Public companies in the United States and elsewhere are increasingly using open market repurchases, rather than dividends, to distribute cash. This paper explains why managers' ability to use inside information to repurchase stock at a bargain price is likely to systematically transfer value from public investors. In addition, tying cash distributions to the gap between the stock price and its actual value is likely to distort managers' payout, disclosure, and investment decisions, further reducing shareholder returns. The paper also proposes requiring firms to publicly disclose in advance the repurchase orders transmitted to their brokers. Such a disclossure rule, the paper shows, would reduce the economic distortions associated with repurchases without undermining their protential benefits.

Academics studying public firms' choice of governance arrangements have largely assumed that stock prices accurately reflect the effect of these arrange¬ments on firm value. As a result, firms going public generally have an incentive to seek arrangements that maximize shareholder value, and states seeking incor¬porations have an incentive to offer such arrangements. Oddly, this literature has ignored the considerable evidence that stock prices are frequently "noisy" ¬deviating significantly from fundamental value. This Article systematically ana¬lyzes the effect of noisy stock prices on firms' choice of governance arrangements. It demonstrates that stock price noisiness leads firms to seek - and states to of¬fer - arrangements with a current-owner bias - that is, arrangements favoring both insiders and current public shareholders at the expense of future public shareholders and long-term corporate value. Current-owner bias can explain many features of (and gaps in) state corporate law as well as the governance ar¬rangements chosen by public firms. The problem of current-owner bias also has important normative implications for the desirability of the market for corporate charters, the proper relationship between mandatory federal securities regula¬tion and state corporate law, and the wisdom of recent proposals to "empower" firms to choose their own securities regime.

It has long been conventional wisdom that insider's use of inside information to abstain from trading raises the same types of policy concerns as insider trading. This widely held perception has dominated much of the debate over the regulation of insider trading. I show that this view is flatly incorrect. The paper demonstrates that, as long as insiders cannot trade while in possession of inside information, insiders' ability to use inside information to abstain from trading does not make them better off than public shareholders. The paper then explains why insider abstention cannot give rise to the same type of economic distortions that might be associated with insider trading. I also analyze the implications of my findings for a number of issues in insider regulation.

Cash distributed to public shareholders is distributed through three mechanisms: dividends, open market repurchases (OMRs), and repurchase tender offers (RTOs). The leading explanation for why a corporation would distribute cash through an RTO rather than an OMR or a divided is the "signaling theory" - that managers use RTOs to signal that the stock is underpriced.

The Article has three main purposes:(1) to challenge the signaling theory, by exposing a flaw in one of its key assumptions and presenting empirical data suggesting that the theory cannot account for most RTOs; (2) to show that the same empirical data are consistent with insiders using RTOs to engage in insider trading with public shareholders; and (3) to propose that insiders be (a) required to disclose their tendering decision before the close of the RTO and (b) forbidden from selling stock outside of the RTO until six months after the announcement date. The Article explains how this "disclose/delay" rule would substantially reduce insider's ability to use RTOs for insider trading, without interfering with the use of RTOs for any other purpose (inclding signaling).

Researchers have extensively analyzed VCs’ cash flow rights in venture-backed startups, including the right to be paid liquidation preferences ahead of common shareholders when the startup is sold. However, common shareholders have various ways of impeding these preference-triggering transactions, and may use their holdup power to capture part of the VCs’ preferences. Little is known about VCs’ cash flow outcomes: whether VCs receive their full liquidation preferences when startups are sold. Using a hand-collected dataset of VC-backed startups, we find that VCs frequently “carve out” part of their preferences for common shareholders. We also find that the expected value of these carveouts is larger when the common have more holdup power. For example, carveouts are more likely to occur and larger when VCs do not control the board and when the corporate law governing the firm gives common more leverage over the VCs. Our study highlights the distinct role of common shareholders in late-stage startup governance, and shows how VCs’ control rights and cash flow rights interact to affect VCs’ cash flow outcomes. Our results also suggest that the choice of corporate law in private companies matters.

Cash distributed to public shareholders is distributed through three mechanisms: dividends, open market repurchases (OMRs), and repurchase tender offers (RTOs). The leading explanation for why a corporation would distribute cash through an RTO rather than an OMR or a dividend is the "signaling theory"-that managers use RTOs to signal that the stock is underpriced. The Article has three main purposes: (1) to challenge the signaling theory, by exposing a flaw in one of its key assumptions and presenting empirical data suggesting that the theory cannot account for most RTOs; (2) to show that the same empirical data are consistent with insiders using RTOs to engage in insider trading with public shareholders; and (3) to propose that insiders be (a) required to disclose their tendering decision before the close of the RTO and (b) forbidden from selling stock outside of the RTO until six months after the announcement date. The Article explains how this "disclose/delay" rule would substantially reduce insiders' ability to use RTOs for insider trading, without interfering with the use of RTOs for any other purpose (including signaling).

Academics studying public firms' choice of governance arrangements have largely assumed that stock prices accurately reflect the effect of these arrangements on firm value. As a result, firms going public generally have an incentive to seek arrangements that maximize shareholder value, and states seeking incorporations have an incentive to offer such arrangements. Oddly, this literature has ignored the considerable evidence that stock prices are frequently "noisy" -- deviating significantly from fundamental value. This Article systematically analyzes the effect of noisy stock prices on firms' choice of governance arrangements. It demonstrates that stock price noisiness leads firms to seek - and states to offer -- arrangements with a current-owner bias - that is, arrangements favoring both insiders and current public shareholders at the expense of future public shareholders and long-term corporate value. Current-owner bias can explain many features of (and gaps in) state corporate law as well as the governance arrangements chosen by public firms. The problem of current-owner bias also has important normative implications for the desirability of the market for corporate charters, the proper relationship between mandatory federal securities regulation and state corporate law, and the wisdom of recent proposals to "empower" firms to choose their own securities regime.

Rule 10b-5 of the Securities Exchange Act of 1934, the primary instrument for regulating insider trading, prohibits insiders from trading on material inside information. However, Rule 10b-5 does not prohibit insiders from using inside information to abstain from trading. For example, a CEO who learns that good news will emerge shortly is permitted to postpone an intended sale until after the good news has emerged and boosted the stock price. Because of this "abstention problem," legal commentators - both those opposed to Rule 10b-5 and those favoring it - have concluded that even when insiders are prevented from trading on inside information, they still retain an unerodable advantage over public shareholders. This paper shows that, contrary to the received wisdom, insiders who are prevented from trading while in possession of inside information cannot out perform public shareholders in their trading even if they are free to use such information to abstain from trading. In fact, insiders who could neither trade nor abstain while in possession of inside information would be systematically worse off than public shareholders. After examining the distributional effects of insider abstention, the paper considers the efficiency effects of insider abstention - namely, its effect on managerial incentives and the cost of capital. The paper explains that while insider trading has the potential to distort managerial incentives and increase the cost of capital, insider abstention does not. The paper concludes by examining the implications of the analysis for various issues in insider trading regulation - including the long-standing "use vs. possession" debate under Rule 10b-5 and Rule 10b5-1(c), the SEC regulation that provides a safe harbor from Rule 10b-5 liability.