Lucian Bebchuk

One problem that a lot of people have noticed is that Americans do not spend enough time talking about politics. Yes, you can devote several hours a day to watching political news and forwarding political emails and signing secession petitions, but certain areas of life are not utterly infused with political rancor. Buying stocks is … somewhere on the spectrum, less politicized than buying beer but more politicized than buying toothpaste.

Lucian Bebchuk wants to change that. He has a post on DealBook, based on this paper he wrote with Rob Jackson, urging the SEC to make companies disclose their political contributions, so that you can get all mad and sell your stock in companies that make contributions to your less preferred candidate and buy stock in companies that make contributions to your more preferred candidate. I mean, I can just tell you: buy oil stocks if you’re a Republican and tech stocks if you’re a Democrat and the financial industry is kind of a mixed bag but, lately, Republican.

You could ask yourself a question like “why should a company do what its shareholders want?” and then you could answer “because the shareholders own the company,” but that is not an entirely compelling answer. They don’t really; they are residual claimants on the company’s income, or whatever; nobody owns the company, the company is people my friend; the company is a bundle of sticks, and there you are with your stick, waving it around while you beg the question. The company perhaps – perhaps! – owes shareholders an honest day’s effort to maximize the value of that residual income; it does not owe them doing the things that they want it to do.

But also, how do you know what the shareholders want? Or, what is a shareholder? I like thinking of most efforts at shareholder empowerment as kind of “let’s get rid of the agency costs of letting corporate executives use investor money for their personal silly goals and let investment managers use investor money for their personal silly goals.” Read more »

  • 24 Oct 2012 at 7:33 PM

Good Corporate Governance Apparently Does Some Good

We talked a while back about how “corporate governance” is a thing that exists more or less orthogonal to the thing that is “running your corporation as though you were a group of competent humans,” as evidenced by the fact that Citi’s mangled and perhaps legally problematic semi-firing of Vikram Pandit has been celebrated as a paragon of good governance. I don’t really know what “corporate governance” is, if not that, but much of its semantic space is covered by:

  • do your directors and CEO like each other? – [ ] Yes [ ] No
  • do you have strong takeover defenses? – [ ] Yes [ ] No

Two “No” answers = good governance; two “Yes” answers = sketchy.1

You might if you wanted to attempt to quantify those things – which is more important, and how if at all does the good governance that they reflect translate into things like shareholders making money? I enjoyed this Lucian Bebchuk DealBook post on a paper he wrote about golden parachutes in part because it gets at that a bit. Golden parachutes are a weird takeover-y topic: CEO employment contracts that provide for big payouts upon acquisition look formally like takeover defenses, insofar as they cost an acquirer money, but they’re actually sort of an anti-takeover-defense. They encourage takeovers since they’re a sign to acquirers that the CEO is not going to make things difficult if he gets a bid.

Anyway Bebchuk and his coauthors look at some data and find: Read more »

Financial markets are basically about information asymmetries, real and imagined, and financial regulation is largely about limiting those asymmetries to socially acceptable kinds and quantities. A general rule for trading success – perhaps the only useful rule for trading success – is: if you know something that nobody else knows and that will increase the value of a stock, then you should buy that stock! Afterwards, you should tell people. If you know something that will decrease the value of a stock, same thing, but with selling. If you don’t know anything that nobody else knows, index.

If you follow that rule too closely, though, you will end up in jail, as one does. So the trick is to know what kinds of secret information it’s okay for you to trade on, and what kinds it’s not okay for you to trade on. This is actually much harder than most people think it is,* which is why Doug Whitman is on trial.

My favorite category of nonpublic information that it’s maybe okay to trade on is your own intentions. If you wake up and say to yourself “I’m going to buy J.C. Penney stock today,” then right there you have an information advantage: you know something that no one else does.

Of course, who cares? In expectation, (1) you’re poor, so you’re not buying enough JCP stock to push up the price, and (2) you’re stupid, so your opinion of JCP won’t change anyone else’s view on the fair price. But occasionally you – not you you, but the “you” in this sentence – are rich and smart, and then your intentions are actually valuable information. One way you know that they’re valuable information is that stealing them is illegal: if Warren Buffett is secretly planning to buy Lubrizol, and his deputy knows about it, the deputy probably can’t go around buying Lubrizol. Another way to know: when Warren Buffett or Bill Ackman announces a position in a stock, the stock usually goes up.

So: is it okay for Bill Ackman to profit from his knowledge that he wants to buy J.C. Penney stock? Or does he need to tell everyone about his plans before he executes them, so that everyone can adjust their price in light of the knowledge that there’s a big buyer? Obviously you can’t arrest Ackman for insider trading because he traded on his knowledge that he was going to trade. (There are degenerate cases where you can come close.**) But you can argue about whether he owns that information and should therefore be able to profit from it, or whether instead that information should be public so he can’t take advantage of it at the expense of unwitting public investors who would have held out for a higher price if they’d known he was the buyer.

Harvard professor Lucian Bebchuk has a column in DealBook today about how the SEC shouldn’t prevent activists from secretly buying shares in companies. Read more »