This article assesses the impact of the 1992 SEC reforms that enhanced the ability of share-holders to communicate during a proxy contest. Utilizing a sample of 361 shareholder-sponsored corporate governance issue proposals from 1991 to 1995, the article finds that the mean percentage of total outstanding votes cast in favor of an issue proposal declined sig-nificantly post-reform. As explanation, the article furnishes evidence that certain sponsors interested in their own private agenda rather than general shareholder welfare exploited more fully the proxy mechanism post-reform; controlling for the composition of sponsors, the proxy reforms generated no significant change in the for-vote outcome of issue proposals. The article concludes instead that the reforms resulted in a shift in the composition of issue proposals targets toward companies relatively less vulnerable to such proposals pre-reform.

The Article surveys the growing law and finance literature providing evidence that legal protections for minority investors (and accompanying private and public institutions) correlate with various indices of financial development. Evidence in particular exists that countries with a common law origin enjoy both strong levels of investor protection as well as superior financial performance compared with civil law origin countries. Correlation does not mean causation, however. The Article examines the evidence related to whether the legal regime in fact causes financial development. Even if the legal regime does in fact cause such development, a question remains: How to generate investor-friendly legal regimes. Evidence on the efficacy of top-down reforms, including the transplant of laws from one regime to another, is examined. As an alternative, the Article puts forth the hypothesis that increased competition (whether product market, capital market, or regulatory competition) may have a greater ability to generate lasting changes in a country's legal environment to the benefit of investors and overall welfare.

This paper considers the efficiency implications of managerial "favoritism" towards block shareholders of public corporations. While favoritism can take any number of forms (including the payment of green-mail, diversion of opportunities, selective information disclosure, and the like), each may have the effect (if not the intent) of securing a block shareholder's loyalty in order to entrench management. Accordingly, the practice of making side payments is commonly perceived to be contrary to other shareholders' interests and, more generally, inefficient. In contrast to this received wisdom, we argue that when viewed ex ante, permissible acts of patronage toward block shareholders may play an important efficiency role that benefits all shareholders alike. We demonstrate that the prospect of having to share rents with a third party may itself have a deterrent effect on managerial self-dealing - an off-equilibrium benefit that would not be readily apparent if one looked only at instances where favoritism actually occurs in practice.

Many scholars agree that a robust market for corporate control provides a critical check on managerial opportunism within public corporations. Even prior to a tender offer, the specter of a takeover provides a powerful mechanism for aligning the incentives of managers and shareholders. Conventional wisdom, therefore, views with suspicion any practice that retards the takeover threat looming over managers who perform poorly. One such practice that has garnered particular attention of late is managerial "favoritism" towards influential block shareholders. Favoritism can take any number of forms, ranging from preferential stock subscriptions, to selective information disclosure, to outright cash payments. But regardless of its form, the argument goes, favoritism is potentially harmful to firm value, as it co-opts one of the most plausible monitors of management. Thus, many argue that corporate law should proscribe (or at least discourage) all forms of favoritism towards block shareholders. In this Article, we question whether the case for prohibiting favoritism is as compelling as conventional wisdom suggests. Our arguments are both practical and conceptual. From a practical standpoint, we raise doubts as to whether piecemeal regulation is even capable of curtailing favoritism writ large, rather than simply relocating it to less verifiable (and less efficient) domains. From a conceptual standpoint, we argue that permitting favoritism would likely enhance outsiders incentives to form a large block in order to extract patronage. Predicting this enhanced incentive, a rational manager would have to choose ex ante between (1) acquiescing to a division of her control benefits with outsiders; or (2) imposing significant constraints on her own self-dealing so as to deter the initial formation of any block. Using a game-theoretic model, we demonstrate that under many plausible circumstances, managers would prefer the latter option to the former. Consequently, playing favorites with block shareholders may, ironically, be in all shareholders interests.

This paper examines the factors that affect the decision of U.S. companies to issue securities off-shore compared with inside the United States. Utilizing a data set of 1,444 domestic private placements and offshore offerings from 1993 to 1997, the paper reports that firms that experienced a private securities fraud lawsuit in the past resort to foreign sources of capital more frequently. Similarly, companies in standard industrial classification groups that are targeted more often with private securities fraud litigation are also more likely to issue securities offshore than to conduct domestic private placements. Not all issuers, however, choose to exit the U.S. regime. The paper employs past experience with a SEC investigation as a proxy for the amount of risk that the issuer may pose to investors. Issuers with private securities fraud litigation experience that also encountered a past SEC investigation are more likely to raise capital through a domestic offering, consistent with the hypothesis that some issuers choose to raise capital in the United States when the bonding and signaling value of the U.S. legal liability regime outweighs the costs associated with antifraud liability.

Publicly-traded corporations contain a wealth of non-public material information. Insider trading prohibitions limit the ability of corporate insiders to profit from this information advantage through trades in their own corporations' securities. Some may view the SEC's recently promulgated Regulation FD as complementary to restrictions on insider trading, limiting the ability of firms to confer on outsiders a similar inside information advantage through selective disclosures. The employment of selective disclosures to favor outside investors and analysts, nonetheless, may provide a number of benefits to all shareholders of a corporation. Selective disclosures, for example, may help subsidize the formation of blocks of shares that help monitor managers for agency problems. Selective disclosures also may provide firms a low-cost and flexible means of conveying even confidential information indirectly into the capital markets. The Article contends that the real risk of selective disclosures lies with the potential for managers to co-opt such disclosures for their own opportunistic endeavors. Regulation FD, however, represents an untailored and overly broad response to the risk of opportunism. Instead, the Article sets forth a number of more tailored regulatory responses that allow firms to provide selective disclosures in situations where overall shareholder welfare is enhanced while curtailing more opportunistic uses. Prepared for the Dykstra Corporate Governance Symposium at the University of California, Davis School of Law (2001).

The law takes a laissez faire approach toward the efforts of most investors in the securities markets to obtain an information advantage and trade based on this advantage. Indeed, the misappropriation theory of insider trading liability has the effect of assigning trading rights in the securities of a firm (the "traded firm") to the source of material, non-public information. When the source of the information is outside the traded firm?say, a stock analyst or an industry rival?trading on such information is clearly legal if the source consents. The outside trader, however, is often not well placed to decide whether such trading is socially beneficial, internalizing most of the benefits of such trading but not most of its costs. Coasean bargaining is not likely to solve the problem because the traded firm (whose shareholders' predominantly bear the costs of such trading) faces large transaction costs of identifying and bargaining with the undefined and potentially replenishing class of such outside traders. Our thesis is that it is more efficient to allow the traded firm to control whether particular types of informed trading takes place. Under our proposed regime, firms would have the right to impose ex ante restrictions against outsider trading on their stock on the basis of material, non-public information. Reassigning to the traded firm the right to control whether informed outsider trading occurs gives the initial trading decision to a party that internalizes much more of the costs of such trading and therefore is more likely to filter out socially inefficient trades. Reassigning the outsider trading right is also more likely to facilitate Coasean bargaining, because it is easier for potential outside traders to identify the traded firm than it is for the traded firm to identify the potential outside traders. Finally, reassigning the outsider trading right to the traded firm is more consistent with property-rights based notions of just deserts. The outside trader may have a Lockean ownership right in the deliberately acquired non-public information, but such ownership does not necessarily entitle her to trade on another firm's stock. The Lockean creators of the traded firm in initially issuing its stock should also have a right to put outside traders on notice that trading on the basis of non-public information is prohibited (or restricted in pre-specified ways).

This article examines the theoretical issues and surveys the evidence on the desirability of securities class actions. Class actions offer the promise of energizing private enforcement of the securities laws, including in particular antifraud liability. For shareholders of large, publicly-held corporations, the individual benefits of pursuing a fraud action are often outweighed by the considerable costs of litigation. Without a class action, many potential fraud lawsuits may simply not get litigated. Nonetheless, the article explores three related problems with class actions: (a) the problem of frivolous suits (and the need to allow meritorious suits); (b) the lack of incentives on the part of plaintiffs' attorneys to focus on smaller companies; and (c) the agency problem between plaintiffs' attorneys and the plaintiff class. The article then assesses the existing evidence from the United States (in particular on the impact of the Private Securities Litigation Reform Act of 1995) in addressing these problems and proposes future avenues for research. Understanding the impact of class actions is important not only for the U.S. but also for countries considering the adoption of a U.S.-style securities class action system. As an example, the article discusses whether securities class actions would be beneficial in South Korea, a country with a smaller capital market and fewer large companies compared with the United States.

The judicial appointments process has grown increasingly frustrating in recent years. Both sides claim that their candidates are the "most meritorious" and yet there is seldom any discussion of what constitutes merit. Instead, the discussion moves immediately to the candidates' likely positions on hot-button political issues like abortion, gun control, and the death penalty. One side (these days, the Republicans) claims that it is proposing certain candidates based on merit, while the other (the Democrats) claims that the real reason for pushing those candidates is their ideology and, in particular, their likely votes on certain key hot-button issues. With one side arguing merit and the other side arguing ideology, the two sides talk past each other and the end result is often an impasse. To get past the impasse, we propose placing judges in a tournament based on relatively objective measures of judicial merit and productivity. A tournament allows the public to test the politicians' claims of merit. Being able to test those claims helps make transparent the occasions on which the real debate is over ideology. It is harder to disguise a purely ideological candidate as the best from a "merit" standpoint when the candidate performs poorly relative to many other judges based on objective factors. Once merit-based arguments have been isolated (or at least reduced in scope) to factors related to the tournament, it should be possible to have a transparent and meaningful debate over ideology.

The Article runs such a tournament using data on opinions authored by active federal circuit court judges from one common time period: the beginning of 1998 to the end of 2000. The focus on a common time period helps put judges in the tournament on a level playing field. We then generate a series of measures of merit focusing on (a) productivity, (b) opinion quality, and (c) judicial independence. While not perfect, our measures interject a greater focus on merit in the current nomination process (thereby flushing out previously non-transparent motives based on ideology). With our data, we are able to test the claims of merit that the next President will inevitably make when he announces one or the other of his favorite circuit court judges as the nominee for the Supreme Court.

The paper provides evidence on the impact of the Private Securities Litigation Reform Act of 1995 (PSLRA) by examining a sample of initial public offerings from 1990 to 1999 facing a mix of Section 11 and Rule10b-5 antifraud claims. Others have provided evidence that the PSLRA increased the significance of merit-related factors in determining the incidence and outcomes of securities fraud class actions. The increase in the importance of merit-related factors, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of nuisance litigation. Second, the PSLRA may have reduced the incidence of both nuisance litigation as well as a subset of the pre-PSLRA meritorious claims where the additional costs imposed by the PSLRA made such claims unprofitable from the perspective of plaintiffs' attorneys. This paper tests between these hypotheses and provides evidence that meritorious claims lacking obvious "hard evidence" indicia of fraud (an accounting restatement or SEC action) (a) are less likely to be filed post-PSLRA and (b) face a greater likelihood of receiving a dismissal or low-value settlement in the post-PSLRA period. In determining the welfare implications of blocking frivolous suits, policymakers should therefore consider the negative impact of the PSLRA in also discouraging a significant fraction of meritorious litigation.