Person:

Coates, John

We report the results of an online survey, conducted on behalf of Harvard Law School, of 124 practicing attorneys at major law firms. The survey had two main objectives: (1) to assist students in selecting courses by providing them with data about the relative importance of courses; and (2) to provide faculty with information about how to improve the curriculum and best advise students. The most salient result is that students were strongly advised to study accounting and financial statement analysis, as well as corporate finance. These subject areas were viewed as particularly valuable, not only for corporate/transactional lawyers, but also for litigators. Intriguingly, non-traditional courses and skills, such as business strategy and teamwork, are seen as more important than many traditional courses and skills.

We review and assess research findings from 120+ papers in accounting, finance, and law to evaluate the impact of the Sarbanes-Oxley Act. We describe significant developments in how the Act was implemented and find that despite severe criticism, the Act and institutions it created have survived almost intact since enactment. We report survey findings from informed parties that suggest that the Act has produced financial reporting benefits. While the direct costs of the Act were substantial and fell disproportionately on smaller companies, costs have fallen over time and in response to changes in its implementation. Research about indirect costs such as loss of risk taking in the U.S. is inconclusive. The evidence for and social welfare implications of claimed effects such as fewer IPOs or loss of foreign listings are unclear. Financial reporting quality appears to have gone up after SOX, but research on causal attribution is weak. On balance, research on the Act's net social welfare remains inconclusive. We end by outlining challenges facing research in this area and propose an agenda for better modeling costs and benefits of financial regulation.

How are relationships between corporate clients and law firms evolving? Drawing on interview and survey data from 166 chief legal officers of S&P 500 companies from 2006–2007, we find that—contrary to standard depictions of corporate client-provider relationships—(1) large companies have relationships with ten to twenty preferred providers; (2) these relationships continue to be enduring; and (3) clients focus not only on law firm platforms and lead partners, but also on teams and departments within preferred providers, allocating work to these subunits at rival firms over time and following “star” lawyers, especially if they move as part of a team. The combination of long-term relationships and subunit rivalry provides law firms with steady work flows and allows companies to keep cost pressure on firms while preserving relationship-specific capital, quality assurance, and soft forms of legal capacity insurance. Our findings have implications for law firms, corporate departments, and law schools.

In Citizens United, the Supreme Court relaxed the ability of corporations to spend money on elections, rejecting a shareholder-protection rationale for restrictions on spending. Little research has focused on the relationship between corporate governance – shareholder rights and power – and corporate political activity. This paper explores that relationship in the S&P 500 to predict the effect of Citizens United on shareholder wealth. The paper finds that in the period 1998-2004 shareholder-friendly governance was consistently and strongly negatively related to observable political activity before and after controlling for established correlates of that activity, even in a firm fixed effects model. Political activity, in turn, is strongly negatively correlated with firm value. These findings – together with the likelihood that unobservable political activity is even more harmful to shareholder interests – imply that laws that replace the shareholder protections removed by Citizens United would be valuable to shareholders.

In a hand-coded sample of M&A contracts from 2007-08, risk allocation provisions exhibit wide variation. Earn-outs are the least common means to allocate risk, indemnities are most common, followed by price adjustment clauses. Techniques for mitigating enforcement costs - escrows, holdbacks, and seller financing - are common. Target SEC registration and ownership dispersion correlate negatively with the use and extent of risk sharing. Target-owners retain risk more frequently, but not universally or exclusively, in industries in which current liabilities vary more, and when buyers and targets are in different industries. Bidder and target law firm agents match on bid value and prior deal experience, but law firm mismatches are common, and both law firm experience and experienced-based mismatches correlate with the use, variance, and design of risk allocation provisions. While asymmetric information and incentives are important, so are transaction and agency costs, implying roles for lawyers to serve as transaction-cost engineers and for policy-makers to set binding default rules of property, tort and contract law. Specific policy implications include: contract statutes of limitations should be shorter; default law should require minimum amounts in controversy and caps on post-closing contract liability; and lawyers should disclose to clients their M&A experience and typical outcomes of specific risk-allocation provisions.

Some members of Congress, the D.C. Circuit, and legal academia are promoting a particular, abstract form of cost-benefit analysis for financial regulation: judicially enforced quantification. How would CBA work in practice, if applied to specific, important, representative rules, and what is the alternative? Detailed case studies of six rules – (1) disclosure rules under Sarbanes-Oxley Section 404, (2) the SEC’s mutual fund governance reforms, (3) Basel III’s heightened capital requirements for banks, (4) the Volcker Rule, (5) the SEC’s cross-border swap proposals and (6) the FSA’s mortgage reforms – finds that precise, reliable, quantified CBA remains unfeasible. Quantified CBA of such rules can be no more than “guesstimated,” as it entails (a) causal inferences that are unreliable under standard regulatory conditions; (b) using problematic data, and/or (c) the same contestable, assumption-sensitive macroeconomic and/or political modeling used to make monetary policy, which even CBA advocates would exempt from CBA law. Expert judgment remains an inevitable part even of what advocates label “gold-standard” quantified CBA, because finance is central to the economy, is social and political, and is non-stationary. Judicial review of quantified CBA can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy.

This article provides an early assessment – both quantitative and qualitative – of the Roberts Court’s securities law decisions. Such cases represent an increased share of Supreme Court’s docket, compared to prior Courts, but only because its overall docket has shrunk, while it has continued to take an average of one to two securities law cases per year. The Roberts Court has maintained the same overall split in “expansive” or “restrictive” outcomes as the post-Powell Rehnquist Court, with reduced polarization: more than half were unanimous and only three included five-vote majorities. An attitudinal model does no better than a coin flip in predicting outcomes. What are new is a heightened role for procedure and a resistance to bright-line rules, with procedural decisions more restrictive and rejections of bright-line rules more expansive. The turn to procedure matches the background and interests of the Chief Justice, a former appellate litigator leading a broader “procedural revolution” on the Court, beyond the limited reach of securities law. The analysis is applied to predict outcomes for cases to be argued in the October 2014 term, and is used to sketch the types of cases likely to attract the attention of the Court in the future.

Still, for reasons I try to illuminate in Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications , efforts to quantify and monetize costs and benefits of significant financial regulations in precise and reliable ways face significant challenges. ... If my Article and this exchange help make it more likely that those proposals will be significantly modified--to embrace retrospective review, for example, rather than to insist that agencies use unreliable, up-front quantified guesstimates to defend regulatory changes--then this will be a good outcome, even if it takes a Chicken Little (to which Posner and Weyl liken me ) to generate a consensus. ... THE ROLE OF BREAKEVEN ANALYSIS IN CBA OF FINANCIAL REGULATION Sunstein's Response advances the technique of breakeven analysis to address the serious challenges financial regulators face in estimating the effects of major regulations. ... Meanwhile, non-financial regulations exist for which full quantified CBA is just as challenging as for any financial regulation. ... Institutionally, the guidelines are not (technically) regulations, but statements of enforcement policy, designed to give private parties insight into how the regulators analyze the effects of mergers and select enforcement strategies under the antitrust statutes. ... But such potential consequences are almost certain to be minor, and the first-order (in the sense of "larger") effects of the rule can be calculated by running experiments with representative individuals to see how often the cameras reduce accidents. ... At the same time, none of the examples that Kraus lists reflect the kind of quantification and monetization sought by some CBA advocates.

Cost-benefit analysis of financial regulation (CBA/FR) has become a flashpoint in contemporary legal and political debates, partly due to the Dodd-Frank Act. Yet debates over CBA/FR exhibit terminological confusion, and CBA/FR advocacy has outrun the possible, given data limitations and current research techniques, and has neglected institutional and legal design, relying unreflectively on the dubious idea of judicially enforced quantification in a conventional administrative law framework. The aim of this paper is to take up the institutional design question: how to move towards feasible and net beneficial CBA/FR practices? It argues that just as eliciting shareholder-oriented business decisions in for-profit corporations is a managerial challenge, not susceptible to command and control, so too generating good CBA/FR is a managerial challenge. Courts should have a reduced, not increased, role in reviewing CBA/Fr, and the tools of management – funding, governance, disclosure, regulatory design, and agency culture – are more likely to promote good CBA/FR than simple legal mandates.