” as it is called—whose centerpiece has been loyalty shares and their concomitant voting boost for companies on the new exchange. In this article, we show why loyalty shares promoters’ thinking is overly optimistic. Facilitating insider control will be loyalty shares’ dominant motive and effect. Long-term thinking, planning, and investing will be weaker motivations and effects. Indeed, loyalty shares will at times undermine long-term planning at companies that use them.Loyalty share voting boosts would shift voting power in those U.S. public companies that adopt them, but they will not shift voting power toward shareholders most likely to promote the long-term. Instead, we should expect loyalty shares to empower conflicted corporate players who seek not more corporate focus on the long-term but to better protect themselves and their corporate positions. Controller-insider self-interest will dominate their motivation, not fighting short-termism, because insiders have self-interested reasons to lock in control and shut down outsiders, even if doing so fails to improve corporate time horizons. Policymakers with a bona fide long-term vision will find themselves frustrated by the outcome. Existing data from Europe, where loyalty shares are more extensively used thus far than in the United States, supports this structural analysis. Control motivations dominate; long-term motivations are pale or absent from the on-the-ground practice. Other reasons—as yet undiscussed as far as we can tell—may well justify opening corporate law to loyalty share programs. We introduce to the loyalty share analysis the ex ante value to the entrepreneur of retaining control—i.e., loyalty shares can help to motivate founders and thereby induce new entry, new start-ups, and new, original entrepreneurial activity. Weighing the value of continued control in fostering start-ups and original entrepreneurial activity against its later costs is not easy and it is not obvious which weighs more but, if there is economy-wide value to loyalty shares, that motivational value is where it is likely to reside. For short-termism, policymakers should be skeptical that promoting sound corporate long-termism will be a major result of facilitating loyalty shares in the American corporation.

In July 2020, the European Commission published the “Study on directors’ duties and sustainable corporate governance” by Ernst & Young (EY). The Report purports to find evidence of debilitating short-termism in EU corporate governance and recommends many changes to support sustainable corporate governance. In this paper, we point out deep flaws in the Report’s evidence and analysis. We recently submitted the content of this paper in response to the European Commission’s call for feedback. Parallel issues have arisen in American discourse, although none has reached the incipient lawmaking level that it has in Europe. First, the Report defines the corporate governance problem as one of pernicious short-termism that damages the environment, the climate, and stakeholders. But the Report mistakenly conflates time-horizon problems with externalities and distributional concerns. Cures for one are not cures for the others and a cure for one may well exacerbate the others. Second, the Report’s main evidence for an increase in corporate short-termism is rising gross payouts to shareholders (dividends and stock repurchases). However, the more relevant payout measure to assess corporations’ ability to fund long-term investment is net payouts (gross payouts minus equity issuances), which is much lower and has left plenty of funds available for long-term and short-term investment. Third, when the Report turns to other evidence for short-termism, it selectively picks academic studies that support its views on short-termism, while failing to engage substantial contrary literature. Significant studies fail to detect short-termism and some substantial studies show excessive long-termism. Conceptually, some short-termism is an unfortunate but an inevitable side effect of effective corporate governance and may not be a first-order problem warranting wholesale reform. Finally, the Report touts cures whose effectiveness has little evidentiary support and, for some, there is real evidence that the cures could be counterproductive and costly.

To investigate the widespread claim that stock market short-termism is a major drag on U.S. corporate investment, R&D, and the broad economy, the author examines trends in corporate capital investment, buybacks, and R&D that stretch back, in some cases, over the past 50 years. (He briefly summarizes firm-level data and explains their limits in making policy recommendations.) As critics of market-driven corporate short-termism have pointed out, U.S. corporate investment in capital equipment and other tangible assets has been falling steadily since the late 1970s, and buybacks have been rising. This relationship is suggestive of large public firms pushing out their cash and weakening their capacity to invest. But if the story of economy-wide short-termist decline due to stock market pressure were valid and strong, we would expect to see the following: (1) investment spending in the United States declining faster than in Europe and Japan, where large companies depend less on stock markets for capital and where shareholder activists are less influential; (2) cash from large share buybacks inducing a bleeding out of cash from the U.S. corporate sector; and (3) economy-wide declines in corporate R&D spending. What the author reports, however, is U.S. corporate R&D spending, far from falling, has been rising since the 1970, and is rising faster than the economy is growing. And while corporate distributions of capital through dividends and gross buybacks have also been rising sharply for decades, corporate cash holdings (as a percentage of total assets), are at near record high levels. The best explanation for such high cash holdings together with record-high payouts—and perhaps the author’s most striking finding—is that such distributions are closely matched to new corporate borrowings. What’s more, the annual pattern of net payouts by S&P 500 companies, often mature companies, is remarkably similar to net new investment into smaller public companies outside of the S&P 500 companies. Since capital spending by European and Japanese companies—which face neither U.S.-style quarterly-oriented stock markets nor aggressive activist investors—has been falling more rapidly than in American companies suggests that U.S. capital markets may not be a particularly powerful source of corporate shortsightedness. The author brings forward alternative explanations. These trends do not preclude the possibility that had the critics’ proposals been in place decades ago, investment, R&D, and overall performance would have been even better. But before embarking on potentially expensive reforms we should have more confidence that there is indeed a severe problem that needs addressing. For example, while critics see short-termism as damaging American R&D, the numbers show corporate R&D spending to be rising, while government support for innovation and R&D has been falling since the financial crisis. If innovation needs more support, it’s the government cutbacks that would first seem to need to be addressed.

In July 2020, the European Commission published the “Study on directors’ duties and sustainable corporate governance” by EY. The Report purports to find evidence of debilitating short-termism in EU corporate governance and recommends many changes to support sustainable corporate governance. In this paper, we point out deep flaws in the Report’s evidence and analysis. We recently submitted the content of this paper in response to the European Commission’s call for feedback. First, the Report defines the corporate governance problem as one of pernicious short-termism that damages the environment, the climate, and stakeholders. But the Report mistakenly conflates time-horizon problems with externalities and distributional concerns. Cures for one are not cures for the others and a cure for one may well exacerbate the others. Second, the Report’s main ostensible evidence for an increase in corporate short-termism is rising gross payouts to shareholders (dividends and stock repurchases). However, the more relevant payout measure to assess corporations’ ability to fund long-term investment is net payouts (gross payouts minus equity issuances), which is much lower and has left plenty of funds available for long-term and short-term investment. Third, when the Report turns to other evidence for short-termism, it selectively picks academic studies that support its views on short-termism, while failing to engage substantial contrary literature. Significant studies fail to detect short-termism and some substantial studies show excessive long-termism. Conceptually, some short-termism is an unfortunate but an inevitable side effect of effective corporate governance and may not be a first-order problem warranting wholesale reform. Finally, the Report touts cures whose effectiveness has little evidentiary support and, for some, there is real evidence that the cures could be counterproductive and costly.

Explains that favorable treatment of derivatives and financial repurchase agreements under bankruptcy law weakens market discipline during ordinary financial times and exacerbates financial failure during an economic downturn or financial crisis. Safe harbors for such instruments facilitate collateral runs and fire sales and encourage short-term financing, which benefit from such privilege. The purpose of the special treatment, containment of contagion, is not accomplished and the resulting risk is to inefficiently burden other creditors including the United States government, which serves as de jure or de facto guarantor of significant financial institutions.

This Essay (the “Essay”) estimates the U.S. bankruptcy system’s ability to absorb an anticipated surge of financial distress among American consumers, businesses, and municipalities as a result of COVID-19. An increase in the unemployment rate has historically been a leading indicator of the volume of bankruptcy filings that occur months later. If prior trends repeat this time, the May 2020 unemployment rate of 13.3 percent will lead to a substantial increase in all types of bankruptcy filings. Mitigation, governmental assistance, the unique features of the COVID-19 pandemic, and judicial triage should reduce the potential volume of bankruptcies to some extent, or make it less difficult to handle, and it is plausible that the predictive power of the recent unemployment spike will be smaller than history would otherwise predict. We hope this will be so. Yet, even assuming that the worst-case scenario could be averted, our analysis suggests substantial, temporary investments in the bankruptcy system may be needed. Our model assumes that Congress would like to have enough bankruptcy judges to maintain the average bankruptcy judge’s caseload at no more than it was during the last bankruptcy peak in 2010, when the bankruptcy system was pressured and the public caseload figures indicate that judges worked 50 hour weeks on average. To keep the judiciary’s workload at 2010 levels, we project that, in the worst-case scenario, the bankruptcy system could need as many as 246 temporary judges—a very large number. But even in our most optimistic model, the bankruptcy system will still need 50 additional temporary bankruptcy judgeships, as well as the continuation of all current temporary judgeships. The optimistic model begins with the observation that an unusually large number of the unemployed believe that they are only temporarily furloughed and will be back at work soon. Accordingly, we (optimistically) removed the excess-from-baseline number of unemployed who believe they will be back at work shortly—as if they will be back at work shortly with no adverse impact on the economy’s channel to bankruptcies. That reduction yielded a projected need of between 50 and 69 fewer judges to maintain a judicial workload no greater than the one bankruptcy courts faced in the 2009 financial crisis. In other circumstances, the enormous uncertainty of what the bankruptcy caseload will be would warrant waiting to see what develops. And strong action probably will not occur until we see a major across-the-board rise in filings. (Large business filings are rising sharply now, but consumer filings are not rising.) The downside of a wait-and-see strategy is that full-scale bankruptcy court appointments need about a year to complete. The dilemma in what action to take now is that if bankruptcies do in fact rise by several-fold---a plausible but uncertain prospect, then waiting for the rise will lead to a large gap that will put the system one year behind where it ought to be if the filings had been anticipated as certain and acted upon. Hence, we recommend that the relevant players act on the optimistic estimation and re-assess bankruptcy needs as the economy evolves and more information develops. Judicial appointments need not be for the full term of a bankruptcy judge. Capacity can be added via temporary judges (of which there already are some in the bankruptcy court system) and by recalling recent retirees who are willing to serve.

This Essay (the “Essay”) estimates the U.S. bankruptcy system’s ability to absorb an anticipated surge of financial distress among American consumers, businesses, and municipalities as a result of COVID-19. An increase in the unemployment rate has historically been a leading indicator of the volume of bankruptcy filings that occur months later. If prior trends repeat this time, the May 2020 unemployment rate of 13.3 percent will lead to a substantial increase in all types of bankruptcy filings. Mitigation, governmental assistance, the unique features of the COVID-19 pandemic, and judicial triage should reduce the potential volume of bankruptcies to some extent, or make it less difficult to handle, and it is plausible that the predictive power of the recent unemployment spike will be smaller than history would otherwise predict. We hope this will be so. Yet, even assuming that the worst-case scenario could be averted, our analysis suggests substantial, temporary investments in the bankruptcy system may be needed. Our model assumes that Congress would like to have enough bankruptcy judges to maintain the average bankruptcy judge’s caseload at no more than it was during the last bankruptcy peak in 2010, when the bankruptcy system was pressured and the public caseload figures indicate that judges worked 50 hour weeks on average. To keep the judiciary’s workload at 2010 levels, we project that, in the worst-case scenario, the bankruptcy system could need as many as 246 temporary judges—a very large number. But even in our most optimistic model, the bankruptcy system will still need 50 additional temporary bankruptcy judgeships, as well as the continuation of all current temporary judgeships. The optimistic model begins with the observation that an unusually large number of the unemployed believe that they are only temporarily furloughed and will be back at work soon. Accordingly, we (optimistically) removed the excess-from-baseline number of unemployed who believe they will be back at work shortly—as if they will be back at work shortly with no adverse impact on the economy’s channel to bankruptcies. That reduction yielded a projected need of between 50 and 69 fewer judges to maintain a judicial workload no greater than the one bankruptcy courts faced in the 2009 financial crisis. In other circumstances, the enormous uncertainty of what the bankruptcy caseload will be would warrant waiting to see what develops. And strong action probably will not occur until we see a major across-the-board rise in filings. (Large business filings are rising sharply now, but consumer filings are not rising.) The downside of a wait-and-see strategy is that full-scale bankruptcy court appointments need about a year to complete. The dilemma in what action to take now is that if bankruptcies do in fact rise by several-fold---a plausible but uncertain prospect, then waiting for the rise will lead to a large gap that will put the system one year behind where it ought to be if the filings had been anticipated as certain and acted upon. Hence, we recommend that the relevant players act on the optimistic estimation and re-assess bankruptcy needs as the economy evolves and more information develops. Judicial appointments need not be for the full term of a bankruptcy judge. Capacity can be added via temporary judges (of which there already are some in the bankruptcy court system) and by recalling recent retirees who are willing to serve.

The Chief Justice of the Delaware Supreme Court begins by invoking the New Deal, and expressing admiration for the way its goals and some of its social programs have been put into practice by Northern European social democracies. Most important are their protections for workers and the unemployed—protections the Judge finds deplorably absent in U.S. law and corporate labor practices. Nevertheless, when contemplating how corporate boards in the U.S. might respond to the growing demand for U.S. public companies to address social problems like the environment and economic inequality, the Delaware judge falls back on the prescription of Adolph Berle, who, though one of the framers of the New Deal, insisted that companies “stick to their knitting” by putting shareholders first as the only way of ensuring the accountability of corporate managements and boards. Harvard Law's Mark Roe responds with a defense of corporate America against the charge of corporate short‐termism by noting that, although U.S. capital expenditures have declined in the past 15–20 years, corporate investment in R&D and other intangible assets have both grown sharply. Corporate distributions in the form of dividends and stock buybacks are rising, but so have the net borrowings of the companies making the distributions, leaving the cash balances of U.S. companies also near record levels. And the remarkably high valuations of successful high tech companies are themselves forceful rebuttals of the idea that pressure from the stock market for current earnings is a serious deterrent to investment and innovation. The University of Pennsylvania's Jill Fisch follows Roe's dismissal of the short‐termism argument with even more forceful questioning of whether corporate America in fact has a major governance problem. U.S. companies have been taking voluntary measures to address environmental problems—in some cases even in the face of federal deregulatory initiatives—and many have raised their workers’ wages, without any challenges (and often with encouragement) from their shareholders. And echoing Justice Strine's concerns, Fisch also ends up questioning the premise that companies can be asked to define a single social purpose (other than maximizing shareholder value) that would be appropriate for, and end up satisfying, all their different stakeholders. Columbia Business School's Bruce Kogut closes with the suggestion that our greatest problems today may be coming not from the shortsightedness and other failings of corporations and corporate law, but from “deep distrust of the competence of the state.” Kogut's main prescription is that to take advantage of the enormous potential gains from effective arm's‐length collaboration between business and the public sector, governments at all levels should find ways to strike “Coasian bargains” with the private sector that makes the best possible uses of the core competencies and resources of each.

Stock‐market–driven short‐termism is crippling the American economy, according to legal, judicial, and media analyses. Firms forgo the R&D they need, cut capital spending, and buy back their own stock so feverishly that they starve themselves of cash. The stock market is the primary cause: directors and executives cannot manage for the long term when their shareholders furiously trade their company’s stock, they cannot make long‐term investments when stockholders demand to see profits on this quarter’s financial statements, they cannot even strategize about the long term when shareholder activists demand immediate results, and they cannot keep the cash to invest in their future when stock market pressure drains away that cash in stock buybacks. This doomsday version of the stock‐market–driven short‐termism argument entails economy‐wide predictions that have not been well‐examined for their severity and accuracy. If the scenario is correct and strong, we should first see sharp increases in stock trading in recent decades and more frequent activist interventions, and these increases should be accompanied by (1) sharply declining investment spending in the United States, where large firms depend on stock markets and where activists are important, as compared to advanced economies that do not depend as much on stock markets, (2) buybacks bleeding cash out from the corporate sector, (3) economy‐wide R&D spending declining from what it should be, and (4) a stock market unwilling to support innovative, long‐term, technological firms. These are the central channels from stock‐market–driven short‐termism to overall economic degradation. They justify corporate law policies that seek to prevent these outcomes. But these predicted economy‐wide outcomes are either undemonstrated, implausible, or untrue. Corporate R&D is not declining, corporate cash is not bleeding out, and the world’s developed nations with neither American‐style quarterly oriented stock markets nor aggressive activist investors are investing no more intensely in capital equipment than the United States. The five largest American firms by stock market capitalization are tech‐oriented, R&D intensive, longer‐term operations. The economy‐wide picture is more one of capital markets moving capital from larger, older firms to younger ones; of a postindustrial economy doing more R&D than ever; and of an economy whose investment intensity depends on overall economic activity, not stock market trading nor hedge fund activism. True, the economy‐wide data could hide stock market hits that hold back R&D from increasing more and that weaken American capital spending more than is fitting for a post‐industrial economy. But if so, these effects have not been shown and several seem implausible. Hence, the calamitous form of the stock‐market–driven short‐termist argument needs to be reconsidered, recalibrated, and, quite plausibly, rejected. Then, last, comes the broadest question: why has a view that lacks strong economy‐wide evidentiary support become the rare corporate governance issue that attracts attention from the media, political players, policymakers, and the public—and that is widely accepted as true? I suggest why in this paper’s final part.

Much has been written and discussed in banking circles about recent rollbacks in prudential regulation, with some seeing the rollbacks as unsafe and others seeing them as allowing stronger financial action. Undiscussed is that the basic taxation of the corporation in the United States — and banks are taxed like ordinary corporations — has a profound impact on the level of debt and equity throughout the economy and in the banking system in particular, and that recent changes to the tax code could affect bank safety, stability, and capitalization levels. We analyze here how and why the 2017 tax act will incentivize banks to be better capitalized, albeit modestly so. For those worried about regulatory rollbacks that decrease bank safety, this tax incentive — which has been unremarked upon and not analyzed in the academic literature, as far as we can tell — offsets some recent regulatory rollbacks. And, more important analytically and potentially for policy, we show that this tax change, if properly expanded, would have a major beneficial safety impact on banks. Properly reformed, the taxation of banks (1) can substantially improve bank safety, at a level that may well rival the improvements from post-crisis regulation and (2) can be done in a revenue-neutral way.

In this chapter, we analyze three instances that illustrate the political economy of corporate governance. First, we examine how the politics of organizing financial institutions affects, and often determines, the flow of capital into the large firm, thereby affecting, and often determining, the power and authority of shareholder-owners. Second, we show how continental European nations have been slow in developing diffusely owned public firms in the years after World War II. The third political economy example deals with management in diffusely owned firms. The chapter also looks at the historical organization of capital ownership in the United States, noting how the country’s fragmented financial system limited the institutional blockholders and increased managerial autonomy over the years. Finally, it discusses the power of labor in postwar Europe, political explanations for the continuing power of the American executive and the board in recent decades, other political economy channels for corporate governance, and the limits of a political economy analysis.

In this chapter I examine whether short-termism in stock markets justifies using corporate law to further shield managers and boards from shareholder influence, to allow boards and managers to pursue their view of sensible long-term strategies in their investment and management policies even more freely. First, the evidence that on stock market short-termism is mixed and inconclusive, with managerial mechanisms under-rated sources of short-term distortions, including managerial compensation packages whose duration often is shorter than that of institutional stockholding; further insulating boards from markets would exacerbate these managerial short-term-favoring mechanisms. Nor are courts well positioned to make this kind of basic economic policy, which if serious is better addressed with policy tools unavailable to courts.

The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors.Most individual shareholders cannot obtain full information about a corporation’s speech or political activities, even after the fact, nor can most shareholders prevent their savings from being used for political activity with which they disagree. More generally, the Court's focus on whether union non-members are effectively forced to fund political speech or activity with which they disagree should reflect the fact that most Americans must routinely fund speech with which they disagree. While some of this compulsion is from practical reality rather than law there are numerous examples outside the union context of laws that require individuals to fund expressive activities. There is, simply put, very little way for most individuals in modern America to avoid subsidizing speech with which they disagree.

At the root of recurring bank crises are deeply-implanted incentives for banks and their executives to take systemically excessive risk. Since the 2008–2009 financial crisis, regulators have sought to strengthen the financial system by requiring more capital (which can absorb losses from risk-taking) and less risk-taking, principally via command-and-control rules. Yet bankers’ baseline incentives for system-degrading risk-taking remain intact. A key but underappreciated reason for banks’ recurring excessive risk-taking is the structure of corporate taxation. Current tax rules penalize equity and boost debt, thereby undermining the capital adequacy efforts that have been central to the post-crisis reform agenda. This tax-based distortion incentivizes financial firms to undermine regulators’ capital adequacy rules, either transactionally or by lobbying for their repeal. The resulting debt-heavy structure not only renders banks fragile but also pushes them toward further excessively risky strategies. This result is not inevitable. By repurposing tax tools used elsewhere, we show how the safety-undermining impact of the corporate tax can be reversed without affecting the overall level of tax revenue that the government raises from the financial sector. Several means to the desired end are possible, with the best trade-off between administrability and effectiveness being to lift the tax penalty on banks to the extent that they add to their loss-absorbing, safety-enhancing equity buffer above the regulatory minimum. This solution would minimize the tax impact and could have any revenue loss offset by modest tax changes affecting the riskiest forms of financial sector debt. Existing studies indicate that the magnitude of the resulting safety benefit should rival the size of the benefit from all the post-crisis capital regulation to date. Thus the main thesis we bring forward is not a small or technical claim. Standard bank regulatory style is command-and-control, and while much can be and has been accomplished with the standard style, it has its limits. In today’s political environment, current safety rules’ continuance may not be viable, as repeal of recent regulatory advances, not their refinement, has become a serious possibility. Yet rolling back the post-crisis regulatory advances without addressing the underlying risk-taking incentives would be unwise. While our policy preference would be to supplement and not replace traditional and recent regulation with the tax reform, any major rollback makes reducing the risk-taking tax distortion more urgent than ever.

Bankruptcy Code § 546(e) contains a safe harbor that prevents avoidance of a securities settlement payment, e.g., as a preferential or constructively fraudulent transfer. This amicus brief was filed in Merit Mgmt. Grp. v. FTI Consulting, Inc., No. 16-784 (U.S.). The brief explains how § 546(e) rationally constrains its scope via the statutory specification that the safe harbor only applies (because it need only apply) if the “transfer” sought to be avoided was allegedly “made by or to (or for the benefit of)” a protected securities market intermediary, such as a stockbroker or a financial institution. Ascertaining the meaning and function of that determinative scope language requires an understanding of (1) the concept of a “transfer” as the fundamental analytical transaction unit throughout the Code’s avoidance provisions, and (2) the relationship between that avoidable “transfer” concept and the inextricably interrelated concepts of who that “transfer” is “made by or to (or for the benefit of).” By its express terms, § 546(e) only shields a challenged “transfer” from avoidance if (1) that transfer was “made by” a debtor-transferor who was a qualifying intermediary, “or” (2) a party with potential liability — because the challenged transfer allegedly was made “to or for the benefit of” that party — was a protected intermediary.

In recent decades, academics across multiple disciplines and policymakers in multiple institutions have searched for the economic, political, and institutional foundations for financial market strength. Promising theories and empirics have developed, including major explanations from differences in nations’ political economy. A common view among multiple academic observers is that, particularly because many pro-market corporate reforms occurred in Europe during the 1990s, when social democratic parties governed and financial markets deepened, basic left-right explanations fail to explain financial market depth. Hence, more complex political explanations are in play, and the correlation of left governments, market-oriented reforms and financial deepening presents an unexpected paradox. This finding might be interpreted to indicate that left-right orientation is unimportant in affecting financial development and that either nonpolitical institutional issues or different political considerations are more central. We show here, first, that conceptually it’s not relative local placement of the governing coalition on the nation’s left-right spectrum that counts, but whether the polity as a whole — i.e., its political center of gravity or its dominant governing coalition — is left or right on economic issues. If interests and opinion shift in a nation, such that its political center of gravity is no longer statist and anti-market, then even locally left parties could and would often implement pro-market reforms. (And conversely, in an earlier era when interests and opinions were statist and anti-market, one should not expect to see even locally right parties pushing pro-market financial reforms forward.) Second, we bring forward data showing substantial movement over recent decades of political parties and governing coalitions; these shifts must be accounted for in assessing the impact of left-right divisions on financial and securities markets. In large measure, these political shifts correlate with financial markets shifts. Leftright matters not only in the fixed-in-time cross-section, but also the left-right economic shifts over time make an often significant empirical difference. The result from this data and study, in our view, leads to results and correlations that comport with most observers’ intuitions about the impact of left-right politics on financial market depth. The results thereby further buttress the importance of a nation’s basic left-right political orientation in explaining financial market outcomes.

During the past century, three decisionmaking systems have arisen to accomplish a bankruptcy restructuring — judicial administration, a deal among the firm’s dominant players, and a sale of the firm’s operations in their entirety. Each is embedded in the Bankruptcy Code today, with all having been in play for more than a century and with each having had its heyday — its dominant age. The shifts, rises, and falls among decisionmaking systems have previously been explained by successful evolution in bankruptcy thinking, by the happenstance of the interests and views of lawyers that designed bankruptcy changes, and by the interests of those who influenced decisionmakers. Here I argue that these broad changes also stem from baseline market capacities, which shifted greatly over the past century; I build the case for shifts underlying market conditions being a major explanation for the shifts in decisionmaking modes. Keeping these three alternative decisionmaking types clearly in mind not only leads to better understanding of what bankruptcy can and cannot do, but also facilitates stronger policy decisions today here and in the world’s differing bankruptcy systems, as some tasks are best left to the market, others are best handled by the courts, and still others can be left to the inside parties to resolve.

egulators have sought since the 2008 financial crisis to further strengthen the financial system. Yet a core source of weakness and a powerful additional instrument for strengthening the financial system persists unchanged and absent from the regulatory agenda — namely the relentless impact of the corporate tax on the choice between risky debt and safer equity. The tax penalty for equity and the concomitant boost for debt undermines the capital adequacy efforts that have been central to the post-crisis reform agenda. Yet this result is not inevitable. By repurposing tax tools used elsewhere in the world, we show how the safety-undermining impact of the current corporate tax can be ended or even reversed. The best trade-off of goals and practical potential is, first, to reduce the corporate income tax burden on bank equity levels above the required minimum, by according an imputed deduction for the cost of equity capital above the regulatory-required amount. This tax benefit can then, second, be made revenue-neutral to the finances by offsetting it, such as by decreasing the tax deductibility of the riskiest classes of financial system liabilities. That offsetting tax rate can, we show, be quite low, because the financial system’s debt base is wide while its equity base is narrow. Standard bank regulation is command-and-control style. Regulators order what banks can and cannot do; banks resist, lobby to reverse and undermine the commands, find transactional alternatives, and distort their behavior when approaching regulatory constraints. Regulators cannot in many areas know as much as the regulated; with a tax instrument, they do not need to know as much. Existing cross-country and cross-state data show the tremendous potential from this reform to incentivize more safely capitalized banks. The magnitude of the safety benefit should rival the size of all the post-crisis regulation to date. Thus the main thesis we bring forward is not a small or technical claim but a call for a major shift in regulatory style. Authors

This casebook for a basic bankruptcy course takes a deal-oriented finance approach to bankruptcy, with a focus on business bankruptcy. The student will not only learn the major elements of bankruptcy and corporate reorganization in chapter 11 of the Bankruptcy Code, but also the major facets of bankruptcy that influence financing transactions. The hidden message behind these materials is how to understand complex financial deal-making and how to integrate finance with law, in the context of bankruptcy.

Distressed firms with publicly issued bonds often seek to restructure the bonds’ payment terms to better reflect the firm’s weakened repayment capabilities and thereby avoid a bankruptcy. But Depression-era securities law bars the bondholders from agreeing via a binding out-of-bankruptcy vote to new payment terms, thus requiring individualized consent to the new payment terms, despite that such binding votes are commonplace now in bankruptcy and elsewhere. Recent judicial application of this securities law rule to bond recapitalizations has been more consistent than it had previously been, with courts striking down restructuring deals that twisted bondholders’ arms into consenting to unwanted deals. These coercive bond exchanges first became common in the 1980s, when many hostile tender offers for public companies had a similarly coercive deal structure. The coercive deal structure in these takeover offers was brought forward then to justify wide managerial countermeasures, but this structure disappeared in takeovers. However, it persisted in bond exchange offers. While these court decisions striking down the coercive bond exchanges faithfully apply Depression-era securities law to thwart issuers from twisting bondholders’ arms into exchanging, the bond market and distressed firms would be better served by exempting fair votes that bind all bondholders to new payment terms. The Securities and Exchange Commission now has authority to exempt fair restructuring votes from this now out-of-date securities law.

The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors.

To fully understand governance and authority in the large corporation, one must attend to politics. Because basic dimensions of corporate organization can affect the interests of voters, because powerful concentrated interest groups seek particular outcomes that deeply affect large corporations, because those deploying corporate and financial resources from within the corporation to buttress their own interests can affect policy outcomes, and because the structure of some democratic governments fits better with some corporate ownership structures than with others, politics can and does determine core structures of the large corporation. In this review piece for the Oxford Handbook on Corporate Governance, we analyze the generalities and then look at core aspects of corporate governance that have been, and continue to be, politically influenced and sometimes politically driven: first, the historically fragmented ownership of capital in the United States; second, the postwar power of labor in Europe and its corporate impact; and, third, the ongoing power of the American executive and the American board as due in part to their influence on political and legal outcomes.

Lehman Brothers’ failure and bankruptcy deepened the 2008 financial crisis whose negative effects the United States’ economy suffered from for several years. Yet, while Congress reformed financial regulation in hopes of avoiding another crisis, bankruptcy rules such as those that governed Lehman’s failure, have persisted unchanged. When Lehman failed, it lost considerable further value when its contracting counterparties terminated their financial contracts with Lehman. These broad terminations degraded Lehman’s overall value to its creditors beyond the immediate losses that caused its downfall. Lehman’s financial portfolio was thought to be running a paper profit of over $20 billion when it filed, and is said to have lost up to $75 billion as a result of the post-filing liquidation by Lehman’s counterparties of their deals with Lehman. How such a vast value loss can occur and how bankruptcy can ameliorate the problem are the subjects of this Article. For bankruptcy to handle a systemically important financial institution successfully, it must be able to market those parts of the failed institution’s financial contracts portfolio that are saleable at its fundamental value, i.e., other than at fire sale prices. Current law prevents this marketing, however. It allows only two polar choices: sell the entire portfolio, intact, or allow for the liquidation of each contract, one-by-one. The latter is what happened for Lehman, disrupting markets worldwide. The former — sale intact — cannot be accomplished as a business matter for a very, large financial contracts portfolio (and the most serious are embedded in the world’s biggest financial institutions) and would be economically undesirable even if possible. Bankruptcy needs authority, first, to preserve the failed firm’s overall portfolio value, and, second, to break up and sell a very large portfolio that is too large to sell intact. Congress and the regulators have said that bankruptcy is the favored means for financial resolution. Yet, while regulatory initiatives have sought to make failure less likely and resolution more viable than it proved during the crisis, bankruptcy law has neither been fixed nor even updated here since the financial crisis. If a major financial institution were to fail today, the same bankruptcy problems that arose during the past crisis and vexed Lehman could again disrupt the country’s and the world’s financial systems. We here outline one critically needed fix: authorizing bankruptcy to break up a large derivatives portfolio by selling its constituent product lines, one-by-one, instead of limiting bankruptcy to its current constraints of either a sale of the entire portfolio or a Lehman-style close-out of each contract, one-by-one.

Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.

Regulatory reaction to the 2008-2009 financial crisis focused on complex financial instruments that deepened the crisis. A consensus emerged that these risky financial instruments should move through safe, strong clearinghouses, which would be bulwarks against systemic risk, and that the destructive impact of the failures during the crisis of AIG, Lehman Brothers, and the Reserve Primary Fund could have been softened or eliminated had strong clearing-houses been in place. Via the Dodd-Frank Wall Street Reform Act, Congress instructed regulators to construct clearinghouses through which these risky financial instruments would trade and settle. Clearinghouses could cut financial risk, reduce contagion, and halt a local financial problem before it becomes an economy-wide crisis. But clearinghouses are weaker bulwarks against financial contagion, financial panic, and systemic risk than is commonly thought. They may well be unable to defend the economy against financial stress such as that of the 2008-2009 crisis. Although they are efficient financial platforms in ordinary times, they do little to reduce systemic risk in crisis times. They generally do not reduce the core risk targeted-that the failure of a financial firm will cause other firms to fail-but rather transfer that risk of loss to others. The major reduction in risk among the inside-the-clearinghouse traders is largely achieved by pushing that risk elsewhere, often to a systemically dangerous spot. Financial contagion can thus side-step the clearinghouse fortress and bring down other core financial institutions. Worse, clearinghouses could not have readily handled the major stresses that afflicted the economy in 2008-2009, could well have transmitted and magnified them, and can only weakly affect the type of financial stress that Congress targeted with Dodd-Frank. When we add in the other weaknesses of the new clearinghouses-as too-big-to-fail institutions, as institutions whose members' incentives to contain clearinghouse riskiness are weaker than the public's, and as institutions that will not be easy to regulate-even the direction of clearinghouses' impact on systemic risk is uncertain. The stakes are high in correctly assessing the value of clearing-houses in containing systemic risk. Much like an overconfidence inspired by powerful military fortresses that an invading enemy can side-step, the reigning overconfidence in clearinghouses lulls regulators to be satisfied that they have done much to arrest problems of contagion and systemic risk by building up clearing-houses, when they have not.

The problem of creditor conduct in distressed firms — for which policymakers ought to have the economically-sensible repositioning of the distressed firm as a central goal — has vexed courts for decades. Because courts have not come to coherent, stable doctrine to regulate creditor behavior and because they do not focus on using doctrine to facilitate the sensible repositioning of the distressed firm, social costs arise and those costs may be substantial. It’s easy to see why developing a good rule here has been hard to achieve: A rule that facilitates creditor operational intervention going beyond ordinary collection on a defaulted loan can induce creditors to intervene perniciously, to shift value to themselves even at the price of mismanaging the debtor. But a rule that confines creditors to no more than collecting their debt can allow failed managers to continue mismanaging the distressed firm, with the only real managerial alternative — the creditor — paralyzed by judicial doctrine. The doctrinal difficulty and the potential for creditor paralysis arise from unclear and inconsistent judicial doctrine. Some courts hold that it’s the creditor’s inequitable control of the debtor that is the characteristic that leads to creditor liability. Others rule that the creditor contract rights go beyond simply suing and collecting, fully allowing the creditor to condition its own forbearance from suing on the debtor complying with the creditor’s wishes, even if the conditions are costly to the firm’s other creditors. Worse for encouraging positive creditor engagement, the doctrinal standard via which courts shift from protected contract rights to perniciously-exercised control is obscure. Leading cases have the same basic facts, sometimes even the same court, but sharply differing results. Creditor control is the key doctrinal metric; but the creditor’s goal is the better metric for judicial focus. Here we show, first, that there is often no on-the-ground, operational difference between these two standards — pernicious control and free-wheeling contract enforcement — and that this lack of sharp difference helps to explain why the judicial results are vexing, contradictory, and costly. We next show how similar problems are dealt with differently in corporate law settings — by courts evaluating the questioned transaction for business judgment deference to boards of directors . Then we show how putting a layer of basic corporate duties — entire fairness for conflicted transactions and business judgment rule deferential review for non-conflicted transactions — atop the creditor intervention doctrines clarifies the creditor in control problem and lights up a conceptual way out from the problem. A safe harbor for creditors is plausible — if courts could reduce the extent of creditor conflict for critical decisions — and would both encourage constructive creditor intervention and discourage detrimental value-shifting creditor intervention. And then we show that modern financial markets yield a practical way out, using this corporate doctrine as the map: Modern capital markets’ capacity to build options, credit default swaps, and contracts for equity calls provides new mechanisms that, when combined with the classic corporate doctrinal overlay, can better inform courts and parties on how to evaluate and structure creditor entry into managerial decisionmaking. The capital markets and corporate doctrine combination can create a doctrinal conduit to better incentivize capital market players to improve distressed firms than the current doctrines regulating creditor conduct.

Bankruptcy reallocates value in a faltering firm. The bankruptcy apparatus eliminates some claims and alters others, leaving a reduced set of claims to match the firm’s diminished capacity to pay. This restructuring is done according to statutory and agreed-to contractual priorities, so that lower-ranking claims are eliminated first and higher ranking ones are preserved to the extent possible. Bankruptcy scholarship has long conceptualized this reallocation as a hypothetical bargain among creditors: creditors agree in advance that if the firm falters, value will be reallocated according to a fixed set of predetermined rules and contracts. In any given reorganization case, creditors may contest how the priority rules are applied — arguing over which creditor is prior and by how much. But once creditors’ relative status under the fixed priority rules is determined or compromised, the lowest-ranking financiers are eliminated. If there is not enough value left to go around for a group of equal-ranking creditors, creditors in that lowest-ranked group share proportionately. In this paper, we argue that over the long haul, the normal science of Chapter 11 reorganization differs from this creditors’ bargain. The bargain is never fixed because creditors regularly attempt to alter the priority rules and often succeed. Priority is in fact up for grabs. Bankruptcy should be reconceptualized as an ongoing rent-seeking contest in which creditors continually seek to break priority — to obtain categorical changes in priority rules in order to jump themselves ahead of competing creditors. Creditors seek to break priority by inventing innovative transactional structures, by persuading courts to validate their priority jumps with new doctrine, or by inducing Congress to enact new rules. Because these breaks are often successful, creditors must continually adjust to other creditors’ successful jumps. They can adjust to a priority break either by accepting it and modifying their terms for future transactions, or by attempting to suppress it with countermeasures. In recent years, major priority jumps have come from transactional innovation — such as special purpose vehicles — and from judicial sanction — via roll-up financing and critical vendor payment doctrines. And they have come from lobbying Congress. Financial industry participants obtained jumps from Congress for derivatives and repurchase agreements in the 1980s and 1990s, concessions that facilitated the financing that exacerbated the 2007-2009 financial crisis. Priority jumping, and the subsequent acquiescence, reaction, and reversal, are also part of bankruptcy history, from the equity receivership to the chapter X reforms of the 1930s to the 1978 Bankruptcy Code. We explain how priority jumping interacts with finance theory and how it should lead us to reconceptualize bankruptcy not as a simple, or even a complex, creditors’ bargain, but as a dynamic process with priority contests fought in a three-ring arena of transactional innovation, doctrinal change, and legislative trumps. The process of breaking bankruptcy priority, of reestablishing it, or of adapting to it is where bankruptcy lawyers and judges spend a large portion of their time and energy. While a given jump’s end-state (when a new priority is firmly established) may sometimes be efficient, bankruptcy rent-seeking overall has significant pathologies and inefficiencies.

By treating derivatives and financial repurchase agreements much more favorably than it treats other financial vehicles, American bankruptcy law subsidizes these arrangements relative to other financing channels. By subsidizing them, the rules weaken market discipline during ordinary financial times in ways that can weaken financial markets, thereby exacerbating financial failure during an economic downturn or financial crisis emanating from other difficulties, such as an unexpectedly weakened housing and mortgage market in 2007 and 2008. Moreover, and perhaps unnoticed, because this favorable treatment in the Bankruptcy Code is readily available only for short-term financing arrangements, the Bankruptcy Code thereby favors short-term financing arrangements over more stable longer term arrangements. While some policymakers and proponents of bankruptcy's favorable treatment justify it as reducing financial contagion, there is reason to think that the safe harbors do not reduce contagion meaningfully and did not reduce it in the recent financial crisis, but instead contributed to runs and weakened market discipline. A basic application of the Modigliani & Miller framework suggests that the risks policymakers might hope the favored treatment would eliminate are principally shifted from inside the derivatives and repurchase agreement markets to creditors who are outside that market. The most important outside creditor is the United States, as de jure or de facto guarantor of too-big-to-fail financial institutions.

A long-held view in corporate circles has been that furious rapid trading in stock markets has been increasing in recent decades, justifying corporate governance and corporate law measures that would further shield managers and boards from shareholder influence, to further free boards and managers to pursue their view of sensible long-term strategies in their investment and management policies. Here, I evaluate the evidence in favor of that view and find it insufficient to justify insulating boards from markets further. While there is evidence of short-term stock market distortions, the view is countered by several underanalyzed aspects of the American economy, each of which alone could trump a prescription for more board autonomy. Together they make the case for further judicial isolation of boards from markets untenable. First, even if the financial markets were, net, short-term oriented, one must evaluate the American economy from a system-wide perspective. As long as venture capital markets, private equity markets, and other conduits mitigate, or reverse, much of any short-term tendencies in public markets, then a potential short-term problem is largely local but not systemic. Second, the evidence that the stock market is, net, short-termist is inconclusive, with considerable evidence that stock market sectors often overvalue the long term. Third, managerial mechanisms inside the corporation, including compensation packages with a duration that is shorter than typical institutional stock market holdings, and managerial labor markets across firms, including managerial efforts to get good results on their watch, are important sources of short-term distortions; insulating boards from markets further would exacerbate these managerial short-term-favoring mechanisms. Fourth, courts are not well positioned to make this kind of basic economic policy, which, if determined to be a serious problem, is better addressed with policy tools unavailable to courts. And, fifth, the widely held view that short-term trading has increased dramatically in recent decades over-interpret, the data; the duration for holdings of many of the country’s major stockholders, such as mutual funds run by Fidelity and Vanguard, and major pension funds, does not seem to have shortened. Rather, a high-velocity trading fringe has emerged, and its rise affects average holding periods, but not the holding period for the country’s ongoing major stockholding institutions. The view that stock market short-termism should affect corporate lawmaking fits snugly with two other widely supported views. One is that managers must be free from tight stockholder influence, because without that freedom boards and managers cannot run the firm well. Whatever the value of this view and however one judges the line between managerial autonomy and managerial accountability to stockholders should be drawn, short-termism provides no further support for managerial insulation from the influence of financial markets. The autonomy argument must stand or fall on its own. Similarly, those who argue that employees, customers, and other stakeholders are due more consideration in corporate governance point to pernicious short-termism to support their view further. But these stakeholder considerations can be long-term and they can be short-term. As such, the best view of the evidence is similarly that the pro-stakeholder view must stand or fall on its own. It gains no further evidence-based, conceptual support from a fear of excessive short-termism in financial markets. Overall, system-wide short-termism in public firms is something to watch for carefully, but not something that today should affect corporate lawmaking.

For capital markets to function, political institutions must support capitalism in general and the capitalism of financial markets in particular. Yet the shape, support, and extent of capital markets are often contested in the polity. Powerful elements — from politicians to mass popular movements — have reason to change, co-opt, and remove value from capital markets. And the competing capital markets’ players themselves have reason to seek rules that favor their own capital channels over those of others. How these contests are settled deeply affects the form, extent, and effectiveness of capital markets. And investigation of the primary political economy forces shaping capital markets can lead us to better understand economic, political, and legal institutions overall. Much important work has been done in recent decades on the vitality of institutions. Less well emphasized, however, is that widely-shared, deeply-held preferences, often arising from the interests and opinions that prevail at any given time, can sometimes sweep away prior institutions, establish new ones, or, less dramatically but more often, sharply alter or replace them. At crucial times, preferences can trump institutions, and how the two interact is well-illustrated by the political economy of capital markets. Since North’s (1990) famous essay, academic work has focused on the importance of institutions for economic development. Here, I emphasize the channels by which immediate preferences can trump institutional structure in determining the shape and extent of capital markets.

Delaware and Washington interact in making corporate law. In prior work I showed how Delaware corporate law can be, and often is, confined by federal action. Sometimes Washington acts and preempts the field, constitutionally or functionally. Sometimes Delaware tilts toward or follows Washington opinion, even if that opinion does not square perfectly with its own consensus view of the best way to proceed. And sometimes Delaware affects Washington activity, effectively coopting a busy Washington from acting in ways that do not accord with Delaware’s major constituents’ view of best practice. Delaware influences Washington decision-making when Delaware is positioned between its own ultimate preferences (determined in part by its primary constituencies’ consensus position) and Washington’s prevailing preferences. Since Congress has a long and complex agenda, if key players in Washington become satisfied that the Delaware legal outputs are close enough to their own preferences, Delaware can induce Washington to desist from going further. At the Columbia Symposium on Delaware corporate lawmaking, I presented a straight-forward spatial model paralleling spatial models that political scientists have used to illustrate other contexts of government jurisdictional interaction. In this article, I describe and set forth that model to illustrate Delaware-Washington interaction in the last decade’s making of proxy access rules.

Shareholder power to effectively nominate, contest, and elect the company’s board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers’ agendas. As is well known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paidfor voting documents, as the SEC has pushed toward, could revolutionize American corporate governance by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders’ hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC’s rules. During this decade-long process a core corporate law was up for grabs, but the action was in Washington, D.C. until the end of the decade, not the states, despite that a century of corporate law theory has focused on jurisdictional competition among states in making corporate law. In earlier work, I amended the state competition understanding with a view that many key features of American corporate lawmaking are Washington-oriented: Washington often makes corporate law directly, it did so for the central corporate controversy in most decades of the twentieth century, and it can influence state lawmaking, either directly or by establishing complements and substitutes to state corporate law. Shareholder access fits this federal-state paradigm and goes beyond it. It fits in that states were largely silent on these shareholder-power initiatives until 2009, when Delaware amended its corporate code to facilitate shareholder nominees. Indeed, it’s hard to understand Delaware passing its 2009 shareholder statute if the issue had not been on the national agenda for nearly a decade. But the interaction goes beyond the basic Washington-Delaware paradigm in that Delaware’s corporate lawmaking could have influenced the federal outcome and, quite plausibly, corporate players sought it, or used it, as a tool to dampen federal congressional, judicial, and regulatory actors’ enthusiasm for strong shareholder access. The federal-state interaction is two-way, with the strongest interest group inputs at each jurisdictional level sharply differing. Overall, the vertical interaction between states and Washington in reforming shareholder-insider voting power in the past decade is a far cry from the classical understanding of American corporate law being honed in horizontal state-to-state competition, and it implicates sharply differing political economy, interest-group dynamics.