William W. Bratton is Nicholas F. Gallicchio Professor of Law and Co-Director, Institute for Law & Economics at University of Pennsylvania Law School; and Simone M. Sepe is Professor of Law and Finance at the University of Arizona James E. Rogers College of Law. This post is based on their recent article, forthcoming in the Cornell Law Review.
A central question in corporate legal theory is whether large corporations should be conceived as hierarchical enclaves that operate apart from markets or as entities that operate within markets and under market control. The majority favors market control, making two basic assumptions: first, shareholders have the right incentives to mitigate the managerial agency problem, and, second, competitive markets are intrinsically superior to institutions as coordinators of production. Recent developments in practice appear to vindicate this majority view, turning shareholder empowerment from a normative aspiration to a positive reality. The rise of hedge funds and other activist investors has brought an unprecedented shift in power from managers to shareholders, who are now empowered to determine business decisions at publicly-traded companies.
In our article Corporate Law and The Myth of Efficient Market Control, forthcoming in the Cornell Law Review, we take the occasion of these transformative changes to put corporate legal theory’s majority view to the test, through a comprehensive economic examination of the claim of efficient market control. This examination brings to the forefront a substantial theory of markets and prices that has never been explored before in corporate law, general equilibrium theory (GE).
