Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance

This article discusses hedge funds activism based on Hirsch- man’s classic. It is argued that hedge funds do not create the loyalty concerns underlying the usual short-termism critique of their activism, because the arbiters of such activism are typically indexed funds, which cannot choose short-term exit. Nevertheless, the voice activated by hedge funds can be excessive for a particular company. Furthermore, this article claims that the short-termism debate cannot shed light on the desirability of hedge funds activism. Neither theory nor empirical evidence can tell whether hedge funds activism leads to short-termism or long-termism. The real issue with activism is a conflict of entrepreneurship, namely a conflict between the opposing views of the activists and the incumbent management regarding in how long an individual company should be profitable. Leaving the choice between these views to institutional investors is not efficient for every company at every point in time. Consequently, this article argues that regulation should enable individual companies to choose whether to curb hedge funds activism depending on what is efficient for them. The recent Europe- an experience reveals that loyalty shares enable such choice, even in the midstream, operating as dual-class shares in dis- guise. However, loyalty shares can often be introduced without institutional investors’ consent. This outcome could be improved by allowing dual-class recapitalisations, instead of loyalty shares, but only with a majority of minority vote. This solution would screen for the companies for which temporarily curbing activism is efficient, and induce these companies to negotiate sunset clauses with institutional investors

We need a European exit strategy for Covid-19 before it's too late

In the Covid-19 crisis, Europe is paying a high price for diversity, write Alessio Pacces and Maria Weimer. The failure to coordinate national public health responses in the initial stage of the outbreak has undermined both the fight to save lives and core European values and principles. But the fight against Covid-19 is a marathon, not a sprint. Going forward, Europe’s survival will depend on how it handles the exit from this crisis. The Commission has published a European Roadmap for lifting Covid-19 measures – member states must follow its recommendations before it is too late

The European Master in Law and Economics: A Program with a Focus on the Economics of the Europeanization and Internationalization of the Law

El Máster Europeo en Derecho y Economía (EMLE) está diseñado para proporcionar a los estudiantes un conocimiento avanzado en el campo del análisis económico del Derecho: la utilización de métodos económicos para explicar y evaluar los efectos de las normas jurídicas divergentes. Ofrece la oportunidad única de unos estudios interdisciplinares en Derecho y Economía en dos o incluso tres universidades europeas y no-europeas. Este programa internacional e interdisciplinar es ofrecido por un consorcio de nueve universidades de países europeos y no-europeos. Los estudiantes que participan en el Programa EMLE obtienen reconocimiento académico en todas las universidades en las que han cursado un trimestre. Esto significa que los estudiantes obtienen dobles o triples titulaciones, dependiendo de su asignación. Todos los títulos están oficialmente reconocidos en todos los países implicados. Cada universidad asociada concede un título de Máster (LL.M. / M.A /M.Sc). El programa proporciona a los estudiantes una comprensión avanzada de los efectos económicos de las leyes divergentes y los prepara para una carrera profesional, por ejemplo, en organizaciones públicas, en despachos de abogados multinacionales o en empresas de consultoría. El Máster Europeo en Derecho y Economía ha sido reconocido como Máster Erasmus Mundus, tanto en la primera (2004-2008) como segunda (2010-2014) convocatorias del programa Erasmus Mundus. En el contexto de los Másters conjuntos europeos, EMLE es uno de los dos Másters en Derecho y uno de los seis Másters en Economía que han obtenido la prestigiosa calificación de Erasmus Mundus

Illiquidity and financial crisis

This article analyzes the determinants of liquidity crises based on the dynamics of banking and finance under Knightian uncertainty. In this perspective, the facts of the global financial crisis seem to confirm Minsky's hypothesis of endogenous financial instability derived from Keynes's theory of liquidity and expectations. Conventional expectations allow overcoming uncertainty via the liquidity of secondary markets and, in turn, of banks' liabilities that are accepted as money. However, the failure of existing conventions drives the system into uncertainty-driven liquidity spirals, which are the more dangerous the more private money financial intermediaries have managed to create in the first place. Despite limited availability of data that can proxy for Knightian uncertainty, this approach to liquidity problems may explain better than others how a relatively small shock, such as the default of U.S. subprime mortgages, could trigger a worldwide systemic crisis

Methodology of Law and Economics

Introduction A chapter on the methodology of law and economics, i.e. the economic analysis of law, concerns the methodology of economics. The above quote (Becker 1976, 5) shows that economics should not be defined by its subject, but by its method (also Veljanovski 2007, 19). This method forms the core of our contribution. We discuss several related issues. In his entry on methodology in the Encyclopedia of Law and Economics, Kerkmeester (2000) states that most legal economists follow a pragmatic, eclectic approach and that it is hard to fit them in a particular school. A review of the methodology of law and economics must therefore concentrate on the ideas which are shared by the vast majority of legal economists (Kerkmeester 2000, 383). De Geest defines the use of elements from different schools as the ‘integrated paradigm’, and the predominant approach to law and economics as the ‘mainstream approach’ (De Geest 1994, 459ff, Mackaay 1991, p. 1509). In law and economics, the economic approach operates on two distinct levels. First, human choice is analyzed from an economic point of view. The predominant approach here is the rational choice theory, which we discuss in Section 2. The basic idea of this theory is that human behaviour is analyzed as if people are seeking to maximize their expected utility. The second level of the economic approach is the goals which are attributed to the legal system. In Section 3, we discuss the concept of market failure, which in law and economics is regarded as the primary raison d’être of law. Legal rules are analyzed as instruments to correct market failure, or at least to reduce its adverse consequences. We will briefly illustrate this idea by discussing, among others, competition law, tort law, patent law and consumer law as instruments to counter market power, negative externalities, collective goods and information asymmetry. In Section 4, we discuss the Coase Theorem, which states that the allocation of legal entitlements between market players is irrelevant for efficiency when the parties can transact these entitlements costlessly. Given that transaction costs are positive in the real world, we also pay attention to their implications for regulation. In Section 5, we discuss ‘behavioural law and economics.’ This relatively recent approach is based on insights from cognitive psychology, suggesting that people do not always act rationally. After reviewing the major findings in this field, we elaborate on the consequences for the more traditional approach of the rational choice theory. In Section 6 we conclude

Featuring Control Power: Corporate Law and Economics Revisited

This dissertation reappraises the existing framework for economic analysis of corporate law. The standard approach to the legal foundations of corporate governance is based on the ‘law matters’ thesis, according to which corporate law promotes separation of ownership and control by protecting minority shareholders from expropriation. This book takes a broader perspective on the economic and legal determinants of corporate governance. It shows that investor protection is a necessary, but not sufficient, legal condition for efficient separation of ownership and control. Supporting control powers vested in managers or controlling shareholders is at least as important as protecting investors from their abuse. Corporate law does not only matter in the last respect; it matters in both. This result is derived by interpreting corporate governance based on three categories of private benefits of control. Corporate law affects corporate governance depending on its impact on each category of private benefits, and not just on those accounting for shareholder expropriation. Three major areas of corporate law are considered with this view. The first is the legal distribution of corporate powers. The second is the discipline of related-party transactions. The third is regulation of control transactions. The three areas are investigated comparatively in the US, the UK, Italy, Sweden, and the Netherlands. The investigation shows that, when corporate law is analyzed in this fashion, it explains the different patterns and performance of corporate governance. This account of corporate law is not only useful for understanding separation of ownership and control, but also for indicating how to improve its efficiency through legal intervention

The European Master in Law and Economics: A Program with a Focus on the Economics of the Europeanization and Internationalization of the Law

El Máster Europeo en Derecho y Economía (EMLE) está diseñado para proporcionar a los estudiantes un conocimiento avanzado en el campo del análisis económico del Derecho: la utilización de métodos económicos para explicar y evaluar los efectos de las normas jurídicas divergentes. Ofrece la oportunidad única de unos estudios interdisciplinares en Derecho y Economía en dos o incluso tres universidades europeas y no-europeas. Este programa internacional e interdisciplinar es ofrecido por un consorcio de nueve universidades de países europeos y no-europeos. Los estudiantes que participan en el Programa EMLE obtienen reconocimiento académico en todas las universidades en las que han cursado un trimestre. Esto significa que los estudiantes obtienen dobles o triples titulaciones, dependiendo de su asignación. Todos los títulos están oficialmente reconocidos en todos los países implicados. Cada universidad asociada concede un título de Máster (LL.M. / M.A /M.Sc). El programa proporciona a los estudiantes una comprensión avanzada de los efectos económicos de las leyes divergentes y los prepara para una carrera profesional, por ejemplo, en organizaciones públicas, en despachos de abogados multinacionales o en empresas de consultoría. El Máster Europeo en Derecho y Economía ha sido reconocido como Máster Erasmus Mundus, tanto en la primera (2004-2008) como segunda (2010-2014) convocatorias del programa Erasmus Mundus. En el contexto de los Másters conjuntos europeos, EMLE es uno de los dos Másters en Derecho y uno de los seis Másters en Economía que han obtenido la prestigiosa calificación de Erasmus Mundus

The Law and Economics of Shadow Banking

This essay discusses the economic case for regulating shadow banking. It asks three questions. First, what is shadow banking? Second, why shadow banking should be regulated. Third, how to regulate shadow banking efficiently. Although shadow banking is, like banking, based on maturity transformation, no definition of shadow banking is ideal for regulatory purposes. Focusing on systemic risk, we take an instrument-based approach and define banking as leveraging on collateral to support liquidity promises. For regulation to be effective, however, this definition must be combined with other entity-based approaches. The economic rationale for regulating shadow banking is the negative externality stemming from systemic risk. Because uncertainty makes any measure of systemic risk imprecise, quantity regulation is preferable to a Pigovian tax to cope with this externality. Regulation should limit the leverage of shadow banking by imposing a minimum haircut regulation on the assets being used as collateral for funding. In theory, minimum haircuts regulation is an efficient way to constrain shadow banking. However, the practical difficulties of monitoring leverage at the assets level call for an indirect regulation of institutional leverage, too. This is effectively achieved through the regulation of bank leverage, which increases the cost of liquidity puts to shadow banking. Such risk-insensitive restrictions, however, undermine the efficiency of banking, whether official or shadow