Monthly Archives: December 2006

Legal Origins and Modern Stock Markets

This post is by Mark Roe, Harvard Law School.

The Program on Corporate Governance recently issued my discussion paper, Legal Origins and Modern Stock Markets. The paper will be published in the Harvard Law Review in December 2006. The Abstract is as follows:

Legal origin–civil vs. common law–is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world’s richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation.

Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world’s richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century–the total devastation of many key nations, wrecking many of their prior institutions–predict modern postwar financial markets’ strength well and tie closely to postwar divergences in politics and policies in the world’s richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century–the kinds of systemic shocks that destroy even strong institutions–while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated the world’s richest nations and those nations’ basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world’s richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West.

The full discussion paper is available for download here.

Executive Compensation in Japan

This post is by Mark Ramseyer of Harvard Law School.

The Program on Corporate Governance has recently issued a discussion paper by Minoru Nakazato, Eric B. Rasmusen, and myself: Executive Compensation in Japan: Estimating Levels and Determinants from Tax Levels. Our Abstract describes the paper as follows:

Most studies of executive compensation have data on pay, but not on total income. Studies of executives in Japan do not even have good data on pay. Although we too lack direct data on Japanese salaries, from income tax filings we compile data on total executive incomes, and from financial records obtain some indication of which executives have substantial investment income. We find that Japanese executives earn far less than U.S. executives–holding firm size constant, about one-third the pay of their U.S. peers. Using tobit regression analysis, we further confirm that executive pay in Japan depends on firm size, with an elasticity of .24, but not on accounting profitability or stock returns. Corporate governance variables such as board composition have little or no effect on executive compensation, except that firms with large lead shareholders do appear to pay less.

The full discussion paper is available for download here.

SEC Tables Consideration of Proxy Access

During the evening of December 6, the Securities and Exchange Commission published its agenda for the open meeting scheduled for December 13, 2006. This past September, in AFSCME v. AIG, the Second Circuit held that shareholders had the right to introduce proposals to adopt proxy access regimes at their corporations.

Following the decision, the SEC immediately announced that it would consider amending Rule 14a-8 to address the Second Circuit’s decision. In October, however, the SEC deferred consideration of any proposed amendment to Rule 14a-8 until the open meeting scheduled for December 13. From the agenda published for next week’s meeting, it is apparent that the Commission has again decided to delay its consideration of this subject.

Individuals affiliated with the Program have over the past several years actively participated in the debate over proxy access. This involvement includes:

-An amicus curiae brief in the AFSCME v. AIG case itself, filed by Lucian Bebchuk, Allen Ferrell, Reinier Kraakman, Mark Roe, and Guhan Subramanian, in support of shareholders’ right to introduce proxy-access proposals;

-A letter on this subject sent to the SEC by several members of the faculty and other law professors;


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