Three Essays On The Legal Environment Corporate Policy And Governance

This dissertation consists of three essays on the legal environment, corporate policy and corporate governance. The dissertation research seeks to contribute to a new understanding of the relationship between the legal environment, corporate behavior and corporate governance. In the first essay, we use a unique hand-collected dataset on corporate subsidiaries and lawsuits to examine the relationship between litigation risk and subsidiary usage by large U.S. corporations. We find that firms, in general, tend to have a large number of subsidiaries when exposed to high litigation risk. Dividing the sample into financially distressed and financially healthy sub-samples, we find that financially distressed firms tend to have a large number of subsidiaries when exposed to high litigation risk, while this tendency is less pronounced in financially healthy firms. High severity litigation risk matters more than low severity litigation risk. The results are consistent with the prediction of theoretical models. Taken together, they bring to light an efficient link between litigation risk and subsidiary usage. The second essay empirically examines the relationship between litigation risk and key financial and investment policy choices. We use a unique hand-collected database on corporate lawsuits as a proxy to measure litigation risk. The key financial and investment policies we investigate include: the levels of financial leverage, cash holdings, and capital expenditures. After controlling for other determinants of corporate financial and investment policies, we find a negative relationship between litigation risk and financial leverage. We also find a positive relationship between the level of cash holdings and securities and intellectual property litigation. In addition, we document a negative relationship between the level of cash holdings and high severity litigation risk in general, and government contracts, corporate governance, and employment and labor litigation, in particular. Furthermore, we find a positive relationship between litigation risk and the level of capital expenditures. Partitioning the sample into unified and parent-subsidiary firms, we find that relative to high litigation risk firms with a unified corporate structure, high litigation risk firms with parent-subsidiary structures have significantly higher levels of financial leverage and cash holdings, and lower level of capital expenditures. Thus, corporate organizational form appears to be a clear substitute for financial policy in responding to litigation risk. Taken together, these results highlight a link between litigation risk and corporate financial and investment policy choices. In Essay three, we examine the effects of board structure on corporate litigation. Using a unique hand-collected dataset on corporate lawsuits and the 2002 NYSE/NASDAQ exchange listing requirements on board independence as an exogenous shock, with the difference-in-difference methodology, we empirically examine how an increase in the percentage of independent directors on boards affects a wide variety of corporate litigation. We find that an exogenous increase in the percentage of independent directors on a board is associated with a significant decrease in corporate litigation. In addition, the results are stronger in industries where the exposure to the various types of corporate litigation is greater. These findings provide evidence of the effective monitoring role of independent directors.

It shows that the reshaping of laws by citizens and courts after their enactment by the legislature might improve the decision process of the legislature and the public good outcomes that ensue. Chapter two is an empirical analysis of the dynamics of environmental legal rules. It uses the network of citations to legal precedent to test whether the dynamic body of law governing the environment is driven by political shifts in power or follows a process that is autonomous from these shifts in power. The results suggest that environmental law is now constitutionalized - its main principles entrenched in democratic culture rather than subject to the ebb and flow of democratic turnover of power. Chapter three also considers the dynamic aspects of governance. It uses a computational model to examine how political parties with different ideological commitments towards renewable energy might strategically use the path-dependence of technological transitions to shape policy over the long-term. It also examines how electoral pressures might constrain or help them in this endeavor.

Within this broad domain of nonmarket strategy, I study a set of research questions concerning firms' risk and uncertainty management strategies as a response to government's policy actions. A robust literature in strategy, international business, and management has long established that governments' and businesses' interests do not always align and a measure of risks and uncertainty persists regarding governments' intent, priorities, and future behavior from the firms' perspective. Adopting a phenomena-driven approach, I advance and elaborate upon our understanding with respect to each of these theoretical perspectives - signaling theory, political risks, and policy uncertainty - by examining instances of governments' policy actions as shifts in institutional environment and how that may relate to firms' evaluation of underlying risks and uncertainty. Specifically, I study three such initiatives - law enforcement actions against organized crime, encouraging private participation in infrastructure projects, and harmonization of patent laws with global standards - in the form of three essays. In doing so, I focus on the firm as the unit of analysis, relying principally on quantitative analyses on a sample of observational data but also use other approaches - case study, interviews, etc. - to support my findings.

This anthology of recent scholarship on corporate governance has been extensively revised and updated. It explores the application of legal doctrine and theory to topical policy issues such as corporate social responsibility, executive compensation, corporate criminality, federalism, and ethical rules for corporate lawyers. It contains materials on recent developments, including the 2008 financial collapse. The book puts into current context long-running debates on fundamental corporate law issues, such as shareholders' ownership of the corporation, director independence, and management's focus on maximizing share price. The new edition contains a new chapter on creditors and bankruptcy. The book is organized around policy issues rather than the doctrinal areas of the basic law school course. It presents diverse views on each issue through various approaches to analyzing corporate law and incorporating doctrine, law and economics, empirical work; history; and organizational behavior. The book is designed for use as the primary text in a course or seminar in corporate governance, but could also serve as supplemental reading in the basic law school corporations course. It includes questions for classroom discussion or self-directed study. The edited selections are generally longer than in a standard law anthology in order to provide a deeper treatment of the issues.