Finance and Growth: The Legal and Regulatory Implications of the Role of the Public Equity Market in the United States

The important study of the relationship between finance and economic growth has exploded over the past two decades. One of the most significant open questions is the role of the public equity market in stimulating growth and the channels it follows if it does. This paper examines that question from an economic, legal, and historical perspective, especially with regard to its regulatory and corporate governance implications. The US market is my focus. In contrast to most studies, I follow both economic history and the actual flow of funds in addition to empirics and theory to conclude that the public equity market’s contribution to US economic growth is highly limited to the small but important contemporary role it plays in providing exit opportunities for entrepreneurs and venture capitalists. Nevertheless, there is a serious question as to the real economic growth benefit of easy exit. In particular, exit by merger may well be more macro-economically efficient than exit by IPO. I further tentatively conclude that the modern behavior of the US public equity market may be damaging to the long-term sustainability of American corporate capitalism and to long-term social welfare – in particular the market’s significant role in increasing economic inequality. Thus an overall appraisal of the market’s benefits and costs in the broader context of economic growth and economic inequality is long overdue. Important questions for corporate governance, financial regulation, and the structure of market institutions are raised. Along the way, I will have reason to question the continuing viability of the Miller-Modigliani irrelevance theorem

Caremark\u27s Hidden Promise

In re Caremark, decided in 1996, established for the first time a director’s duty to monitor under Delaware law. A significant amount of jurisprudence and commentary has developed. Almost all of this literature parses the language of the case and those following, and disregards the underlying claims for damages. As a result of this linguistic focus, many have concluded that the duty to monitor largely is toothless and, importantly, deals only with claims of failure to monitor legal risk. A duty to monitor business risk has been disavowed. Following the money reveals a different story. Classifying the cases according to their damages claims reveals that, in fact, Delaware courts have gone far toward extending the duty to monitor to business risk, while at the same time doctrinally disavowing that they have done so. Closely related to this monitoring duty is the pre-conditional duty of good faith, which is breached by directors’ knowledge of wrongdoing. Once again, doctrine masks important distinctions that are revealed by a close examination of the facts of the cases. Analysis reveals that Delaware courts may be failing to make an important distinction with regard to forms of notice. Making this distinction would help to shore up the duty to monitor without imposing unreasonable demands on directors. These two lines of analysis lead to the conclusion that a meaningful duty to monitor both legal and business risk is well along in development. Extracting and reassembling the facts would realize Caremark’s original promise

Fiduciary Duty in a Guanxi Society

China has imported the Anglo-American law of fiduciary duty into its corporate statute. I argue that fiduciary duty confronts a problem. Its transplantation is into the rich cultural soil of guanxi, a soil that is incompatible with the equally richly developed culture of fiduciary duty.This is the first paper to examine the relationship between fiduciary duty and guanxi. I conclude that, while fiduciary duty may take root in the limited (but important) context of self-dealing transactions, it is likely to fail in its essential function of guiding fiduciary behavior in the presence of a guanxi relationship