The Social Costs of Dividends and Share Repurchases

A long-held view in the academy is that shareholders are residual claimants” in the sense that shareholders are paid in full only after the corporation pays its creditors. The reality on the ground is far different. Corporations give assets away to their shareholders long before they have satisfied creditors, both voluntary contract creditors and involuntary tort creditors. In particular, existing U.S. corporate and voidable transfer laws allow corporations to pay dividends and make share repurchases up to the point where the corporation is insolvent or nearly so. Voluntary creditors can limit dividends and share repurchases by contract, but involuntary creditors like tort claimants cannot, and unsophisticated voluntary creditors rarely do so. I use a simple Black-Scholes model of a debtor firm to illustrate the incentive that shareholders have to take dividends and share repurchases before debts are repaid. I then present data on the huge payouts of asset value by indebted U.S. publicly-traded corporations from 2010 to 2018. While good for shareholders, the permissiveness of corporate payout rules brings with it substantial social costs. Dividends and repurchases (1) dramatically increase the riskiness of corporate debt, diverting large resources into credit monitoring and speculation, (2) require a larger bankruptcy system to process large and complex corporate failures, (3) make firms more fragile and less resilient to financial crises, (4) unfairly shift costs to involuntary and unsophisticated creditors in violation of the implicit social bargain of limited liability, and (5) distort the supply of securities toward riskier debt that is publicly subsidized through tax deductibility of interest expense, simultaneously reducing the availability of safe assets that are in high demand. It would be socially beneficial to restrict dividends and share repurchases to corporations that have low debt and adequate insurance against harm to involuntary creditors, and that meet higher thresholds for wages and benefits. Such a rule would still allow corporations to operate without doing those things; they could still have high debt, be underinsured, and pay minimum wages with minimal benefits. But if they did so, they could not pay out assets to shareholders until they first met all their other obligations

The Siren Song of Litigation Funding

For an investor, litigation funding is too tempting to resist. Litigation funding promises that most elusive of investment returns: those uncorrelated with an investor’s other investment returns. Litigation funding also invests in a world that seems fraught with possible pricing inefficiencies. It seems plausible—even likely—that a team of smart lawyer-underwriters can identify high-value litigation investments to generate superior returns for litigation funding investors. But more than a decade of experience suggests the promise of litigation funding is a siren song. The promise draws investors into the water, but the payoffs may be meager and rare. While litigation funding has always been controversial with defendants and business trade associations, the real problem is that the investment class is a poor one. First, high-stakes civil litigation is far more complex and random than most investors understand. There are an overwhelming number of ways that litigants can lose and far fewer paths to significant victories. Second, few good cases—from an investment perspective—are likely to find their way to funders. Third, litigation funding is probably prone to optimism bias, causing litigation funders to overestimate the probability of victory in their cases. Finally, litigation funding is fungible with little value added by the funder, suggesting that competition will drive down any significant previously-existing profits. While litigation funding serves a valuable social purpose when it finances meritorious cases that otherwise would not be pursued, we can expect investor success in the field to be rare and likely limited to those funders with the most litigation savvy and the best luck. Nevertheless, investors are unlikely to give up on the space despite the large prospect of poor returns

Failed Anti-Activist Legislation: The Curious Case of the Brokaw Act

The Brokaw Act was proposed legislation aimed at “financial abuses being carried out by activist hedge funds who promote short-term gains at the expense of long-term growth . . . .” Sponsoring Senators named it after a small town in Wisconsin that, according to the Act’s sponsors, was decimated by the actions of a hedge fund activist in shutting down the local paper mill with a loss of hundreds of jobs. The Brokaw Act represented the first attempt at federal legislation aimed at restricting hedge fund activism. Since then, new and similar bipartisan proposals have appeared as have threats of state regulation. In this Comment, we show that the occurrences in Brokaw, Wisconsin are far different from the representations the sponsoring Senators made. Hedge fund activists played essentially no role in the closure of the Brokaw mill. To the contrary, the paper company’s incumbent management closed the mill—just the latest in a series of management’s mill closures—amid an industry-wide decline that made the mill uneconomic to keep open. We then consider two claims of hedge fund activism’s opponents that appear to motivate the Brokaw Act. The first claim—that hedge fund activists typically use the ten-day disclosure period of Rule 13d-1 to accumulate positions significantly in excess of 5%—has been the subject of empirical study and is incorrect. The second claim—that hedge fund activists often form a “wolf pack” in the pre-disclosure period to act collectively against a target—is also without support from empirical evidence. Neither claim warrants legislative action. Finally, we consider two additional parts of the Brokaw Act. The first would expand the concept of beneficial ownership to include certain derivatives linked to the value of equity securities, while the second would require increased disclosure of short positions in the stock of public companies. Neither activity plays an important role in hedge fund activism, and both require additional study before the passage of any legislation

The Sudbury Neutrino Observatory

The Sudbury Neutrino Observatory is a second generation water Cherenkov detector designed to determine whether the currently observed solar neutrino deficit is a result of neutrino oscillations. The detector is unique in its use of D2O as a detection medium, permitting it to make a solar model-independent test of the neutrino oscillation hypothesis by comparison of the charged- and neutral-current interaction rates. In this paper the physical properties, construction, and preliminary operation of the Sudbury Neutrino Observatory are described. Data and predicted operating parameters are provided whenever possible.Comment: 58 pages, 12 figures, submitted to Nucl. Inst. Meth. Uses elsart and epsf style files. For additional information about SNO see http://www.sno.phy.queensu.ca . This version has some new reference

Longman Tests in Context : t.III

80 tr.; 20 cm

Chemical control of brown rot ( Sclerotinia fructicoLa) of stonefruits in Queensland

Improved brown rot control was obtained in apricots, peaches and nectarines by four applications of benomyl (full bloom, 21 to 28, 7 to 14 and 1 to 3 days before harvest) and also by an increased number of applications of captan, captafol or chlorothalonil during the period from blossoming to harvest