When Henry Manne writes about insider trading, as he does this week in the WSJ op-ed, one can be sure that it is worth reading. The op-ed, which is the first installment of a two part series, offers two central points: (1) the behavioral finance literature does not support the regulation of insider trading, but has pushed usefully pushed economists to think beyond the realm of the “marginal trader” and into a Hayekian theory of price formation, and (2) this “wisdom of crowds” approach to price formation provides a new rationale insider trading regulations.

Read the full piece here.

Abstract

Economic theorists argue that broad termination rights allow franchisors to police opportunism on the part of franchisees which have an incentive to free ride on the franchised trademark. However, in principle, these termination rights could generate another form of opportunism as franchisors then have an incentive to skim establishments that prove to be particularly profitable. We use the adoption of state franchise termination laws to determine which form of opportunism is more important on the margin. Using panel data on fast food establishments, we find that laws restricting franchisor termination rights lead to a reduction in franchising, and this reduction is not offset by the concomitant increase in franchisor-operated establishments. We also examine state employment rates in industries characterized by high rates of franchising relative to other industries where franchising is rare, finding that employment in franchise industries drops, as a proportion of total employment, by about 7 percent when states enact restrictions on franchisor termination rights. Both sets of results imply that the potential for franchisee opportunism is stronger, and restrictions on termination rights are likely to reduce joint surplus among franchisors and franchisees.

Abstract

Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power well. The coupling of votes and shares makes possible the market for corporate control. The power of economic owners to elect directors is also a core basis for the legitimacy of managerial authority. Both theory and evidence generally support the importance of linking votes to economic interest. Yet the derivatives revolution and other capital markets developments now allow both outside investors and insiders to readily decouple economic ownership of shares from voting rights. This decoupling, which we call the new vote buying, has emerged as a worldwide issue in the past several years. It is largely hidden from public view and mostly untouched by current regulation.

Hedge funds have been especially creative in decoupling voting rights from economic ownership. Sometimes they hold more votes than economic ownership – a pattern we call empty voting. In an extreme situation, a vote holder can have a negative economic interest and, thus, an incentive to vote in ways that reduce the company’s share price. Sometimes investors hold more economic ownership than votes, though often with morphable voting rights – the de facto ability to acquire the votes if needed. We call this situation hidden (morphable) ownership because the economic ownership and (de facto) voting ownership are often not disclosed.

This Article analyzes the new vote buying and its potential benefits and costs. We set out the functional elements of the new vote buying and develop a taxonomy of decoupling strategies. We also propose a near-term disclosure-based response and outline a menu of longer-term regulatory choices. Our disclosure proposal would simplify and partially integrate five existing, inconsistent ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed: we discuss strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

Bill’s post concerning the role of lawyers in reducing regulatory costs reminded me that that I had forgotten to post after the recent Harvard Negotiation Law Review Symposium on Deal-Making and Strategic Negotiation (thanks for the invite Vic). I had blogged about the value of case studies for empirical scholarship here. The symposium included some very interesting discussions regarding what might be thought of as unconventional roles for the lawyer, i.e. managing regulatory costs and thinking about branding considerations.

Read the full piece here.

Today’s WSJ reports that professional stock analysts employed by brokerage firms are up to their old sunny ways. These “sell-side” analysts came under fire in 2002 for rendering falsely optimistic trading recommendations. Congressional hearings revealed that during the late 1990s, analysts’ “buy” recommendations outnumbered “sell” recommendations by nearly 100 to one.

Read the full piece here.

Back in February, I criticized the SEC’s rules regarding how energy companies must disclose their oil reserves in securities filings. My main point was that the conservative way the SEC measures reserves is quite different from the measurement approach the oil companies themselves take when deciding how to invest billions of their own dollars.

Read the full piece here.

In today’s W$J, Holman Jenkins stands up for short-sellers, and rightly so. Those folks have taken a bit of a beating lately. They’ve been sued by companies like Biovail and Overstock.com and trashed on talk shows like CBS’s 60 Minutes.

Read the full piece here. 

Today’s W$J reports on an odd lawsuit the Australian government is pursuing against Citigroup. According to the Australian Securities and Investments Commission, a smoke break conversation between Citigroup employees resulted in illegal insider trading. Citigroup, it seems, was representing bidder Toll Holdings, Inc. in a yet-to-be-announced hostile bid for Patrick Corp., Austrialia’s largest port cargo handler. Someone from Citigroup’s investment banking operation allegedly shared information about the deal with one of Citigroup’s proprietary traders (i.e., someone who trades securities for Citigroup’s own account). The trading that followed, Australian regulators say, violated the law.

Read the full piece here. 

I’m really starting to worry about the lawyers for former Qwest CEO, Joseph Nacchio. (I first expressed concern here.) Mr. Nacchio has been charged with 42 counts of criminal insider trading. The charges are based on allegations that Mr. Nacchio learned, after Qwest had made some rosy public statements, that business wasn’t going as well as predicted, and he then sold $101 million worth of stock on the basis of that non-public information.

Read the full piece here.