Brian Leiter and David Bernstein report an exciting development: Vanderbilt Law School is starting a new PhD program in “law and economics.� See the official announcement here. The program will be headed by Kip Viscusi and Joni Hersch, two well-regarded law and economics scholars who are joining the Vanderbilt faculty from Harvard Law School. One imagines that Robert Rasmussen, who now heads Vanderbilt’s existing law and economics program and is himself a highly respected law and economics scholar, will also be involved in the enterprise.

Is this program a good idea? I think so. Until now, the only place for would-be law and economics scholars to get PhDs has been at economics departments. And most economics departments don’t have faculty who are learned or do research in the law and economics area, which by now has become a distinct field and which to teach right requires a level of knowledge about the legal system that most economists lack. Moreover, at least half of what is taught in economics departments is of little relevance to law and economics (i.e., everything on the “macroeconomic� side of the divide). A JD/PhD program jointly sponsored by a law school and an economics department thus entails spending a great deal of time studying subject matter that in no way illuminates the law with economics instructors who by and large lack legal training.

In contrast to traditional JD/PhD programs, the Vanderbilt program will be able to focus entirely on traditional legal training and on analytical methods from economics that can illuminate the law while avoiding study of those areas of economics that are of little use to legal practice and legal-economic scholarship. An initial challenge (but ultimately an advantage) for the program is the need to develop a uniquely law-centric curriculum that makes the study of law its central focus and tailors the economic aspects of the program to that end. Such a curriculum would enable students in the Vanderbilt program to complete a JD/PhD more quickly than can be done at other schools and at the same time equip them better for the task of legal-economic research.

If successful, Vanderbilt’s program may well start a trend and before long we could see similar programs at other law schools with strong faculty in law and economics and perhaps even in other “law and” fields such as legal history and law and philosophy.

Larry points us to a new corporate finance blog, Richard Booth’s The Quant. It looks like a great blog. The most recent post is on executive compensation–particularly on the serious problems of expensing options (and the FASB rule requiring it). Here’s a lengthy and informative excerpt (with a couple words from me following):

In the end, it might not matter whether a company treats the grant of options as an expense. Studies show that a company’s choice of accounting convention makes no difference as to stock price. As it is, analysts can translate earnings into cash flow, while CFOs can explain away the aberrant effects of accounting rules by calculating pro forma earnings. But does it really make sense to invent yet another way by which the numbers diverge? Moreover, it will be exceedingly difficult to unwind the effects of expensing options. First, expensing options may change management behavior by eliminating the incentive to distribute cash through repurchases. Second, option pricing models are based on an options market composed of diversified investors who can use options for hedging. For the CEO who gets paid in options, they are an all-or-nothing proposition. If your stock goes up, you win. If it goes down, you get squat. It follows that options are worth a whole lot less as compensation than they are as market instruments.

Indeed, management compensation has been declining as a percentage of income as options have become the primary form of compensation. In 1985 officer compensation was more than 70 percent of corporate taxable income in the aggregate, whereas during the five years up to 2000 it averaged about 40 percent of taxable income. Thus, the perception that management compensation is out of control is mostly about the redistribution of pay from losers to winners.

* * *

Still, it has been suggested that payment in stock would make more sense because it would give management the same kind of stake as an investor. Wrong. Aside from the fact that managers cannot diversify, with an outright grant of stock, management assumes the risk that stock price will fall and not simply fail to increase. With stock, management will have some interest in undertaking conservative strategies designed to maintain stock price. On the other hand, in a bear market, creating incentives to maintain stock price may sound like a pretty good idea. Then again, if one is interested primarily in safety of principal or a reliable return, there is always the bond market. It makes no sense to invest in stock unless one seeks a higher return. So it makes no sense to create incentives for management to pursue a conservative strategy. Again, investor diversification is key. A diversified investor prefers that each individual company maximize return even if it means that a few may go bust. If one is adequately diversified, the winners will usually outperform the losers by more than enough to generate a superior return. But few CEOs would bet the farm on a promising new line of business if it were not for stock options and plenty of them.

“Mere” accounting rules and disclosure rules can have significant substantive consequences. Regulators and corporate scolds look at superficial evidence of excess or of inconsistency and cast about for a “fix.” As often as not, the fix makes things worse, not better, in large part because economic reality is far more complex (and diverse across firms) than regulation can comprehend. The rules, in effect, favor expensing options early and “consistently” (see the full post for why consistency is not among the rules’ actual results), even if inaccurately. The consequence may be less risk taking, less effective compensation schemes, less investor return and, in fact, less consistency. Pretty dramatic consequences for a mere adjustment in accounting standards.

Yesterday’s New York Times reported on “a growing movement, from suburban Washington to Los Angeles, to protect mature urban trees — and in some communities, make it a crime to chop them down.” Washington Redskins owner Daniel Snyder, for example, was recently fined $37,000 for removing 130 view-obstructing trees on his riverfront estate, and the Montgomery County City Council, upset over Snyder’s action, has now amended a local ordinance to make Snyder’s crime punishable by up to six months in jail.

While Snyder’s misconduct was clear-cutting, a number of localities are criminalizing the removal of single trees. In San Francisco, for example, the Board of Supervisors will have authority to designate certain trees as landmarks, and the owners of those trees will not be permitted to remove them. Under a proposed Los Angeles ordinance, trees that are of designated species (native oak, black walnut, California sycamore, or bay laurel) and reach a certain size (4 inches in diameter) will automatically be protected.

What about compensation for the landowner who finds her property value diminished because city residents want to look at her tree? There’s not any, of course. Why would a city pay for what it can steal?

Putting aside the obvious injustice here (i.e., individual landowners are being forced to bear all the costs of a public good), this seems like a stupid way to protect trees. Imagine the fate of the poor native oak in Los Angeles that manages to reach 3.75 inches in diameter. If its owner thinks there’s any chance the property on which the tree is located might be developable sometime in the future, that tree’s days are numbered. In San Francisco, rational property owners are undoubtedly scouring their land for handsome trees that city planners might soon try to appropriate. Better get ‘em down before the Board of Supervisors comes a-knockin’!

This is not a new problem, of course. The so-called “shoot, shovel, and shut-up” syndrome has long plagued the Endangered Species Act, which precludes development of private property that may be habitat of a listed species. Here, though, the perverse incentives seem even stronger. It’s fairly difficult for landowners to make preemptive efforts to rid themselves of endangered species. (Landowners usually won’t know the critters are a problem until they are listed, and at that point, destroying an individual creature or its habitat can lead to punishment.) With mature trees, by contrast, landowners can protect their property rights, without breaking the law, simply by ensuring that their trees never get big enough to merit protection.

I’m all for big trees. So are lots of other folks. As the Times reported, “[a] study by the University of Washington even found that people shopped longer and more often in tree-lined retail areas and spent about 12 percent more money.” Findings like that suggest that private markets will produce big trees.

But what about those gorgeous old trees that have the misfortune of being owned by someone who doesn’t appreciate their magnificence? Shouldn’t citizens be able to stop the owner from chopping them down? Maybe. But if the public demands the tree, the public should pay for it by compensating the landowner for the loss in property value occasioned by the land use restriction. This is only fair. It’s also the only way to ensure that landowners allow the trees on their property to become magnificent.

The Slate has an interesting take on the Disney/Pixar deal.  In an article entitled “The $6 Billion Man,” Edward Jay Epstein asserts that Disney is essentially paying $6 billion to obtain the services of John Lasseter, Pixar’s creative guru.  Lasseter’s salary last year was about $2.8 million, and the value of his Pixar shares and options appreciated about $50 million, so he did pretty well.  If, however, someone was paying $6 billion for my contract, I’d ask for a raise or maybe hire Drew Rosenhaus to get me a new contract. 

On an unrelated note, Disney apparently has a computer-animation unit, cleverly code named Pixaren’t, formed for the purpose of making sequels to Pixar movies without Pixar involvement.

[See below the fold for an excerpt from Pixar’s latest proxy statement describing Lasseter’s employment agreement which runs through 2011.] (more…)

Via Wonkette (“I know those words, but that [] makes no sense”), I see that congressional staffers have been, ahem, updating their bosses’ Wikipedia entries. Here’s the dispute wiki at Wikipedia, and an informative article from, of all places, Lowell, Mass. Clearly the best part is that someone thought to try to add Scott McLellan’s name to the entry for “Douche.” (Hey, I’m just reporting here).

It appears that there is some effort being made to ban all congressional IP addresses from updating any entries on Wikipedia. Now there’s a business model that could profitably be extended.

It is, of course, a potential problem with wikis: free and open access means free and open access, even to the bad kids. I’m not really surprised the bad kids are working on the Hill.

For all you’ve ever wanted to know and more about wiki-related issues, see the wiki category archive over at Concurring Opinions.

Following up on this post, according to an article in today’s FT, 1,000 hedge fund advisers had already registered with the SEC prior to adoption of the registration requirement, so it appears that about 1,800 hedge fund advisers will be registered. Again, there are an estimated 8,000 hedge funds. Granted some advisers likely manage more than one fund, it looks like somewhere near a quarter of hedge fund advisers will be registered.

On another note, today’s FT also reports that registered hedge fund advisers deemed high risk by the SEC will be inspected every three years. Other hedge fund advisers will be selected randomly for inspection. The article does not specify the criteria for an adviser being categorized as high risk. But given the numbers, isn’t there a high risk that the truly high risk advisers will not be registered and therefore not subject to inspection?

Thom recently posted about Judge Alito’s comments on the recent Lepage’s decision involving bundled discounts offered to retailers. There is presently much debate among antitrust scholars regarding the proper treatment of “above-cost” price cuts, such as the bundled discounts in Lepage’s. The anticompetitive theory in these cases is not that discounts mask what is effectively “predatory pricing.” Rather, the theory is that the payments will deprive rivals from achieving minimum efficient scale for a period of time long enough to prohibit meaningful competition.

These forms of competition have attracted a good deal of antitrust scrutiny recently: slotting allowances, category management, bundled rebates, and discounts. For some thoughts on the economics of these practices, see my papers with Ben Klein on slotting and category management. How should antitrust law deal with manufacturer payments to retailers to shelve products, increase exposure, or secure promotional effort, which I collectively label: “Competition for distribution”?

Some have argued that per se legality is the correct approach to bundled rebates, but not necessary all payments for distribution. Thom’s proposed approach (among other things) requires the plaintiff to demonstrate in the context of bundled rebates that he could not have collaborated with other firms to construct a competing bundle. Others have argued for stricter scrutiny of bundled rebates, slotting allowances and payments for distribution more generally. Still others attempt to present a “unified theory” of Section 2 which would govern predatory pricing and allegedly exclusionary conduct.
In my paper (and thus the title of the post), Antitrust Law and Competition for Distribution, forthcoming in the Yale Journal on Regulation later this year, I focus on a number of economic facts regarding competition for distribution in search of guiding principles for an antitrust approach to these practices. Read below the fold for my thoughts on these economic characteristics, and what they suggest about a coherent approach to competition for distribution: (more…)

Click here for the SEC’s 370 page proposing release “Executive Compensation and Related Party Disclosure.” I think I’ll hold off on printing it out until I’m at work.

[hat tip: Broc]

Today’s NYT has a sobering article entitled Public Companies, Singing the Blues. The article discusses a question raised by Daniel Loeb, a famous hedge fund manager, at a dinner of buyout kings in Davos, Switzerland (the site of the World Economic Forum).

Loeb’s question: “Why can buyout firms take public companies private and make enormous returns, while the same type of returns seem out of reach for public companies and their shareholders?â€? He went on to say that buyout firms “were essentially arbitraging the public markets and ‘are appropriating profits that should belong to public shareholders.’”

As the article states, there are various advantages to being private: less regulation, fewer pesky shareholders, bolder and more useful boards, less focus on the short term, etc. Buyout funds take public companies private to capture these advantages. But are they fleecing public shareholders in the process as the article suggests? They can’t be, at least in the long term. My guess is that Loeb was just being sensationalistic. If there really is an easy arbitrage opportunity in the buyout market resulting in abnormal positive returns, a lot of money will flow into buyout funds (as it has been), more money and funds will be chasing deals, buyout premiums will increase, and the easy arbitrage profit will disappear.

We know that people respond to incentives, and that behavior will adjust in response to relative changes in price. But I think it’s commonly assumed that the only relevant price change attributable to disclosure regulations is the nominal change in direct costs of compliance. Sure, we all understand that if shareholder or regulatory pressure is brought to bear on corporate actors as a consequence of disclosure, that pressure can change behavior. But for some reason we’re unduly optimistic about this change; we just assume it will be for the better (you know, because “sunlight is a good disinfectant.” Brandeis said so).

But I want to point to another, I think overlooked, aspect of this dynamic: Behavioral changes taken by corporate actors to minimize disclosure-induced, unfavorable (by which I mean privately-costly) consequences. These adjustments can be costly. They may whittle away whatever benefits we think might arise from the disclosure obligation in the first place, and, ironically, they may actually staunch the flow of information.

What I’m interested in is how disclosure regulations might alter substantive behavior, particularly in unintended fashion. It was probably once the case that disclosure obligations were intended merely to inform and not to regulate. But I doubt that is any longer the case, although rhetoric (which is to say, compliance with statutory authority) is sticky. The idea that targeted disclosure regulation has substantive effect is not new—my dad mentioned it back in 1974 (and probably before); Steve Bainbridge more recently in The Creeping Federalization of Corporate Law. I’m sure there are many other examples. But we should also consider how disclosure has unintended, substantive effect as a function of actors’ efforts to avoid disclosure.

(more…)

The hedge fund registration requirements debated extensively in the blawgosphere a few months back (see, e.g., here, here, and here) will take effect on Wednesday of next week. According to this article in the W$J, so far 530 hedge fund advisers have registered and a few hundred more are expected before Wednesday. Recent estimates put the number of hedge funds at around 8,000 (although the number may be on the decline). So why haven’t there been more registrations? Well, the rules do not require registration if customers cannot withdraw money from an adviser’s fund for two years or more or if the fund is not taking new investors. Hence, a number of advisers have increased the lockup period for their funds to two years and others have closed their funds to new investors. Additionally, some hedge funds advisers have previously registered or are waiting to register pending the outcome of litigation challenging the rules (see this article).

The SEC’s reasons for adopting the new rules include the incredible growth of hedge fund assets, the fact that some hedge funds have expanded their marketing to attract retail investors, the gradual and detectable decline in investment minimums, and fraud deterrence. The SEC believes that fraudsters are attracted to the hedge fund industry specifically due to the lack of oversight. Likewise, the SEC hopes that similar to tax audits the prospect of random compliance examinations will serve to deter fraud. You can quibble with whether these reasons warrant additional regulation and whether adviser registration is the right answer (and many have). But if the SEC truly believes additional regulation is warranted and adviser registration is the right answer, why did they draft rules that appear to result in less than 25% of hedge fund advisers registering?

For a brief overview of the new rules (put together by my research assistant, Ron Taylor), see below the fold. (more…)

Yesterday’s New York Times editorialized on my favorite recent non-story — the one about Justice Scalia’s failure to attend the swearing-in ceremony of Chief Justice Roberts.

C’mon guys. As lesser newspapers have already reported, Justice Scalia was in Colorado to teach a previously scheduled ten-hour seminar over two days. He received no honorarium for his work. He arrived at 11:00 PM the night before the seminar began, left at 6:30 AM the day after it ended, and, at some point during the two days, managed to squeeze in less than two hours of tennis (scandal!). The date of the swearing-in ceremony was uncertain until the last minute, because the timing of the confirmation vote itself was up in the air. Of course he honored his commitment to teach the course, for which lots of folks had spent lots of money and done lots of work. One of the conference attendees, who has written about what really happened, praised Justice Scalia for “work[ing] his ass off.”

Perhaps realizing there’s no real scandal here, the Times decided to make a larger point, criticizing judicial “junkets.” It focused in particular on what it called “vacations” provided to federal judges “under the guise of ‘judicial education.’”

The term “vacations” may be stretching things. These are not the sort of conferences (like, say, most law conferences) where one can skip out on the sessions and go lie by the pool. The seminars are small (there aren’t that many federal judges after all), and one’s absence from meetings would be noticed. The seminars do seem to be in desirable locations, and the food and accommodations are no doubt first-rate, but in exchange for a comfy bed and a good meal, the judges are expected to endure day-long lectures on highly technical subjects.

What, then, is the attraction? Well, federal judges are generalists, who are expected to decide cases involving all sorts of matters on which they may have no formal training. Their decisions, then, are a matter of public record and are usually subject to review by higher courts. They therefore want to write the best, most persuasive opinions they can, and they are attracted by the prospect of acquiring analytical skills that will help them do their jobs better. In short, their motivation for attending these seminars is almost certainly not the comfy beds and good meals (we can assume that federal judges generally eat and sleep pretty well). Instead, they want to become smarter judges.

So why would the Times (along with Senators Leahy, Feingold, and Kerry, who are drafting legislation to ban these educational seminars) object? Perhaps it’s because of the subject taught at some of the most successful judicial seminars. The three most famous judicial seminars — those hosted by George Mason’s Law and Economics Center, the Liberty Fund, and the Foundation for Research on Economics and the Environment — focus on educating judges about basic principles of microeconomics. An understanding of how markets work can be invaluable to judges charged with deciding cases involving the various complicated regulatory regimes purportedly aimed at correcting market failure.

But Senators Leahy, Feingold, and Kerry (and the Times) would prefer judges who are less economically sophisticated. Perhaps that’s because folks who understand economics are less likely to reflexively support many of the interventionist public policies preferred by those senators and the Times editorial board. Thus, the Times (et al.) would rather have judges who are a bit more ignorant of the dismal science.

How enlightened is that?

The Disney/Pixar deal is a hot topic in the blawgosphere (see, e.g., here, here, here and here), so I want to join in. I took a quick look at the transaction documents (they’re now available here on the SEC’s website) and noticed that Steve Jobs has executed a voting agreement (here) pursuant to which he agrees to vote 40% of Pixar shares in favor of the deal. A voting agreement of this type is a common deal protection measure. What caught my eye about the Jobs agreement is that he is not obligated to vote all of his shares in favor of the deal. According to Pixar’s most recent proxy statement, Jobs owns 50.61% of the outstanding shares of Pixar. Thus, I assume that the 40% number is a result of the Omnicare decision. In Omnicare, the Delaware Supreme Court, in a controversial 3-2 decision, struck down under the Unocal test a merger agreement that (1) included a shareholder voting agreement pursuant to which holders of a majority of shares of the target company contractually obligated themselves to vote all of their shares in favor of the merger, (2) included a requirement that the target company’s board of directors put the transaction to a shareholder vote even if it no longer supports the transaction (”force the vote” provision), and (3) did not include a fiduciary out.

If the 40% number (as opposed to all shares owned) is a result of Omnicare, it seems to me to be an overly conservative reading of the case. The Disney/Pixar deal does not include a force the vote provision (does California corporate law, Pixar’s state of incorporation, even allow a forced vote?) and does include a fiduciary out, so none of the factors present in Omnicare are in the deal. Doesn’t that leave room for Jobs to agree to vote all his shares in favor of the deal? Maybe it’s at 40% for some other reason. On another note, has a common practice emerged with respect to deal protection provisions post-Omnicare?

My initial post on this blog hailed the power of the blogosphere to correct half-truths asserted by professional journalists. From Russ Roberts (via Cafe Hayek), a case in point.