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    Indirect investor protection (Spamann 2022) makes investment in most public securities safe even without understanding their terms or the underlying business. SPACs disable this protection by offering two alternative payoffs from the same security, the SPAC share, in the de-SPAC: the redemption value, or a share in the post-de-SPAC entity. The former is usually higher and chosen by sophisticated repeat players, while unsophisticated investors elect the latter or receive it by default (Klausner et al. 2022). Before the de-SPAC, the SPAC share price reflects the higher payoff, such that unsophisticated investors systematically overpay. This overpayment is captured, directly or indirectly, by SPAC sponsors and IPO investors. This allows the latter to make money from SPACs even if SPACs create negative social value.

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    In a pre-registered 2 × 2 × 2 factorial between-subject randomized lab experiment with 61 federal judges, we test if the law influences judicial decisions, if it does so more under a rule than under a standard, and how its influence compares to that of legally irrelevant sympathies. Participating judges received realistic materials and a relatively long period of time (50 min) to decide an auto accident case. We find at best weak evidence that the law matters or that rules constrain more than standards, and no evidence of a sympathy effect. (JEL K00, K13, K40, K41)

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    Holger Spamann, Indirect Investor Protection: The Investment Ecosystem and Its Legal Underpinnings, 14 J. Legal Analysis (forthcoming 2022).

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    This paper argues that the key mechanisms protecting portfolio investors in public corporate securities are indirect. They do not rely on actions by the investors or by any private actor charged with looking after investors’ interests. Rather, they are provided by the ecosystem that investors (are legally forced to) inhabit, as a byproduct of the self-interested, mutually and legally constrained behavior of third parties without a mandate to help the investors such as speculators, activists, and plaintiff lawyers. This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes the current system’s fragile reliance on trading.

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    Textual redundancy is one of the main challenges to ensuring that legal texts remain comprehensible and maintainable. Drawing inspiration from the refactoring literature in software engineering, which has developed methods to expose and eliminate duplicated code, we introduce the duplicated phrase detection problem for legal texts and propose the Dupex algorithm to solve it. Leveraging the Minimum Description Length principle from information theory, Dupex identifies a set of duplicated phrases, called patterns, that together best compress a given input text. Through an extensive set of experiments on the Titles of the United States Code, we confirm that our algorithm works well in practice: Dupex will help you simplify your law.

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    This site provides a more accessible version of the Delaware General Corporation Law (DGCL), and a guide to the Federal Proxy Rules.

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    We experimentally study the decision-making process of judges in China, where judges are specifically prohibited to cite prior decisions as the basis for their judgments, and where, in past surveys, most judges explicitly stated that precedent played at most a marginal role in their decisions. In an experiment resembling real-world judicial decision making, we find, however, that precedent seems to have a significant influence on the decisions of the participating Chinese judges. Indeed, judges spend more time reading prior cases than statutes, and they typically read precedents before they access the statutes. On the other hand, judges rarely mention the precedent in their reasons. Our findings suggest that the Chinese judiciary operates much more similarly to its homologues in the U.S. and elsewhere than their written opinions and much folklore would suggest.

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    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.

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    In our lab, 299 real judges from seven major jurisdictions (Argentina, Brazil, China, France, Germany, India, and USA) spend up to fifty-five minutes to judge an international criminal appeals case and determine the appropriate prison sentence. The lab computer (i) logs their use of the documents (briefs, statement of facts, trial judgment, statute, precedent) and (ii) randomly assigns each judge (a) a horizontal precedent disfavoring, favoring, or strongly favoring defendant, (b) a sympathetic or an unsympathetic defendant, and (c) a short, medium, or long sentence anchor. Document use and written reasons differ between countries but not between common and civil law. Precedent effect is barely detectable and estimated to be less, and bounded to be not much greater than, that of legally irrelevant defendant attributes and sentence anchors.

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    This paper argues that the key mechanisms protecting retail investors’ financial stake in their portfolio investments are indirect: they do not rely on actions of the investors themselves, or of their agents including fund managers, or of any other private actor directly charged with looking after the investors’ interests. Rather, investors’ main protections are provided by the ecosystem that they (are legally forced to) inhabit. These protections arise as a byproduct of the self-interested, legally constrained behavior of sophisticated third parties that are in competition with one another, particularly hedge funds, traders generally, and plaintiff lawyers. While existing law consciously supports some of these indirect mechanisms, others remain hidden from view and are at risk from contractual innovations and their own success. The analysis provides a more convincing rationale for mandatory corporate and securities law, cautions against the SEC’s recent push to open private markets to smaller investors, and identifies a new challenge from the rise of large index funds.

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    Preemptive rights are thought to protect minority shareholders from cheap-stock tunneling by a controlling shareholder. We show that preemptive rights, while making cheap-stock tunneling more difficult, cannot prevent it when asymmetric information about the value of the offered shares makes it impossible for the minority to know whether these shares are cheap or overpriced. Our analysis can help explain why sophisticated investors in unlisted firms and regulators of listed firms do not rely entirely on preemptive rights to address cheap-stock tunneling, supplementing them with other restrictions on equity issues.

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    This is the first chapter of the book Corporations in 100 Pages (2020), authored by Holger Spamann, Scott Hirst, and Gabriel Rauterberg. The book is an introduction to corporate law for students and anyone else interested in the foundations of corporate law. The book provides an accessible, self-contained presentation of the field’s essentials: what corporations are, how they are governed, their interactions with their investors, and other stakeholders, major transactions (M&A), and parallels with other legal entities, including partnerships. Optional background chapters cover the investor ecosystem, contemporary corporate governance, and corporate finance. The book’s exposition of doctrine and policy is nuanced and sophisticated, yet short and simple enough for a quick read. Chapter 1, “Corporations & Corporate Law,” introduces the book by addressing two questions: What are corporations? And what is corporate law? The chapter discusses the corporation as formally an abstraction to which the law assigns right and duties. Its extraordinary usefulness lies in how it allows large groups of people to organize relationships involving multiple assets, such as by pooling funds, transferring them to the corporation, and then allowing the corporation to serve as a single contracting interface with third parties. The chapter discusses how corporate law, as the subject is taught in law schools and discussed in practice, consists of the body of rules that govern the relationships among a corporation’s shareholders, its board of directors, and its managers; the relationships within each group; and the powers of each group to affect the corporation’s affairs. Corporate law is thus only a small subset of the far larger set of laws governing corporations, which includes “antitrust law,” “consumer law,” “environmental law,” and far more. Corporate law remains largely a matter of state statutory and common law, but also turns decisively on the corporation’s governing legal instruments, like the charter and bylaws, and contracts amongst its shareholders. Securities law also affects how corporations finance themselves. The chapter ends by providing examples of corporations, such as a small private corporation and a large public one, which illustrate the important legal features of the corporate form.

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    This statutory supplement (fall 2020 edition) is for the Corporations casebooks by Holger Spamann and by Holger Spamann and Guhan Subramanian. It contains excerpts from the Delaware General Corporation Law, the Securities Exchange Act of 1934, Rules & Regulations promulgated by the Securities Exchange Commission pursuant to authority granted under the 1934 Act, as well as short excerpts from the Restatement of the Law Third (Agency) and the Uniform Partnership Act of 1914. It is current as of August 1, 2020.

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    Heyes and Saberian (AEJ-AE 2019) estimate from 2000-2004 data that outdoor temperature reduces U.S. immigration judges’ propensity to grant asylum. This estimate is the result of coding and data errors and of sample selection. Correcting the errors reduces the point estimate by two thirds, with a wide 95% confidence interval straddling zero. Enlarging the sample to 1990-2019 flips the point estimate’s sign and rules out the effect size reported in Heyes and Saberian with very high confidence. An analysis of all criminal sentencing decisions by U.S. federal district judges 1992-2003 yields no evidence of temperature or other weather effects either.

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    Law students randomly assigned to represent one side in a legal argument in the classroom exhibit substantial role-induced prediction bias for their side within only 40 minutes of their role assignment. Reminding students that prediction requires a more neutral perspective than advocacy does not attenuate the bias. The bias occurs evenly in male and female participants, who also report equal confidence in their predictions.

  • Holger Spamann, Scott Hirst & Gabriel Rauterberg, Corporations in 100 Pages (2020).

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    This book is a primer on corporate law for law students and anyone else interested in the foundations of corporate law. The book provides a self-contained, accessible presentation of the field’s essentials: what corporations are, how they are governed, their interactions with their investors and other stakeholders, major transactions (M&A), and parallels with alternative entities including partnerships. Optional background chapters cover the investor ecosystem, contemporary corporate governance, and corporate finance. The book’s exposition of doctrine and policy is nuanced and sophisticated yet short and simple enough for a quick read.

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    This is the fifth chapter of the book Corporations in 100 Pages (2020), authored by Holger Spamann, Scott Hirst, and Gabriel Rauterberg. The book is an introduction to corporate law for students and anyone else interested in the foundations of corporate law. The book provides an accessible, self-contained presentation of the field’s essentials: what corporations are, how they are governed, their interactions with their investors, and other stakeholders, major transactions (M&A), and parallels with other legal entities, including partnerships. Optional background chapters cover the investor ecosystem, contemporary corporate governance, and corporate finance. The book’s exposition of doctrine and policy is nuanced and sophisticated, yet short and simple enough for a quick read. Chapter 5 explains the law governing “Fiduciary Duties,” which are legal duties imposed on specific individuals (“fiduciaries”) who exercise power on behalf of others. The chapter first provides an overview of corporate fiduciary duties: who owes what to whom, and introduces the principal fiduciary duties of care and of loyalty. The chapter then distinguishes standards of conduct and standards of review, and explains the two main standards of review that apply to fiduciary duties in corporate law, the “business judgment rule” and “entire fairness.” The chapter then explains how these standards of review apply to the paradigm cases of self-dealing and mere carelessness, as well as to cases involving corporate opportunities, bad faith, knowing violations of law, and (lack of) candor or oversight.

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    This is the seventh chapter of the book Corporations in 100 Pages (2020), authored by Holger Spamann, Scott Hirst, and Gabriel Rauterberg. The book is an introduction to corporate law for students and anyone else interested in the foundations of corporate law. The book provides an accessible, self-contained presentation of the field’s essentials: what corporations are, how they are governed, their interactions with their investors, and other stakeholders, major transactions (M&A), and parallels with other legal entities, including partnerships. Optional background chapters cover the investor ecosystem, contemporary corporate governance, and corporate finance. The book’s exposition of doctrine and policy is nuanced and sophisticated, yet short and simple enough for a quick read. Chapter 7, “Mergers and Acquisitions,” discusses ways of buying all or part of a corporation. The chapter provides an overview of these transactions and introduces key concepts and the main sources of law. The chapter then explains the three ways in which all or part of a corporation can be acquired—by acquiring its assets, acquiring its shares, and through a merger with another corporation—and the legal and practical differences between the three structures and variants thereof. The chapter explains the difference between friendly and hostile transactions, and the legal rules regarding how corporations may permissibly defend themselves against hostile transactions. The chapter also discusses the special considerations and rules that apply to mergers and acquisitions involving controlling shareholders. Finally, the chapter discusses litigation concerning mergers and acquisitions.

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    A popular research design identifies the effects of corporate governance by (changes in) state laws, clustering standard errors by state of incorporation. Using Monte-Carlo simulations, this paper shows that conventional statistical tests based on these standard errors dramatically overreject: in a typical design, randomly generated “placebo laws” are “significant” at the 1/5/10% level 9/21/30% of the time. This poor coverage is due to the extremely unequal cluster sizes, especially Delaware's concentration of half of all incorporations. Fixes recommended in the literature fail, including degrees-of-freedom corrections and the cluster wild bootstrap. The paper proposes a permutation test for valid inference.

  • Holger Spamann & Guhan Subramanian, Corporations: Statutory Supplement: 2019/20 (2019).

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    This statutory supplement (fall 2019 edition) is for the Corporations casebook by Holger Spamann and Guhan Subramanian. It contains excerpts from the Delaware General Corporation Law, the Securities Exchange Act of 1934, Rules & Regulations promulgated by the Securities Exchange Commission pursuant to authority granted under the 1934 Act, as well as short excerpts from the Restatement of the Law Third (Agency) and the Uniform Partnership Act of 1914. It is current as of August 1, 2019.

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    Law students randomly assigned to represent one side in a legal argument in the classroom exhibit substantial role-induced prediction bias for their side within only 40 minutes of their role assignment. Reminding students that prediction requires a more neutral perspective than advocacy does not attenuate the bias. The bias occurs evenly in male and female participants, who also report equal confidence in their predictions.

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    William Eskridge and Lauren Baer’s (96 GEO. L. J. 1083 (2008)) “empirical study of all 1014 Supreme Court cases between Chevron and Hamdan in which an agency interpretation of a statute was at issue” finds that “the Court does not apply the Chevron framework in nearly three-quarters of the cases where it would appear applicable.” Our reexamination of this study finds that the fraction of such cases is far lower, and indeed closer to zero. Our main methodological innovation is to infer Chevron applicability from Supreme Court litigants’ briefs rather than our own evaluation of the cases’ facts, as in Eskridge and Baer’s study. In over half the cases flagged by Eskridge and Baer, neither of the parties (nor, where applicable, the Solicitor General as amicus) cited Chevron, and in almost half of the cases within that subset, no one argued for or against deference of any kind. In most of a sample of the remaining cases, the Supreme Court either did not need to reach the Chevron issue, or actually applied it, at least in an abbreviated form.

  • Holger Spamann, Corporations (2019).

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    This book is designed for a first course in corporate law. It is the text used by the author in his Corporations class at Harvard Law School. Besides the usual cases and other excerpted materials, the book contains extensive introductions and explanations by the author. The content is also available online at https://opencasebook.org/casebooks/79342-corporations; it is current as of December 2018.

  • Holger Spamann, Simplified DGCL: including a guide to the federal proxy rules (2018).

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    Cho, Barnes, and Guanara (2017) analyzed criminal sentencing by U.S. federal judges in the years 1992 through 2003. Controlling for case covariates, they estimated that “sentences rendered on sleepy Mondays”—Mondays immediately following the start of daylight saving time, when the night from Saturday to Sunday is shortened by 1 hr—“were approximately 5% longer than those rendered on [the immediately preceding and subsequent] Mondays” (p. 243). Cho et al. estimated that so large a difference would arise by chance with a probability of only 0.5% if judges tended to render equal sentences on those three Mondays (i.e., p = .005). Cho et al. interpreted this finding as evidence that sleep-deprived judges punish more harshly than judges who have not been sleep deprived. This Commentary raises three concerns about Cho et al.’s analysis and conclusions. First, Cho et al. reported results from a model that differed from the model described in their article. The latter model is theoretically superior but yields a nonsignificant result. Second, even the model used by Cho et al. yields a much smaller, nonsignificant coefficient if one accounts for judges’ choice whether to impose any prison time at all, as is standard in the sentencing literature. Third, new data from 2004 through 2016 show not even a trace of a sleepy-Monday effect. Table 1 summarizes all four models mentioned thus far (Models 1, 2, 4, and 7) along with several models providing robustness checks (Models 3, 5, 6, and 8), and the remainder of this Commentary discusses these eight models in more detail. At the outset, it is worth noting that Cho et al.’s result depends entirely on their model: As reported in their note 3, a model without their control variables did not yield a statistically significant estimate of a sleepy-Monday effect.

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    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.

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    This book provides cases, commentaries, case studies, and discussion questions on corporate law. It is intended for use in the introductory course in corporate law at U.S. law schools. Emphasis is placed on Delaware corporate law, though comparative perspectives are developed as well. Teaching slides and teaching notes are available from the authors. The book has a Statutory Supplement.

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    We experimentally investigate the determinants of judicial decisions in a setting resembling real-world judicial decision-making. U.S. federal judges (N=32) spend 55 minutes judging a real appeals case from an international tribunal, with minor modifications to accommodate the experimental treatments. The fictitious briefs focus on one easily understandable issue of law. Our 2×2 between-subject factorial design crosses a weak precedent and legally irrelevant defendant characteristics. In a survey, law professors predicted that the precedent would have a stronger effect than the defendant characteristics. In actuality, the precedent has no detectable effect on the judges’ decisions, whereas the two defendants’ affirmance rates differ by 45% (p<.01). Judges’ written reasons, on the other hand, do not mention defendant characteristics at all, focusing instead on the precedent and other legalistic and policy considerations.

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    In this comment on Gelbach (JITE 2016), I make two points. First, I support Gelbach’s application of mechanism design (MD) to legal design because it takes information requirements and other constraints seriously. MD derives the best rule under the stated constraints. This rigorously confirms the existing rule’s optimality, reveals a superior alternative, or, if the MD solution appears unrealistic, uncovers additional constraints that any real solution must satisfy. Second, I consider implementing the social optimum, rather than the private optimum. In Gelbach’s discovery example, even a court with limited information can objectively implement some social goals; for other social goals, the court can at least do the best it can according to its subjective beliefs.

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    I generate out-of-sample predictions of US crime and incarceration rates from cross-country regressions. Predictors suggested in the literature explain a large part of the international variation, but fail to explain the US. The US incarceration rate is four times higher than predicted, while US crime rates are at best slightly below the prediction. An explanation of this US crime puzzle requires a low crime-punishment elasticity at US levels of punishment, and/or an extraordinarily high US latent crime rate. I derive joint bounds for the two. Drawing on additional country-specific information, I argue that the most plausible explanation combines both elements.

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    This article clarifies why optimal corporate governance generally excludes monetary liability for breach of directors’ and managers’ fiduciary duty of care. In principle, payments predicated on third-party investigations of directors’ and managers’ business decisions could usefully supplement payments predicated on stock prices or accounting figures in the provision of performance incentives, including risk-taking incentives. Consequently, the reason not to use liability incentives is not absolute but a cost-benefit trade-off: Litigation is expensive, while the benefits from refining incentives are limited. The analysis rationalizes many existing exceptions from non-liability but also leads to novel recommendations, particularly for entities other than public corporations.

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    The finances of many states, cities, and other localities are in dire straits. In this Article, we argue that partial responsibility for this situation lies with the outdated and ineffective financial reporting regime for public entities. Ineffective reporting has obscured and continues to obscure the extent of municipal financial problems, thus delaying or even preventing corrective actions. Worse, ineffective reporting has created incentives for accounting gimmicks that have directly contributed to the dramatic decline of public sector finances. Fixing the reporting regime is thus a necessary first step toward fiscal recovery. We provide concrete examples of advisable changes in accounting rules and advocate for institutional changes, particularly Securities and Exchange Commission involvement, that we hope will lead to better public accounting rules generally.

  • James Naughton & Holger Spamann, Deficiencies in Accounting and Financial Reporting of State and Municipal Governments, 85 CPA J., June 2015, at 16.

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    Detroit's bankruptcy highlighted what savvy observers have been warning about for years: The finances of many states, cities, and other localities are in dire straits. The authors believe that this financial calamity is partly attributable to the outdated and ineffective financial reporting regime for public entities, and that fixing this regime is a necessary first step toward fiscal recovery. The current regime omits foreseeable long-term consequences from reported financial numbers. This omission blinds citizens, and perhaps even politicians, to the long-term repercussions of policy choices. It may even prompt politicians to choose economically suboptimal measures precisely because it allows them to misrepresent their financial performance to voters.

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    I review the empirical comparative law literature with an emphasis on quantitative work. After situating the field and surveying its main applications to date, I turn to methodological issues. I discuss at length the obstacles to causal inference from comparative data, and caution against inappropriate use of instrumental variables and other techniques. Even if comparative data cannot identify any single causal theory, however, they are extremely important in narrowing down the set of plausible theories. I report progress in measurement design and suggest improvements in data analysis and interpretation using techniques from other fields, particularly growth econometrics.

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    This paper exposits a model of parallel trading of corporate securities (shares, bonds) and derivatives (TRS, CDS) in which a large trader can sometimes profitably acquire securities with their corporate control rights for the sole purpose of reducing the corporation's value and gaining on a net short position created through off-setting derivatives. At other times, the large trader profitably takes a net long position. The large trader requires no private information beyond its own trades. The problem is most likely to manifest when derivatives trade on an exchange and transactions give blocking powers to small minorities, particularly out-of-bankruptcy restructurings and freezeouts.

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    Economists have documented pervasive correlations between legal origins, modern regulation, and economic outcomes around the world. Where legal origin is exogenous, however, it is almost perfectly correlated with another set of potentially relevant background variables: the colonial policies of the European powers that spread the “origin” legal systems through the world. We attempt to disentangle these factors by exploiting the imperfect overlap of colonizer and legal origin, and looking at possible channels, such as the structure of the legal system, through which these factors might influence contemporary economic outcomes. We find strong evidence in favor of non-legal colonial explanations for economic growth. For other dependent variables, the results are mixed.

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    This paper empirically compares civil procedure in common-law and civil-law countries. Using World-Bank and hand-collected data, and unlike earlier studies that used predecessor data sets, this paper find no systematic differences between common- and civil-law countries in the complexity, formalism, duration, or cost of procedure in courts of first instance. The paper further finds that by a subjective measure, contract enforceability in common-law countries is higher than in French, but lower than in German and Scandinavian, civil-law countries. Given civil procedure's central role for the common-civil-law distinction, these findings challenge the distinction's economic relevance.

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    The “antidirector rights index” has been used as a measure of shareholder protection in over a hundred articles since it was introduced by La Porta et al. (“Law and Finance.” 1998, Journal of Political Economy 106:1113–55). A thorough reexamination of the legal data, however, leads to corrections for thirty-three of the forty-six countries analyzed. The correlation between corrected and original values is only 0.53. Consequently, many empirical results established using the original index may not be replicable with corrected values. In particular, the corrected index fails to support three widely influential claims: that shareholder protection is higher in common than in civil law countries; that shareholder protection predicts stock market size or ownership dispersion; and that weak corporate governance explains the extent of exchange rate depreciation during the Asian financial crisis of 1997–1998.

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    This paper seeks to make three contributions to understanding how banks’ executive pay has produced incentives for excessive risk-taking and how such pay should be reformed. First, although there is now wide recognition that pay packages focused excessively on short-term results, we analyze a separate and critical distortion that has received little attention. Equity-based awards, coupled with the capital structure of banks, tie executives’ compensation to a highly levered bet on the value of banks’ assets. Because bank executives expect to share in any gains that might flow to common shareholders, but are insulated from losses that the realization of risks could impose on preferred shareholders, bondholders, depositors, and taxpayers, executives have incentives to give insufficient weight to the downside of risky strategies. Second, we show that corporate governance reforms aimed at aligning the design of executive pay arrangements with the interests of banks’ common shareholders - such as advisory shareholder votes on compensation arrangements, use of restricted stock awards, and increased director oversight and independence -cannot eliminate the identified problem. In fact, the interests of common shareholders could be served by more risk-taking than is socially desirable. Accordingly, while such measures could eliminate risk-taking that is excessive even from shareholders’ point of view, they cannot be expected to prevent risk-taking that serves shareholders but is socially excessive. Third, we develop a case for using regulation of banks’ executive pay as an important element of financial regulation. We provide a normative foundation for such pay regulation, analyze how regulators should monitor and regulate bankers’ pay, and show how pay regulation can complement and reinforce the traditional forms of financial regulation.

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    The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes that the wealth of the top executives at these firms was largely wiped out along with their firms. In the ongoing debate about regulatory responses to the financial crisis, commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. This Article provides a case study of compensation at Bear Stearns and Lehman Brothers during 2000-2008 and concludes that this assumed fact is incorrect. We find that the top-five-executive teams at these firms cashed out large amounts of performance-based compensation during this period. From 2000-2008, they were able to cash out large amounts of bonus compensation that were not clawed back when the firms collapsed, and to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion, respectively, from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives' initial holdings at the beginning of the period, and the executives' net payoffs for the period were thus decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narratives suggest, that the executives' pay arrangements provided them with excessive risk-taking incentives. We discuss the implications of our analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.

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    A substantial body of comparative legal scholarship considers statements applicable to large, conceptually infinite numbers of countries. Such statements gain in credibility if they are supported by evidence from large samples of countries. Processing such vast evidence requires quantitative methods. Designing the requisite numerical measures of law is not straightforward, but an important insight from statistics suggests that this problem can be overcome by appropriate research design. While in practice considering more countries comes at the expense of less information per country, on balance large sample, quantitative research designs promise to yield interesting insights for comparative law.

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    This paper empirically documents the continued importance of the legal families (common law and civil law) for the diffusion of formal legal materials from the core to the periphery, and some possible channels of diffusion, in post-colonial times. This raises the possibility that substantive differences between countries of different families around the world, such as those documented in the legal origins literature, continue to be the result of separate diffusion processes rather than of intrinsic differences between common and civil law. Using the example of corporate and securities law, this paper documents the frequent and often exclusive use of legal materials and models from the respective legal family’s core countries in treatises and law reform projects in thirty-two peripheral and semi-peripheral countries. Most authors of these treatises and projects were trained in the respective core countries. Data on the activities of national legal development and cooperation organizations, trade and investment flows, and student migration confirm the close legal family ties and provide some evidence of possible channels through which materials may continue to diffuse within their legal families after decolonization. The diffusion of formal legal materials need not imply that the substantive development of law is affected by foreign influences, at least not in ways that induce substantive differences between periphery countries of different legal families. Various theories from comparative law, sociology, political science, and economics provide reasons, however, why the content of law in the periphery might continue to be influenced by core country models of the same legal family, as the evidence of formal diffusion suggests they are. Such diffusion theories fit the available data better than other theories put forward in the literature.

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    The Antidirector Rights Index from La Porta et al.'s Law and Finance (1998) has been used as a measure of shareholder protection in almost 100 published studies. With articles by legal scholars questioning the accuracy of index values for several countries, I undertake a systematic study to verify these values for 46 countries with the help of local lawyers. My emphasis is on accuracy of the data; I do not change the original variable definitions. The study leads to a substantial revision: 33 of the 46 observations need to be corrected, and the correlation of corrected and original values is only .53. With accurate values, the well-known results of La Porta et al. (1997, 1998) no longer hold: accurate index values are neither distributed with significant differences between Common and Civil Law countries nor correlated with stock market size and ownership dispersion. All of the many results derived with the index will have to be revisited.

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    I re-code the "Antidirector Rights Index" (ADRI) of shareholder protection rules from La Porta et al. 1998 for 46 countries in 1997 and 2005 with the help of local lawyers. My emphasis is on consistent coding; I do not change the original variable definitions. Consistently coded ADRI values are neither distributed with significant differences between Common and Civil Law countries, nor predictive of stock market outcomes. The revision of the variable definitions in Djankov et al. 2005 salvages some of the original results, but reinforces severe endogeneity concerns regarding the index components that drive the remaining significant results. I review the other index components and conclude that the ADRI is unlikely to be a valid measure of shareholder protection. Results derived with the ADRI in the literature may have to be revisited. Along the way, I develop some general guidelines for consistent coding.

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    It is generally assumed that trade retaliation under the WTO performs some kind of ‘rebalancing’ by allowing the injured Member to suspend ‘concessions and obligations’ vis-à-vis the violating Member of a level equivalent to the level of ‘nullification and impairment’ suffered by the injured Member. This article argues that this perception is misguided. The article first questions if a sensible comparator exists with which equivalence for purposes of ‘rebalancing’ could be evaluated. It then argues that WTO arbitration decisions do not even succeed in their limited goal of providing for retaliation that will affect trade in the same amount as the WTO-inconsistent measure at issue. One reason is the use of an asymmetric and underspecified trade effects comparator. The other reason is very significant miscalculation of the trade effects of the violation, as shown by detailed legal-economic analysis of all relevant arbitration decisions. The decisions concerning countermeasures against prohibited export subsidies do not make any attempt at ‘rebalancing’ in the first place. The article considers political explanations of arbitration decisions. It concludes with some suggestions for improvement.

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    This paper tries to develop a general framework for choice-of-law in a federal system and an internal market. The framework consists of two elements: The first element is the criteria that should guide us in forging a choice-of-law rule, i.e., the answer to the question: How do we determine which choice-of-law rule is preferable? Recent European literature scrutinizes choice-of-law rules under the Dassonville/Cassis de Dijon test of Art. 28 EC, the parallel of the US Constitution's Dormant Commerce Clause, in the first ever intensive exploration of the influence of the concept of the internal market on choice-of-law. But this European literature overemphasizes a few "private interests", while largely ignoring the "state interests" involved, i.e., the horizontal power distribution of the federal system, an important element extensively addressed by the US literature. This paper joins these European and American ideas on a topic of common interest, to develop more sound criteria for forging choice-of-law rules in a system that is both federal and an internal market. The second element is the authority to make choice-of-law rules, i.e., the answer to the question: Who gets to determine which choice-of-law rule is right? In a federal system, this authority should be exclusively the union's. It should ideally be vested in the federal legislature, otherwise possibly in the federal courts. This paper agrees with a growing body of US literature that finds this ideal state to be embodied in the US Constitution. In Europe, authors merely advocate a federal control of state choice-of-law rules (under the EC Freedoms), but this seems to be no more than a third-best cost-inefficient substitute for the (supposedly) missing European federal law-making power in choice-of-law matters.