The Market for Corporate Law: Comment

Abstract

In several papers Professor Bebchuk has over the years developed an impressive but sceptical perspective of the interaction between state legislation in the field of company law on the one hand and the shareholders and managers of incorporated firms on the other hand (Bebchuk [1992]; Bebchuk and Ferrell [2001]; Bebchuk and Cohen [2003]), which runs parallel to my own way of thinking (Schon [2005]). In this new paper, the authors present a formalized model that supports the earlier findings by elaborating a mathematical framework (Bar-Gill, Barzuza, and Bebchuk [2006]). As far as the mathematics is concerned, it is not the task of a lawyer to take them on; as far as they picture the division of power between managers and shareholders, I fundamentally agree with them. So what is left to say? First of all not everyone agrees with Bebchuk's view of the corporate world. The old antagonism between the to the and the to the bottom hypotheses that emerged in the 1970s (Cary [1974]; Winter [1977]) is still alive. Writers like Roberta Romano do not share Bebchuk's sceptical view, which lies at the heart of many of his papers (Romano [1985], [1993]). They see market forces as being in power, which will eventually drive managers to take good care of the funds they administer on behalf of the shareholders. But how shall this happen? Shareholders face information asymmetries, which lead to massive problems in the principal-agent relationship with corporate managers. Shareholders face collectiveaction problems giving rise to rational apathy when it comes to participation in general meetings. One of the few weapons against benefit extraction by managers is the threat of corporate takeovers, which rely on the undervaluation of a firm in the stock market due to bad management. But what if this mechanism does not work? In many papers Bebchuk has made clear that in a world where different states set different rules on the legality of antitakeover measures and where managers have the first say when it comes to the choice of the state of incorporation, state legislation and managerial rent-seeking will work together to reduce the chances that there will be a successful takeover at all (Bebchuk [1992]; Bebchuk and Ferrell [2001]). I believe every word of it. But things are even worse. One of the refinements of the current discussion on the market for corporate law is the recognition of the fact that the race to the top or