Ian Ayres and Joshua Mitts
In some contexts, an individual’s choice to mimic the behavior of others, to join the herd, can increase systemic risk and retard the production of information. Herding can thus produce negative externalities. And in such situations, individuals by definition have insufficient incentives to separate from the herd. But the traditional regulatory response to externality problems is to impose across-the-board mandates. Command-and-control regulation tends to displace one pooling equilibrium by moving behavior to a new, mandated pool. Mortgage regulators, for example, might respond to an unregulated equilibrium where most homeowners start with 2% down by imposing a requirement that causes most homeowners instead to place 10% down. But this Article shows that society can at times be better off if regulation induces separating behaviors by regulated entities. We evaluate a variety of mechanisms including licenses, subsidies, and regulatory variances as well as regulatory menus and heterogeneous altering rules that can incentivize a limited number of regulated entities to take the path less chosen. Anti-herding regulation provides a new means to attend to ways that mimicry can both suppress the production of information and exacerbate systemic risk.
Sovereign Debt Restructuring: Evaluating the Impact of the Argentina Ruling
Recent rulings in the ongoing litigation over the pari passu clause in Argentinian sovereign debt instruments have generated considerable controversy. Some public sector participants and academic articles have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. This paper critically examines this claim and argues that the incentives for holdout litigation are limited because of (1) significant constraints on creditor litigation, (2) substantial economic and reputational costs associated with such litigation, and (3) the availability of contractual provisions and negotiating strategies that mitigate the debtor’s collective action problems. It also argues that the fact-specific equitable remedy in the current Argentina case was narrowly tailored to Argentina’s unprecedented disregard for court opinions and for international norms of negotiating sovereign debt restructurings and is therefore unlikely to be used in future debt restructurings.
Institutional Investing When Shareholders Are Not Supreme
Christopher Geczy, Jessica Jeffers, David K. Musto, and Anne M. Tucker
Institutional investors, with trillions of dollars in assets under management, hold increasingly important stakes in public companies and fund individual retirement for many Americans, making institutional investors’ behaviors and preferences paramount determinants of capital allocation. In this paper, we examine high fiduciary duty institutions’ (HFDIs’) response to decreased profit maximization pressure as measured by the effect of constituency statutes on HFDI investment. We ask this question, in part, to anticipate HFDIs’ response to alternative purpose firms, like benefit corporations. Only with access to institutional investors’ capital can alternative purpose firms gain economic significance to rival the purely for-profit corporation. In our empirical study, we ask whether decreased profit maximization pressure, as evidenced by expanded director discretion to pursue nonshareholder interests, affected HFDIs’ decision to invest (or remain invested) in firms incorporated in constituency statute states because of a conflict, or perceived conflict, between fiduciary duties owed to beneficiaries and shareholders and the “other” serving interests. HFDIs, as agency investors for their shareholders and beneficiaries, are subject to strict fiduciary duties, which, among other things, explicitly disallow sacrificing monetary returns for other goals. We focus on HFDIs under the theory that any impact of fiduciary duties on investment behavior would be strongest among those subject to the strictest duties. In other words, if we were to see an effect at all between expanded duties and investment behavior, it would be most easily observable in HFDIs. Our findings also answer questions raised in earlier scholarship regarding the scope and impact of constituency statutes. In addition, our findings connect constituency statutes to the current academic debate on alternative purpose firms by identifying potential litigants and theories of recovery under the new statutes. Finally, we observe that HFDIs did not meaningfully change investment behavior in response to constituency statutes’ expansion of director duties. Our empirical observations are evidence against fiduciary concerns that impede alternative purpose firms’ access to public capital.