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Corporate Law's Limits


  • Roe, Mark J


A strong theory has emerged that the quality of corporate law in protecting distant shareholders primarily determines whether ownership and control separate. The theory helps to convincingly explain why separation is weak in transition and developing nations. But in several rich nations, although legal structures as measured protect shareholders well, separation is shallow. Something else has impeded separation. Separation should be narrow if shareholders face high managerial agency costs if ownership diffused. But most managerial agency costs are not corporate law's focus. Judicial doctrine attacks self-dealing, not business decisions that hurt stockholders. Indeed, the business judgment rule puts beyond direct legal inquiry most key agency costs--such as overexpansion, overinvestment, and reluctance to take on profitable but uncomfortable risks. Even if a nation's core corporate law is "perfect," it directly eliminates self-dealing, not most managerial mistake or most misalignment with shareholders. If the risk of managerial misalignment varies widely from nation to nation, or from firm to firm, ownership structures should also vary widely, even if conventional corporate law tightly protected shareholders everywhere from insider machinations. I show why this variation in managerial alignment is likely to have been deep. Copyright 2002 by the University of Chicago.

Suggested Citation

  • Roe, Mark J, 2002. "Corporate Law's Limits," The Journal of Legal Studies, University of Chicago Press, vol. 31(2), pages 233-271, June.
  • Handle: RePEc:ucp:jlstud:v:31:y:2002:i:2:p:233-71

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    References listed on IDEAS

    1. Joskow, Paul L, 1988. "Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence," Journal of Law, Economics, and Organization, Oxford University Press, vol. 4(1), pages 95-117, Spring.
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    Cited by:

    1. Edmund S. Phelps & Éloi Laurent, 2005. "La « contre-performance » de l'Europe continentale. Le lien entre institutions, dynamisme et prospérité économique," Revue de l'OFCE, Presses de Sciences-Po, vol. 92(1), pages 9-41.
    2. Dahlquist, Magnus & Pinkowitz, Lee & Stulz, René M. & Williamson, Rohan, 2003. "Corporate Governance and the Home Bias," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 87-110, March.
    3. Mathias Siems & Priya Lele, 2006. "Shareholder Protection: A Leximetric Approach," Working Papers wp324, Centre for Business Research, University of Cambridge.
    4. Benito Arruñada & Veneta Andonova, 2004. "Market institutions and judicial rulemaking," Economics Working Papers 801, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Andreani, Ettore, 2003. "Corporate Control and the Financial System in Germany: Recent Changes in the Role of Banks," Thuenen-Series of Applied Economic Theory 37, University of Rostock, Institute of Economics.
    6. Peter Wirtz, 2006. "Compétences, conflits et création de valeur:vers une approche intégrée de la gouvernance," Revue Finance Contrôle Stratégie,, vol. 9(2), pages 187-201, June.
    7. Peter Hogfeldt, 2004. "The History and Politics of Corporate Ownership in Sweden," NBER Working Papers 10641, National Bureau of Economic Research, Inc.
    8. Mihir A. Desai & Dhammika Dharmapala & Winnie Fung, 2005. "Taxation and the Evolution of Aggregate Corporate Ownership Concentration," NBER Working Papers 11469, National Bureau of Economic Research, Inc.
    9. Jackson, Howell E. & Roe, Mark J., 2009. "Public and private enforcement of securities laws: Resource-based evidence," Journal of Financial Economics, Elsevier, vol. 93(2), pages 207-238, August.
    10. repec:eee:tefoso:v:125:y:2017:i:c:p:309-320 is not listed on IDEAS
    11. repec:spo:wpecon:info:hdl:2441/1421 is not listed on IDEAS
    12. Nedelchev, Miroslav, 2012. "Корпоративно Управление На Финансови Посредници: Конвергенция И Дивергенция
      [Corporate Governance Of Financial Intermediaries: Convergence And Divergence]
      ," MPRA Paper 52268, University Library of Munich, Germany.
    13. Holmen, Martin & Hogfeldt, Peter, 2004. "A law and finance analysis of initial public offerings," Journal of Financial Intermediation, Elsevier, vol. 13(3), pages 324-358, July.
    14. Wang, Jiwei, 2010. "A comparison of shareholder identity and governance mechanisms in the monitoring of CEOs of listed companies in China," China Economic Review, Elsevier, vol. 21(1), pages 24-37, March.
    15. Chen, Gongmeng & Firth, Michael & Gao, Daniel N. & Rui, Oliver M., 2006. "Ownership structure, corporate governance, and fraud: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 424-448, June.
    16. Nedelchev, Miroslav, 2012. "Corporate governance of financial intermediaries: convergence and divergence," MPRA Paper 53939, University Library of Munich, Germany.
    17. Dionysia Katelouzou & Mathias Siems, 2015. "Disappearing Paradigms in Shareholder Protection: Leximetric Evidence for 30 Countries, 1990-2013," Working Papers wp467, Centre for Business Research, University of Cambridge.
    18. Deffains, Bruno & Demougin, Dominique, 2008. "Legal competition, political process and irreversible investment decisions," European Journal of Political Economy, Elsevier, vol. 24(3), pages 615-627, September.
    19. Nikolay Naydenov, 2013. "Comparison of the national models of international corporate governance: indicators for analysis and results," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 120-135.
    20. Clarke, Donald C., 2003. "Corporate governance in China: An overview," China Economic Review, Elsevier, vol. 14(4), pages 494-507.

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