Faculty Bibliography

This article 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 versus enabling tension in corporate/securities law, and exposes the current system’s fragile reliance on trading.

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.

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.