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What matters in Design of Corporate Law

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For the corporate business model to be successful, it is important to align the interests of those who control and finance the firm. Corporate law has here an important task to fulfill. It offers a legal framework that can facilitate for parties to conclude mutually preferable agreements at low transaction costs. The purpose of the paper is to show how to design corporate law to fulfill this task. A two-dimension model that simultaneously considers both regulation intensity and the level of default of the corporate law is presented. Earlier literature treats these dimensions separately. By adding a transaction cost perspective to our model, we assess different regulatory techniques and examine how legislation can help corporations by offering a standard contract that lowers transaction costs of contracting. This can be achieved through a legislation that covers most contingencies and take the heterogeneity of firms into consideration. Furthermore, default rules or standards of opt-out character should be combined with other regulatory techniques with lower transaction costs such as opt-in alternatives and menus.

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  • Almlöf, Hanna & Bjuggren, Per-Olof, 2017. "What matters in Design of Corporate Law," Ratio Working Papers 299, The Ratio Institute.
    • Handle: RePEc:hhs:ratioi:0299
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    Keywords

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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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