I am getting ready to teach MGM v. Scheider next week in Contracts. The case (347 N.Y.S.2d. 755) involves whether a series of communications between a Hollywood studio and actor Roy Scheider (who would later star in JAWS) constituted a contract that bound the star to act in an ABC tv series. [Note: should any of my contract students read this post, the foregoing is not an example of a good case brief.]
When going over the aftermath of this case in class, the inevitable question comes up: “Why didn’t the lawyers insist on a more formal, written, and executed contract?” The same answers surface: sloppiness, lack of sophistication, time pressure. It makes for an easy moral for law students (“be tougher and more careful”), but one that I find increasingly less satisfying and nutritious. Sloppiness just seems too pat an answer to explain this or many of the other lawyer “mistakes” that populate a Contracts case book.
Fortunately, Jonathan Barnett (USC Law) has a new working paper that provides a much more nuanced answer. Barnett’s “Hollywood Deals: Soft Contracts for Hard Markets” explores why many contracts between Hollywood studios and star level talent (both sides usually represented by experienced lawyers) fall into this netherworld of “soft contracts” – that is agreements of questionable status as enforceable contracts. Barnett’s explanation involves both parties navigating two different risks – project risk (the risk a film won’t happen or will flop) and hold-up risk (the risk that a necessary party to a film will back out, possibly to hold the project hostage). The studio system used to provide a way to balance these two risks. The decline of this sytem, according to Barnett, gave rise to a growing use of “soft contracts.” Here is the abstract:
Hollywood film studios, talent and other deal participants regularly commit to, and undertake production of, high-stakes film projects on the basis of unsigned “deal memos,” informal communications or draft agreements whose legal enforceability is uncertain. These “soft contracts” constitute a hybrid instrument that addresses a challenging transactional environment where neither formal contract nor reputation effects adequately protect parties against the holdup risk and project risk inherent to a film project. Parties negotiate the degree of contractual formality, which correlates with legal enforceability, as a proxy for allocating these risks at a transaction-cost savings relative to a fully formalized and specified instrument. Uncertainly enforceable contracts embed an implicit termination option that provides some protection against project risk while maintaining a threat of legal liability that provides some protection against holdup risk. Historical evidence suggests that soft contracts substitute for the vertically integrated structures that allocated these risks in the “studio system” era.
The very accessible paper is worth a read – not only for Contracts scholars and teachers, but also for those interested in the theory of the firm. For a different, stimulating approach to supplementing the teaching of contracts (Hollywood and otherwise), Larry Cunningham’s new book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter is out from Cambridge University Press. Larry gave a preview of the book and his approaching to teaching the subject in our Conglomerate forum on teaching contracts last summer. The book is chock full of very useful stories on chestnut casebook opinions, as well as contracts straight out of Variety involving stars from Eminem to Jane Fonda.
Since the mid-2000s, researchers have been studying the impact of foreclosures on surrounding property values. A colleague and I recently finished an important contribution to this line of research. Anyone attempting to craft responses to the housing market's current woes, particularly efforts to stabilize neighborhoods and home values, should give two of our results serious consideration.
First, our findings suggest that most prior studies overstate the impact that foreclosures have on surrounding property values. The reason they overstate the impact of foreclosures is that they don't take into account long term vacancy or property abandonment even though vacancy and abandoned property also drive down surrounding property values (either by adding units of supply or dis-amenities, depending on the vacant home or abandoned property's condition). In our study, we include measures of all three (both individually and collectively) and we find (in Table 10 on p.42, for those interested) that when you only measure one of the three factors that drive down housing values, you overstate the influence of the factor you are measuring. This result is important because it tells us that foreclosures do not decrease surrounding property values as much as previous studies suggest, and that attempts to stabilize markets should address vacancy and abandonment in addition to foreclosure.
Second, and more importantly, we illustrate how foreclosure, vacancy, and abandonment have differential impacts on weak housing markets relative to average housing markets. (The following information summarizes Tables 12-14.) When we subdivide Cuyahoga County's (home to Cleveland) housing markets by strength, we see huge differences. In the markets that more closely approximate the average market in the US, we see what prior research and theory would predict: foreclosures, vacancies, and abandoned housing all substantially lower surrounding home values. In these markets, long-term vacancy and property abandonment are not as common or as problematic as foreclosure.
But in weaker sub markets, things are strikingly different: long term vacant homes and abandoned properties drive down prices more than foreclosures, and are more common than they are in normal markets. Part of what drives this result is that lenders are attempting (and usually succeeding) to selectively foreclose on the "best-of-the-worst:" properties that have some prospect of resale because they are in the best neighborhoods in weak housing sub markets.
Understanding the relationship between foreclosure and abandonment is tricky: in weak markets, foreclosure accelerates abandonment, but does not appear to cause it. Foreclosed properties are sometimes abandoned, for example when lenders foreclose on a property that turns out to be among the worst-of-the-worst, they sell it to a property speculator that usually abandons it. But abandonment is really driven by long-term population loss that resulted in an oversupply of housing relative to demand. Plenty of property has been vacant long term or abandoned but has not been through a foreclosure recently.
The fact that vacancy and abandonment are bigger problems in weak housing markets than foreclosure is not surprising to those that have studied, worked, or lived in these markets. People with no experience with weak housing markets often overlook the problems of vacancy and abandonment, instead focusing on foreclosure. It is critical for policymakers to understand the differences between average and weak housing markets because the best tools for stabilizing housing in them differ. Weak markets need subsidies for the removal of vacant or abandoned homes, and less funding for rehabilitation. Likewise, proposals to move REO to rental property might not be as wise in weak markets as they are in average or stronger markets.
There are some promising local practices, such as modern land banking and low-value REO donation accompanied by per-property demolition grants that will help correct this supply/demand imbalance. Still, I personal think it would be better in the long run if policymakers paid more attention to right-sizing weak housing markets, and less to subsidizing rehab and new construction in them.
This is the fourth installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section meeting this Sunday from 9 am to 10:45 am at the Marriott Wardman Park.
Stavros Gadinis (U.C. Berkeley) has authored the fourth paper that will be presented on Sunday. His work, From Independence to Politics in Banking Regulation (forthcoming in the Duke Law Journal) provides a very insightful empirical study of how lawmakers are responding to the financial crisis. Surprisingly, Gadinis finds across a number of countries, lawmakers are moving away from giving responsibility for bank regulations to independent agencies. Instead, lawmakers are increasingly assigning responsibility to officials subordinate to elected politicians or to politicians themselves.
Here is his abstract:
U.S. financial regulation traditionally relied on independent agencies, such as the Federal Reserve and the FDIC. In the last two decades, countries around the world followed the U.S. example by strengthening the independence of their financial regulators, encouraged by recommendations from international organizations such as the Basel Committee and the IMF. Yet, reforms introduced following the 2007-2008 financial crisis abandon the conventional paradigm of agency independence and allocate authority to officials under the direct control of elected politicians, such as the Secretary of the Treasury. This paper studies reforms in 10 key jurisdictions for international banking. It shows that politicians gained new powers with three distinct features. First, politicians have new authority not only to handle emergencies, but also to oversee banks’ financial condition during regular times of smooth business operation. Second, politicians exercise these powers directly, rather than by delegation to a regulatory bureaucracy. Third, while reforms did not dismantle independent regulators, they require them to work under the leadership of politicians in new systemic oversight arrangements. Whenever reformers established new regulatory bodies or mechanisms, they placed politicians at the helm.
Gadinis’s paper promises to launch a fleet of subsequent scholarship. Beyond the normative/ policy question of whether this shift away from independence is a good development, are interesting questions that would drill down into the data. I would find it surprising that elected officials would assume all these new powers without building in mechanisms to hedge the risk of being blamed for the next crisis.
At the same time, Gadinis is writing at a particularly fertile juncture of financial regulation and administrative law. Some of the influential recent administrative law scholarship in this area has argued that traditional hallmarks to measure agency independence and traditional mechanisms to safeguard that independence need to be rethought, at least in the U.S. context. For example, Lisa Schulz Bressman & Robert Thompson have looked at the nuanced ways in which the President can exercise influence over agencies. Rachel Barkow has laid out other ways in which agencies can be insulated from capture beyond the traditional mechanisms (which, include taking away the President’s power to fire an agency head and exempting agency regulations from Executive Office cost-benefit review). So we need to pay much more attention to texture and nuance in defining agency independence and serving its underlying goals. Of course, the coding in a comparative empirical study cannot take into account all the differences in institutional environments among numerous countries.
Gadinis’s paper is sure to spark a lively scholarly conversation. Shruti Rana (Maryland) will serve as discussant and be first to engage.
Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.
But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?
In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.
Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others).
She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:
“Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:
(1) instructions from authority
(2) beliefs about others’ prosocial behavior; and
(3) the magnitude of the benefits to others.
Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”
While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.
Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”
In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.
She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.
Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.
Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.
Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.
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Outrage over Bank of America's proposal to charge a monthly fee for debit cards has not abated, even though the bank has backed down on making the change. A social media protest to encourage customers to move funds from Bank of America (and other national banks) to credit unions has gained steam. Organizers have named tomorrow, November 5th, "Dump Your Bank Day" (evidently, the "V is for Vendetta" film has staying power and revived popular American interest in Guy Fawkes).
This raises two empirical questions. First, do credit unions treat their customers any better? A great recent paper by Ryan Bubb (NYU Law) and Alex Kaufman both suggests that they do and explains why. The paper provides both a model and empirical evidence that explain how the ownership structure of credit unions reduces the incentive for these lenders to extract hidden fees from their customers compared to for-profit, shareholder-owned banks. (Note that this paper was written long before the "Dump Your Bank" protest started and does not endorse this movement). Here is the abstract:
In this paper we show how ownership of the firm by its customers, as well as nonprofit status, can prevent the firm from exploiting consumer biases. By eliminating an outside residual claimant with control over the firm, these alternatives to investor ownership reduce the incentive of the firm to offer contractual terms that exploit the mistakes consumers make. However, customers who are unaware of their problems making good decisions, and consequent vulnerability to exploitation, may fail to recognize this advantage of non-investor-owned firms and instead continue to patronize investor-owned firms. We present evidence from the consumer financial services market that supports our theory. Comparing contract terms, we find that mutually owned firms offer lower penalties, such as default interest rates, and higher up-front prices, such as introductory interest rates, than do investor-owned firms. However, consumers most vulnerable to these penalties are no more likely to use mutually owned firms.
Ryan presented the paper at a workshop here in Colorado over the summer. One of the questions I had then was why credit unions can't win customers by sending a credible signal that, to put it colloquially, "we'll screw you less." This Bank of America episode provides an interesting answer that perhaps customers are starting to recognize hidden fees and market choices.
A second question is whether this protest will hurt Bank of America and other national banks? There are historical antecedents for this movement. In the 1960s, protestors tried to start bank runs with calls for depositors to withdraw all funds from banks and then re-deposit them. I'm not aware that any banks suffered as a result.
There is a possibility that this current protest may actually help banks somewhat. There have been plenty of news stories of banks complaining about excess deposits. Some banks have mulled charging fees for large corporate customers and large deposits. Still, I would be surprised if BofA welcomed this protest, just as I would be surprised if the protest inflicted more than p.r. damage on BofA.
If you are at Law & Society this Friday and Saturday, come to the mini-conference on Entrepreneuship & Law that Brian Broughman (Indiana - Maurer School of Law) and our own Gordon Smith (BYU) have organized. Here is the line up:
Friday, June 3, 2011
8:15 am to 10:00 am Regulating Entrepreneurs 2122 (Chair: Brian Broughman)
- Mira Ganor (Texas), The Power to Issue Stock
- Erik Gerding (New Mexico), Shadow Banking, Financial Innovation, and Regulatory Arbitrage
- Michelle Harner (Maryland), Mitigating Financial Risk for Entrepreneurs
- Poonam Puri (Toronto), The Regulatory Burden of Corporate Law
- Discussants: Kristin Johnson (Seton Hall) & Sarah Lawsky (UC Irvine)
12:30 pm to 2:15 pm Governance Structure of Entrepreneurial Firms 2322 (Chair: Brian Broughman)
- Brian Broughman (with (Jesse Fried & Darian Ibrahim), Delaware Law as Lingua Franca: Evidence from VC-Backed Startups
- George Geis (Virginia), Organizational Contracting and Third Party Rights
- Alicia Robb (Kauffman Foundation), Entrepreneurial Finance and Performance: A Transaction Cost Economics Approach
- Discussant: Bobby Bartlett (UC Berkeley)
Saturday, June 4, 2011
8:15 am to 10:00 am Law, Entrepreneurship, and Innovation 3116 (Chair: Gordon Smith)
- Mike Burstein (Harvard), Exchanging Information without Intellectual Property
- Sean O’Connor (Univ. of Washington), Transforming Professional Services to Build Regional Innovation Ecosystems
- Peter Lee (UC Davis), The Accession Insight and Patent Infringement Remedies
- Karl Okamoto (Drexel), Law and Entrepreneurship: An Assessment Approach
4:30 pm to 6:15 pm Global Entrepreneurship 3519 (Chair: Gordon Smith)
- Afra Afsharipour (University of California, Davis), US Private Equity Investments in India
- Sofia Johan (York Univ.)(with April Knil and Nathan Mauck), Determinants of Sovereign Wealth Fund Investment in Private Equity
- Gordon Smith, Stability and Adaptability
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Okay, this isn't entirely new, but it's alway entertaining to look at a citation analysis, and I'm not sure if Peter Oh's paper on the citation patterns of the best corporate and securities articles has gotten much attention. It's lacking conclusions, but it takes a couple of takes on the the best corporate law papers of the past fifteen years ago, and compares them with a random selected sample of Columbia, Harvard, and Yale Law Review/Journal articles. It also shows that your average top corporate law article, even when picked by law professors, gets outcited by your randomly selected CHY article - which is a trend I've often thought exemplifies some of the resilience, for better or for ill, of student law review publications, which are cited much, much more often than are peer reviewed publications, with a ranking bias. It also shows that corporate law pieces may continue to face a citation handicap compared to con law or IP. We'll see if that continues. Table 1 is the place to look for the data, which I won't reproduce here partly because there appears to be a "do not reproduce" request in the SSRN draft.
Almost all economists, and certainly most of the well-cited ones, are quantitative empiricists now (and really a particular kind of empiricist, now they don't do big regressions, they look for instruments or experiments) - that's up from circa zero empiricists 50 years ago. Political science is a bit more heterogeneous, but APSR is almost exclusively the domain of quantitative empiricists, leading some in that field to observe, as Brian Leiter did yesterday re empirical legal studies, that the field is risking becoming arcane and narrow (here's Josh Wright and Professor Bainbridge on it too).
When will law follow suit? I think it will take a while, not least because the sort of state of the art that people with Ph.Ds are expected to do is a very far cry from the sort of work almost any law professor could be expected to do. I like my colleagues in the Finance Department, in other words, but I don't submit to the Journal of Finance (here's the latest edition - some of the subjects are of interest, but do have a look at the methods sections). In a discipline where only a tiny minority of the faculty have social science Ph.Ds, the tipping point towards technical empiricism is harder to identify than it probably is for economics and political science ... and that's not counting the possibility of buyer's remorse in those fields, or in this one, the conflation of the Ph.D with the ability or desire to do empirical work, the prospect that a subgroup will go down an unproductive rabbit hole (as far as I can tell, the law and courts people are still trying to decide whether the law constrains people, especially judges), and so on.
But look, corporate law and law and economics have been acquainted with empiricism as long as anyone, and one way of looking at how ELS is doing would be to see how those scholars are being cited, and for that we might consider Leiter's own invaluable empirical research.
Here's the corporate law list:
Ronald J. Gilson
Runners-up for the top ten
Highly Cited Scholars Whose Cites Are Not Exclusively in This Area
On which I count between 2 and 4 empiricists. Here's the law and economics list:
W. Kip Viscusi
Runners-Up for the Top Ten
A. Mitchell Polinsky
On which I count between 4 and 6 (though I may be missing some). For a total of between 6 and 10 out of 31. This is the senior list, but I've got to tell you, I don't think lists of juniors would be that different (you could look at the youngest members of Leiter's list and consider whether they would characterize themselves as empiricists or not). And those are the most economically-oriented fields. With everyone at every school doing scholarship now, I predict that there will be many scholars who write and cite work that isn't empirical, or the kind of empirical that social scientists understand as empirical, for years. Of course, social scientific empiricists won't care who cites them if they get jobs that they like, but still, you take the point.
Anyway, I'm not sure what to make of this. Nobody wants solely doctrinal scholarship or totally ungrounded theory. I do some "empirical" work, but I do it to be an upstanding member of the community, to take first cracks at developing data that someone else might use, to add context to nonempirical papers, and to steel myself to keep reading that literature. I wouldn't advise anyone else to do anything more than that, unless they've got their Ph.D and go to social science conferences, but your mileage may vary.
In an idle moment last week, I decided to do a little amateur empirical research into a question that been nagging me, “Why does it seem there were vastly more articles on the effects (particularly the supposed ill effects) of Sarbanes Oxley than Gramm Leach Bliley (and the repeal of Glass Steagall)?”
Before delving into the hypothesis, I wanted to make sure my perception was reality. So I did a quick Lexis/Nexis search of U.S. law reviews for the first five full years after those two acts passed. I looked only for titles in which the name of the act appeared ((Gramm or GLB or Steagall) compared to (Sarb! or SOX)).
I came up with a list of 34 articles for Gramm, Leach, Bliley/Glass Steagall versus 354 articles for SOX.
What accounts for the greater SOX appeal? One possible explanation is that Sarbanes Oxley affected vastly more companies and occupied a greater number of lawyers.
What I’d like to test is a second hypothesis, that Sarbanes Oxley was seen as more momentous for the U.S. economy. Which I think is a very interesting contention itself. Just eyeballing the two lists of titles, the portion of the Sarbanes articles that appear on their face to be critical of that act seems larger than the portion of the facially critical GLB articles.
Now before you jump ahead and call scholarly conspiracy (or think that I am looking to identify one), let me be clear about the dynamic I think is worth exploring. I think it is worth asking whether the SOX, which imposed new requirements on industry, generated a lot more political heat, to which legal scholars responded – including with a lot of very good empirical studies. GLB, by contrast, removed a lot of big regulatory barriers – so there was less heat from industry and therefore less demand for scholarship.
Have I proven this? Not al all – this is just the just the beginning.
I'm back from the Conference on Empirical Legal Studies at USC (at which I presented this paper) - always one of the best conferences around. Love the precision timing of the talks, the interesting papers, and I think you'll find that it is one of the relatively rare conferences where lots of panels have lots of attendees.
It's all very good, and very cheering, but it strikes me that ELS has a number of different constituencies, and the common cause among them is not always obvious. There's the law and courts crowd of political scientists, who are quantitatively sophisticated, and deeply divided from those political scientists who are more like constitutional lawyers. They talk about the Supreme Court, mostly because of the data there, rather than any reason related to its importance, but are beginning to move into other areas of public law. There's the more econ-oriented quant crowd, and they often teach in Finance and Accounting departments in business schools, but are unlikely to be Bayesians or whatever (that's more common in political science, I think). They write about government action, when they aren't pricing derivatives or mergers, etc: an example is the literature on whether Sarbanes-Oxley has been good or bad, or whether independent courts are a sine qua non of economic development. And then there are the two kinds of law professor quant crowds. There's the kind that try to operate in these two worlds (often very successfully, given that they have the same Ph.D.s as do the political scientists and the economists), and the kind who do not - this latter group often hand collects data on interesting legal questions and runs basic regressions (I'm one of these, with the possible exception of the interesting legal questions part!).
All of these people, to varying degrees, show up at CELS, and learn, I think, from one another, but each of them ask rather different questions, using rather different methods. It will be interesting to see if the constituencies start their own conferences in the future, or if CELS will continue to serve them all.
Larry Ribstein has some additional thoughts here.
Here is a new economics paper that might be of interest to Gordon and the rest of you out there interested in law & entrepreneurship: Azoulay et al., "Incentives and Creativity: Evidence from the Academic Life Sciences". Here is the abstract:
Despite its presumed role as an engine of economic growth, we know surprisingly little about the drivers of scientific creativity. In this paper, we exploit key differences across funding streams within the academic life sciences to estimate the impact of incentives on the rate and direction of scientific exploration. Specifically, we study the careers of investigators of the Howard Hughes Medical Institute (HHMI), which tolerates early failure, rewards long-term success, and gives its appointees great freedom to experiment; and grantees from the National Institutes of Health, which we are subject to short review cycles, pre-defined deliverables, and renewal policies unforgiving of failure. Using a combination of propensity-score weighting and difference-in-differences estimation strategies, we find that HHMI investigators produce high-impact papers at a much higher rate than two control groups of similarly-accomplished NIH-funded scientists. Moreover, the direction of their research changes in ways that suggest the program induces them to explore novel lines of inquiry.
What might this mean for law? Shooting from my hip, it might imply that companies that are subject to short-term pressures to produce (either because of the types of investors, the incentives of managers, or incentives created by corporate law) might produce less long term innovation. Any thoughts, Gordon, on what might be the results of a study of similar start-up companies backed by v.c. funds with different horizons?
What might this mean should law firms invest more in r&d? The best results may require a longer gestation.
Something for scholars to think about too in our own scholarship.
This Friday, I will be hosting and participating in the BYU Law Review Symposium, which is entitled "Evaluating Legal Origins Theory." Beginning with the publication of Legal Determinants of External Finance in 1997, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny ("LLSV") launched an ambitious research project to explore the meaning and importance of legal origins in financial development ("Legal Origins Theory"). Over the ensuing years, LLSV have embraced an expansive notion of legal origins under which common law is associated with support of market outcomes, while civil law is associated with state-desired allocations. Legal Origins Theory holds that a wide array of laws and regulations are influenced by legal origins, and that these laws and regulations in turn influence economic outcomes.
Many legal scholars have been skeptical of Legal Origins Theory, even as economists have pressed the fundamental claims through increasingly diverse and sophisticated studies. Work on Legal Origins Theory has emphasized three themes: investor protection, government regulation or ownership of economic activities, and judicial enforcement of property rights and contracts. This symposium will bring the insights of leading scholars to bear on each of those themes.
Simon Deakin, Professor of Law, University of Cambridge Faculty of Law, The Legal Origins Hypothesis: What are We Learning from Time-Series Evidence?
Session 1: Legal Families
Holger Spamann, Executive Director, Program on Corporate Governance, Harvard Law School, Contemporary Legal Transplants -- Legal Families and the Diffusion of (Corporate) Law
John W. Cioffi, Assistant Professor of Political Science, University of California – Riverside, Legal Regimes and Political Particularism: A Comparative Law Critique of the 'Legal Families' Theory
Commentary, J. Mark Ramseyer, Mitsubishi Professor of Japanese Legal Studies, Harvard Law School
Session 2: LLSV in the Midst of the Financial Crisis
Lisa Fairfax, Professor of Law and Director, Business Law Program, The University of Maryland School of Law, Legal Origins Theory Through the Prism of the Current Economic Crisis
Ruth V. Aguilera, Associate Professor, University of Illinois at Urbana-Champaign College of Business, and Cynthia Williams, Osler Chair in Business Law, Osgoode Hall Law School, York University, “Law and Finance:” Inaccurate, Incomplete and Important
Commentary, Karl Okamoto, Associate Professor of Law, Earle Mack School of Law, Drexel University
Katharina Pistor, Professor of Law, Columbia Law School, Rethinking the Law and Finance Paradigm
Session 3: Government Regulation or Ownership of Economic Activities
D. Daniel Sokol, Assistant Professor of Law, Levin College of Law, University of Florida, Competition Policy and Comparative Corporate Governance of State Owned Enterprises
John K.M. Ohnesorge, Associate Professor of Law, University of Wisconsin Law School, Legal Origins Theory and Developing Economies
Commentary, Chris Whytock, Associate Professor of Law, S.J. Quinney College of Law, The University of Utah
Session 4: Investor Protection
Poonam Puri, Associate Professor, Osgoode Hall Law School, York University, Investor Protection, Enforcement, the Canadian Capital Markets and the Legal Origins Theory
Andreas Engert, Lecturer, University of Munich, Institute of International Law and Comparative Law, and D. Gordon Smith, Glen L. Farr Professor of Law, J. Reuben Clark Law School, Brigham Young University, Are Civil Law Courts More Formalist? A Qualitative Exploration of the Adaptability Hypothesis
Commentary, Naomi R. Lamoreaux, Professor of Economics, History, and Law, University of California Los Angeles
The NYT today has an article about university professors and graduate students using Facebook for research purposes. The whole time I'm reading the article, I'm thinking, "Do they need consent to get IRB approval for that?" At the end of the article, the reporter notes that whether this type of research requires consent of the subjects varies by institution -- at Harvard, no, at Indiana, probably yes.
Speaking of consent from subjects, my daughter was asked to be in a study by a kinesiology researcher here at U of I. She had earlier been in a linguistics study, so she was game for this one as well. However, when reading the material, I noticed that she would have to have a blood test and a ten-minute body scan. For Carter, who is 8 years old, asking for either of those things voluntarily would be nearly impossible. The consent letter described the blood test as comparable to a bee sting, but telling that to a child is like comparing something to a snake bite. So, I decided that we would have to pass on this study, even though I understand that research is necessary for the public good. (This study was to compare children with low BMI index to children with high BMI index.) I suppose this was just one glimpse into the difficulties in health-related scientific research.
I'm spending the weekend in New York at CELS. Lots of interesting papers and presentations. Just to name a handful:
Marco Becht, Colin Mayer, & Hannes Wagner, Where Do Firms Incorporate? Deregulation and the Cost of Entry, which studies cross-border incorporation patterns in the EU after Centros, Uberseering, and Inspire Art, three recent ECJ decisions.
Kenneth Ayotte & Edward Morrison, Creditor Control and Conflict in Chapter 11, which investigates how creditors and creditor composition affect the conduct of Chapter 11 cases.
Vladimir Atanasov, Bernard Black, Conrad Ciccotello, & Stanley Gyoshev, How Does Law Affect Finance? An Examination of Financial Tunneling in an Emerging Market, which investigates the effects of legal change in Bulgaria relating to two types of financial tunneling: dilutive equity offerings and below-market freezeouts.
My co-author "Subbu" Subramanian at the Goizueta Business School (Emory) also did a great job presenting our paper: Krishnamurthy Subramanian, Frederick Tung, & Xue Wang, Law, Agency Costs, and Project Finance: An Empirical Analysis, a cross-country study showing the effects of legal rules on firms' choice between project finance and traditional corporate finance. Thanks to Kose John (Stern School) for great comments as our discussant.
Here's the abstract of our paper:
When corporations make large investments, what benefits do they derive from Project Finance vis-à-vis Corporate Finance? In this paper, we show that Project Finance contractually mitigates the agency costs stemming from managerial self-dealing. We argue that cash flows become verifiable in Project Finance because of the contractual arrangements made possible due to a single, discrete project that is legally separate from the sponsor.
We compare Project Finance loans with Corporate Finance loans across forty countries. We show, first, that Project Finance is more likely in countries where laws protecting against managerial self-dealing are weaker. We highlight the causal channel for this effect by showing that in such countries, Project Finance is disproportionately more likely in industries where free cash flows are higher. We use a 4-digit SIC level measure of free cash flow to assets across countries, as well as the US 4-digit SIC measure as an instrument for the cross-country measure. Second, since creditors’ threat to seize collateral deters borrower opportunism, we predict that stronger creditor rights mitigate the marginal effect of weaker protection against managerial self-dealing. We provide evidence for this prediction using exogenous country-level changes in creditor rights and using cross-country tests.
Apart from highlighting the corporate governance benefits of Project Finance vis-à-vis Corporate Finance, our study augments the law and finance literature by highlighting a micro channel through which legal origins can affect financing choices.