Corporate Governance in a Viable Market for Secondary Listings

CORPORATE GOVERNANCE IN A VIABLE MARKET FOR SECONDARY LISTINGS Tobias H. Troger* I. INTRODUCTION A seminal series of articles has used quantitative methods to scrutinize the legal roots of diverging ownership structures, and varying market depth and liquidity findings around the world.' Recent scholarship challenges law and finance literature's purely functionalist explanation, which rests upon the alleged fundamental idiosyncrasies of legal families, at least with respect to the evolution of developed economies within the second half of the last century.' Yet, the law's dispositive role within the institutional * Senior Lecturer, Faculty of Law, Eberhard-Karls-University, Tilbingen, Germany. LL.M., Harvard Law School; Dr. iur. (S.J.D.) Eberhard-Karls-University; J.D., LudwigMaximilians University, Munich, Germany. Earlier versions of this paper were presented at workshops at the University of Diisseldorf, Center for Corporate and Business Law, the Max-Planck-Institute for Research on Collective Goods, Bonn, the Annual Law & Economics Conference 2007 at the University of Bologna, and the European Association of Law and Economics' 24th Annual Conference 2007, Copenhagen. The author wishes to acknowledge helpful comments from participants, discussants and colleagues. Those of Carsten Burhop, Luca Enriques, Martin Gelter, Carsten Gemer-Beuerle; Florian Wagnervon Papp, and Dirk Zetzsche were particularly beneficial. Errors remain my own. 1. E.g., Rafael La Porta et al., Law and Finance, 106 J. POL. ECON. 1113 (1998) (presenting a positive correlation between the degree of investor protection, in terms of both legal rules and enforcement, and the robustness of capital markets around the world); Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, Corporate Ownership Around the World, 54 J. FIN. 471 (1999) (looking at ownership structures in large, publicly-traded firms from the twenty-seven richest countries); Rafael La Porta et al., Legal Determinants of External Finance, 52 J. FIN. 1131 (1997) (exploring how a country's legal environment affects the size and extent of its capital market); Rafael La Porta, Florencio Lopez-deSilanes & Andrei Shleifer, What Works in Securities Laws, 61 J. FIN. 1 (2006) (examining the relationship between the laws governing initial public offerings and various metrics of stock market development). 2. E.g., MARK J. ROE, POLITICAL DETERMINANTS OF CORPORATE GOVERNANCE (2003) (explaining the relationship of ownership concentration to the agency cost-increasing effect of "social democratic" polities); Enrico C. Perotti & Ernst-Ludwig von Thadden, The Political Economy of Corporate Control and Labor Rents, 114 J. POL. ECON. 145, 168 (2006) (explaining the subsequent restriction of capital markets in central Europe as a 90 U. PA. JOURNAL OF BUSINESS AND EMPLOYMENT LAW [Vol. 10:1 arrangement necessary to establish viable capital markets remains wellsubstantiated.3 Even the regulation-hostile position, articulated early by George Stigler 4 and later taken up with regard to disclosure duties, partially relies on the legal system to protect investor interests, but considers the safeguards of general contract and tort law sufficient.5 reaction of the economically and financially pummeled middle class to the Great Depression); Raghuram G. Rajan & Luigi Zingales, The Great Reversals: The Politics of FinancialDevelopment in the 20th Century, 69 J. FIN. ECON. 5 (2003) (arguing that the key factor is the relative political strength of incumbents opposing or favoring financial development). See also MARK J. ROE, STRONG MANAGERS, WEAK OWNERS: THE POLITICAL ROOTS OF AMERICAN CORPORATE FINANCE (1994) (linking the development of U.S. capital markets to the statutory elimination of alternative sources of corporate finance). 3. Bernard S. Black, The Legal and Institutional Preconditionsfor Strong Securities Markets, 48 UCLA L. REV. 781, 789-99 (2001) (highlighting certain investor protections fundamental to the development of a strong securities market); Andrei Shleifer & Daniel Wolfenzon, Investor Protection and Equity Markets, 66 J. FIN. ECON. 3 (2002) (considering the particular choices of a model entrepreneur who took a company public under a weak investor protection regime); Lucian A. Bebchuk, A Rent-Protection Theory of Corporate Ownership and Control 1-37 (Nat'l Bureau of Econ. Research, Working Paper No. 7203, 1999), available at http://www.nber.org/papers/w7203 (evaluating the choice between concentrated and dispersed ownership as influenced by the value of private control under different legal frameworks); Allen Ferrell, The Casefor Mandatory Disclosure in Securities Regulation Around the World, 1-63 (Harvard Ctr. for Law, Econ., and Bus., Discussion Paper No. 492, 2004), available at http://ssm.com/abstract-631221 (arguing for stronger mandatory disclosure requirements to reduce inefficient control premiums by reducing agency costs). 4. George J. Stigler, Public Regulation of the SecuritiesMarkets, 37 J. Bus. 117, 12024 (1964) (finding no difference in the average returns on new securities issues from 19251928 and 1949-1954, respectively). See also Gregg A. Jarrell, The Economic Effects of Federal Regulation of the Market for New Security Issues, 24 J.L. & ECON. 613 (1981) (employing the Capital Market Asset Pricing Model (CAPM) to estimate risk-adjusted abnormal returns and finding no difference in the average returns earned prior to and after federal securities regulation); Seha M. Tinig, Anatomy of Initial Public Offerings of Common Stock, 43 J. FIN. 789 (1988) (explaining IPO underpricing as an insurance against prospectus liability under federal securities laws). For indications of the positive effects of U.S. securities laws, see Carol J. Simon, The Effect of the 1933 Securities Act on Investor Information and the Performance of New Issues, 79 AM. ECON. REV. 295, 305-6 (1989) (showing that abnormal returns, due to investors' erroneous forecasting of unseasoned, nonNYSE-listed issuers, were significantly lower after the promulgation of the Securities Act). 5. See Sanford J. Grossman & Oliver D. Hart, DisclosureLaws and Takeover Bids, 35 J. FIN. 323 (1980) (discussing the effects of requiring positive disclosures in takeover bids, beyond a simple prohibition against making false statements, particularly with regard to disclosures relating to any intention to dilute the rights of shareholders who do not tender). See also Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 673-79 (1984) (showing how a mere rule against fraud could deter unscrupulous managers from habitually overstating corporate prospects and depriving investors of any reasonable method by which to discern actual share values); Sanford J. Grossman, The InformationalRole of Warrantiesand PrivateDisclosure About Product Quality, 24 J.L. & ECON. 461 (1981) (arguing that disclosure incentives, which exist in p (...truncated)