Corporate Crime Legislation: A Political Economy Analysis

Corporate crime has once again become an important issue on the U.S. legislative agenda, leading Congress and the various regulatory bodies to tighten the law and enhance honesty and completeness in disclosure. However, the continued and rather explosive growth of corporate crime legislation leaves one with a rather strange puzzle: how can such a state of the world arise? After all, corporations and business interests are considered some of the most, if not the most, powerful and effective lobbyists in the country. Yet, we witness the continued expansion of legislation that criminalizes their behavior (one estimate suggests over 300,000 federal regulatory offenses that can be prosecuted criminally). How could this have happened? This Article sets out to explain this puzzle. Overall, my analysis suggests that most corporate crime legislation arises when there is a large public outcry over a series of corporate scandals during or around a downturn in the economy. In such situations, Congress must respond. Corporate crime legislation may be the preferred response for some corporate interests because it satisfies public outcry while imposing relatively low costs on those interests, thereby avoiding legislative and judicial responses that are more harmful to their interests and sometimes deflecting criminal liability away from managers and executives and onto corporations. This explains not only the impressive growth of corporate crime legislation but also leads to some surprising normative conclusions. In particular, it suggests that if one starts with the view that there is under-deterrence of corporate wrongdoing, then one would probably prefer to reduce corporate criminal liability and focus more on corporate civil and managerial liability

Corporate Defendants and the Protections of Criminal Procedure: An Economic Analysis

Corporations are frequently treated as “persons” under the law. One of the fundamental questions associated with this treatment is whether corporations should receive the same Constitutional protections and guarantees as natural persons. In particular, should corporations receive the Constitutional protections of Criminal Procedure? After all, corporations cannot be sent to jail so the sanctions they face are essentially the same as in civil proceedings. If so, then why not have the same procedural protections for corporate defendants in civil and criminal cases? Little scholarly analysis has focused on this issue from an economic perspective and this article aims to fill that gap. My analysis concludes that the concerns animating most procedural protections in the corporate context (i.e., reducing the costs of adjudicative errors and abusive prosecutorial behavior) would require procedural protections that differ for corporate defendants depending on the identity of the moving party (e.g., government or private litigant), and the type of sanction the corporation is facing, but not on the type of proceedings (criminal or civil) against the corporation. The analysis thus calls for a reorientation of procedural protections for corporate defendants along these lines rather than on the current criminal – civil dichotomy. The implications of such a reorientation are sketched in this paper and may, at times, suggest having stronger protections for corporations in civil proceedings than in criminal proceedings

Corporate Defendants and the Protections of Criminal Procedure: An Economic Analysis

Corporations are frequently treated as “persons” under the law. One of the fundamental questions associated with this treatment is whether corporations should receive the same Constitutional protections and guarantees as natural persons. In particular, should corporations receive the Constitutional protections of Criminal Procedure? After all, corporations cannot be sent to jail so the sanctions they face are essentially the same as in civil proceedings. If so, then why not have the same procedural protections for corporate defendants in civil and criminal cases? Little scholarly analysis has focused on this issue from an economic perspective and this article aims to fill that gap. My analysis concludes that the concerns animating most procedural protections in the corporate context (i.e., reducing the costs of adjudicative errors and abusive prosecutorial behavior) would require procedural protections that differ for corporate defendants depending on the identity of the moving party (e.g., government or private litigant), and the type of sanction the corporation is facing, but not on the type of proceedings (criminal or civil) against the corporation. The analysis thus calls for a reorientation of procedural protections for corporate defendants along these lines rather than on the current criminal – civil dichotomy. The implications of such a reorientation are sketched in this paper and may, at times, suggest having stronger protections for corporations in civil proceedings than in criminal proceedings

Enforcement of Corporate and Securities Laws in India: The Arrival of the Class Action?

Chapter from Enforcement of Corporate and Securities Law: China and the World. Howson, N.C. and Huang, R.H., eds. Corporate governance in Asia has garnered a great deal of recent scholarly attention.1 One topic that permeates discussions across countries is the enforcement of corporate and securities laws – with some countries relying primarily on public enforcement (i.e. enforcement by government) while others rely on some combination of public and private enforcement (i.e. enforcement by private shareholders). Further, understanding how enforcement is operationalised and its concomitant strengths and weaknesses enables us to better appreciate the actual corporate governance situation in many countries. In light of this, the enforcement of corporate and securities laws in India is examined in this chapter with special attention paid to the recent reforms that allow for class actions, for the first time, under Section 245 of the Companies Act 2013 of India. To explore this issue in greater depth, this chapter examines the likely value of private enforcement against the background of India’s ownership structure aand institutional context. This involves laying out what the pre-existing methods of enforcement are and how, if at all, the class action provision builds on their edifice. It also involves a general assessment of how successful this incarnation of the class action is likely to be in the Indian corporate governance space. The overall conclusion is that class actions are likely to be of limited value because of: (1) the glacial speed of the Indian courts, (2) the lack of contingency fees, (3) the limited availability of monetary remedies under the class action provision, and (4) the interaction between ownership structure in India – virtually all firms are controlled – and the absence of fiduciary duties owed by controllers to minority shareholders. The last point suggests that the class action in India is a procedural device that is only weakly tethered to an underlying duty

Stock Market Reactions to India\u27s 2016 Demonetization.

On November 8, 2016, the Indian government made a surprise announcement that certain currency notes (representing 86 percent of the currency then in circulation) would no longer be legal tender (although they could be deposited in banks over a limited period). The stated reason for this sudden “demonetization” was to combat tax evasion and corruption associated with “unaccounted for” cash. We compute abnormal returns for different subsamples of firms—defined by industry, ownership structure, and other characteristics—on the Indian stock market around this event. There is little evidence that sectors thought to be associated with greater tax evasion or corruption experienced significantly different returns. However, we find substantial positive returns for banks and for state-owned enterprises (SOEs). These effects persist over longer time horizons, implying that the initial reactions do not show any indication of subsequent reversal. The bank results appear to indicate a market expectation of a persistent increase in financial depth. We also find a pattern of higher returns for industries that are characterized by a greater dependence on external finance, possibly suggesting an expectation of an easing of financial constraints. The returns for SOEs are more puzzling and we canvass a number of potential explanations, while leaving further examination of this finding to future research

The Development of Modern Corporate Governance in China and India

Corporate governance reform has become a topic of considerable debate both in the US and in many emerging markets. Indeed, the discussion is important because these reforms may have potentially long-standing effects upon the global allocation of capital, and in understanding the ways in which governance norms are communicated across markets and nations in an ever-globalizing world. In this chapter we examine the corporate governance reform efforts of the world\u27s two biggest and fastest growing emerging markets, the People\u27s Republic of China (PRC or China) and India. In the process we find that our understanding of how and why corporate governance reform comes about, where it leads, and what value it has can vary significantly, but still shares some commonalities that are of considerable theoretical and practical importance. The inquiry commenced in this chapter is inspired by certain key facts. First, China and India are growing at a remarkable and unprecedented pace and seem to have survived the 2008-9 Global Financial Crisis better than most other economies. Second, China and India are not Western countries, but have been heavily influenced by globalized Anglo-American notions of corporate law, corporate governance norms, and securities regulation. Third, China and India are presently two of the most popular destinations·for foreign capital in the world - whether via foreign direct investment (FDI) in essentially private (or pre-public) transactions or public capital markets transactions. Fourth, both India and China have undergone, and are progressing through, incredibly important (indeed world -changing) programs of economic reform and restructuring. At the same time they are increasingly - in the Chinese phrase - opening to the outside world. These are the shared facts of our inquiry, which of course are met by many deep differences, in particular relating to the history, internal organization and political and economic structures of the two great nation­civilizations. However, we believe that the common facts recited above - rapid economic development, significant private and public foreign investment, economic, structural and legal/regulatory reform, speedy recovery from the Global Financial Crisis, and a shared interest in (if not implementation of) in essentially Anglo-American corporate law norms -provide an interesting and rich platform for consideration of popular or contested corporate governance and corporate governance reform precepts

Can Corporate Governance Reforms Increase Firms\u27 Market Values: Evidence from India

A central problem in studying the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Thus, if share prices move when governance reforms are announced, the price changes may reflect the reforms, but could also reflect other new information. We address this identification issue by studying India’s adoption in 2000 of major governance reforms (Clause 49), a number of which resemble and predate Sarbanes Oxley. Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls. The reforms were sponsored by the Confederation of Indian Industry (an organization of large Indian public firms), applied initially to larger firms, and reached smaller public firms only after a several-year lag. The difference in effective dates offers a natural experiment: Large firms are the treatment group for the reforms. Small firms provide a control group for other news affecting India generally. If investors consider the reforms to be valuable (or more valuable for larger firms), large firms\u27 share prices should react positively to reform announcements, relative to small firms. The May 1999 announcement by Indian securities regulators of plans to adopt what became Clause 49 is accompanied by a roughly 4% increase in the price of large firms over a (0,+1) event window, relative to smaller public firms; the difference grows to 7% over a (0,+4) window. Mid-sized firms had an intermediate reaction

Controlling Externalities: Ownership Structure and Cross-Firm Externalities

In recent years, debates over the social purpose of corporations have taken center stage amidst rising concern about externalities (such as those associated with climate change and harmful speech) generated by firms. A key motivation is the claim that government regulation and liability regimes appear not to be functioning sufficiently well to force firms to internalize these externalities. There is thus rising interest in exploring alternative mechanisms. In particular, a rapidly growing body of scholarship argues that index funds increasingly approximate diversified “universal owners” with incentives to maximize portfolio value (and thus to internalize cross-firm externalities). However, much of this analysis has focused on diffusely held US firms, while most firms in the world (including many important firms in the US), and many firms thought to be large contributors to these externalities, are controlled firms. Could index funds influence such firms to internalize externalities; if not, what other options might we consider? This paper examines these related questions within a more general conceptual framework for understanding how firms’ ownership structure and corporate law affect the internalization of cross-firm externalities. First, we provide novel empirical evidence suggesting that index funds are not well positioned to force controlled firms to internalize their cross-firm externalities (in particular, that index funds’ environmental engagements are concentrated among firms in countries with dispersed ownership structures). Second, we document that controlling shareholders are common among the largest firms in the energy, automobile, and technology sectors. Third, we explore the incentives of controllers by introducing the concept of “controller wealth concentration” (CWC): the fraction of a controller’s aggregate personal wealth that consists of stock in the firm that she controls. The lower the CWC the more scope there is for the controller to hold investments in other firms affected by the externalities created by the controlled firm. A low CWC is a necessary (though not sufficient) condition for controllers to have a pecuniary incentive to take cross-firm externalities into account (indeed, controllers with low CWC may be more effective than index funds in getting controlled firms to internalize their externalities because of their status as controllers). Fourth, we construct measures of CWC for the controlling shareholders of a global sample of large technology-focused firms. For this sample, CWC is very high relative to that of a diversified portfolio, typically varying from about 50% to close to 100%, despite the existence of controlling minority ownership structures (CMS) – such as dual class stock – that permit controlling shareholders to exert control while holding modest cash flow rights. Thus, we conclude that undiversified controlling shareholders constitute a significant obstacle to the internalization of cross-firm externalities, limiting the ability of universal owners to encourage their investee firms to internalize such externalities. Are there then steps that can be taken to encourage controllers to diversify more? Our framework suggests that, in principle, dual class structures (and other CMS) have the hitherto ignored advantage of allowing controllers to diversify their personal wealth (thereby potentially mitigating cross-firm externalities). Yet, we find that controllers do not typically diversify and lower their CWC even when they maintain control through dual class structures or other CMS. We discuss possible reasons - including founders’ over-optimism about their firms, the need to incentivize founders’ ongoing effort, and founders’ incentives to defer capital gains taxes – to explain why controllers fail to diversify. We then discuss other measures that might encourage controllers to diversify, but conclude that they are unlikely to have very large effects. Globally, a large fraction of corporations have controlled ownership structures. For these firms, the lack of controller diversification makes it difficult to identify mechanisms to internalize corporate externalities, besides increasing regulation and enhancing liability (although these solutions present their own challenges)

The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012

The effect of mandatory securities regulation on firm value has been a longstanding concern across law, economics and finance. In 2012, Congress enacted the Jumpstart Our Business Startups (“JOBS”) Act, relaxing disclosure and compliance obligations for

CEO Connectedness and Corporate Frauds

We find connections CEOs develop with top executives and directors through their appointment decisions heighten the risk of corporate fraud. Appointment-based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases expected costs of fraud by helping to conceal frauds, making CEO dismissal less likely upon fraud discovery, and lowering the coordination costs of carrying out illegal activities. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on frauds. Appointment-based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.http://deepblue.lib.umich.edu/bitstream/2027.42/101121/1/1209_Han.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/101121/4/1209_Kim_Apri14.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/101121/6/1209_EHKim_Jul14.pdfDescription of 1209_Kim_Apri14.pdf : April 2014 revisionDescription of 1209_EHKim_Jul14.pdf : July 2014 revisio