Trust Law, Corporate Law, and Capital Market Efficiency

Abstract

In both the publicly-traded corporation and the private donative trust a crucial task is to minimize the agency costs that arise from the separation of risk-bearing and management. But where the law of corporate governance evolved in the shadow of capital-market checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfactual - a control, as it were - for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this essay is that many of the differences on the agency costs frontier between the public corporation and the private donative trust can be roughly attributed to their relative positions in modern capital markets and the related disparity in their residual claimants' ease of exit. Among other things, this approach reveals a correlation between the trust law model and the views of corporate law scholars who doubt the ECMH and its implications for corporate governance. The essay also discusses the use of market data for assessing breach and damages in corporate and trust litigation and for empirical evaluation of theoretical scholarly analysis in both fields. More generally, comparison of the governance of the public corporation and the private donative trust brings into view the importance of relative price efficiency for the modern approach to corporate governance.