CORNELL UNIVERSITY COLLEGE OF HUMAN ECOLOGY DEPARTMENT OF POLICY ANALYSIS & MANAGEMENT PAM 5334: CORPORATIONS, SHAREHOLDERS, AND POLICY SPRING 2015

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The directors of such [joint-stock]companies, however, being the managers rather of

other people’s money than of their own, it cannot well be expected that they should

watch over it with the same anxious vigilance with which the partners in a private

copartnery frequently watch over their own . . .

Adam Smith, The Wealth of Nations

I am the greatest. I said that even before I knew I was.

251 Martha Van Rensselaer Hall 255-8391

rrg24@cornell.edu

Office hours: Wednesdays, 10AM to noon, and by appointment

Teaching Assistant: Ms. Shirley Xu

sx65@cornell.edu

(347) 925-8637

Office hours: Mondays and Wednesdays, 1:30PM – 2:30PM, MVR 107

Academic Accommodations: Students with disabilities are entitled to equal access in all university programs and activities. Students with disabilities should work with Student Disability Services (SDS) (sds_cu@cornell.edu) to determine their best strategies for ensuring access. The SDS website is (http://sds.cornell.edu/). SDS will provide you with an accommodation letter that will enable me to work with you on the logistics of appropriate academic accommodations. Please make an appointment with me to discuss your requirements.

Course Description: The term “firm” has very broad usage in social science. It refers to any organizational form that people use to create teams or groups that focus on achieving a specific purpose, from making steel to offering legal services. Firms provide a structure through which people can organize themselves into specialized groups or teams. Firm can be categorized by the nature of the property rights owners hold in the firm, and by the details of the organization’s contractual arrangements. Typical firm types include partnerships, sole proprietorships, non-profits, mutuals, and publicly traded corporations, among others. This course focuses on one important firm

type: the modern privately owned corporation that features ownership shares available to the public. The course uses economic and statistical analysis to study the interaction of the public corporation, the market, and the law, and how those interactions affect the welfare of managers, shareholders and consumers. The costs and benefits of the standard corporate form of organization are examined. A variety of legal institutions, some of which have evolved over centuries, are analyzed. Those institutions define and govern the modern corporation. They include limited liability, fiduciary duties, the business judgment rule, and shareholder voting. The mechanisms of corporate governance, i.e., those legal, regulatory, and market-based forces that help control the corporation and ensure that managers operate it in shareholders’ interest, are examined. Corporate governance mechanisms include hostile takeovers, insider trading, outside directors on the board, the monitoring role of institutional investors, audits, and executive compensation plans. State corporate law and anti-takeover devices are also discussed. The role and impact of federal policies, such as the 1933- 34 Exchange Acts, the Sarbanes-Oxley Act, and the Dodd-Frank Act in affecting corporate structure and managerial behavior, will be an important focus. Other institutions and policies related to publicly traded corporations, such as sovereign wealth funds and government-sponsored enterprises (GSEs), will also be examined along the way.

Course Goals: My goal for this course is to significantly improve students’ understanding of, and appreciation for, the corporate form of organization. Students will leave this course with a deeper understanding of what a publicly traded corporation is, how it is organized, why it exists, its benefits and costs to society, how it is governed, controlled, and regulated, and its broader role in society. The course will refine student’s knowledge of the structure and effect of the law and policy surrounding the publicly traded corporation. Students will leave better equipped to understand policy controversies surrounding the corporation. The course also gives students an improved appreciation for the role and importance of alternative organizational forms in society. Consistent with Cornell’s liberal arts approach to higher education, a key goal is to provide students with the tools necessary to undertake independent critical thinking and assessment of public policies. This course serves as a primer for students seeking post-graduate education in law or business while helping prepare those who will work within the structure of a large corporation to better understand their employer. It also provides a framework for equity investors, i.e. those who spend time allocating resources into and out of the ownership shares of large, publicly traded corporations.  

Learning Outcomes:

Outcome 1: Students will be able to explain what a publicly traded corporation is, how it is organized, why it exists, its benefits and costs to society, how it is governed, controlled, and regulated, and its broader role in society.

Outcome 2: Students will be able to describe the structure and effect of the law and policy surrounding the public corporation.

Outcome 3: Students will be able to analyze and engage in policy controversies surrounding the corporation.

Outcome 4: Students will be able to explain and demonstrate the role and importance of alternative organizational forms, including private partnerships, mutuals, and non-profit enterprises.

Class Meetings and Format: Class meets on Mondays and Wednesdays 2:55PM to 4:10PM in MVR Hall, Room 280. The format includes lectures assisted by both PowerPoint and Blackboard, in-class discussions, use of the document camera to display recent newspaper reports and essays,

and extensive student interactions. All PowerPoint slides from the previous semester will be posted on the course site. Slides will be updated to reflect new material. We will post new lecture slides on the course site at least 24 hours before the class meeting.

Blackboard: Please be sure to sign up for and check Blackboard frequently for announcements, lecture slides, problems sets, and other information. We will utilize the Announcements function regularly, and will only email students with particularly important information.

Textbooks: The textbooks are as follows. They are available at the campus bookstore, Kraftees, and used on Amazon. Copies will also be placed on reserve in Mann Library.

Required: Frank H. Easterbrook and Daniel R. Fischel. 1996. The Economic Structure of Corporate Law (Cambridge: Harvard University Press).

Recommended: Robert A.G. Monks and Nell Minow, Corporate Governance, Fourth or Fifth Ed (John Wiley & Sons).

Recommended: Roberta Romano. 2010. Foundations of Corporate Law, Second Ed. (New York: Foundation Press).

Additional Reading: Our goal is to provide students with the knowledge they need to read articles in newspapers and magazines (as well as more academic outlets) about corporate governance, corporate control transactions, Sarbanes-Oxley, Dodd-Frank, and many other corporations-and- policy issues. Particularly relevant newspapers include the Wall Street Journal, the Financial Times, business section of the New York Times, the web-only New York Times Deal Book and The

Economist, among others. New York Times articles by Gretchen Morgenson are often highly

relevant. I am always grateful when students bring to my attention articles that are relevant for the subjects we are studying in PAM 3340.

Prerequisites: The prerequisites for this course are PAM 2100 and Principles of Economics. Several readings rely on statistical and econometric analysis. The more training students have in these areas the better.

Exams: There will be two in-class preliminary exams. The first prelim will be held on Monday, March 2nd, and the second prelim will be on Wednesday, April 8th. The final examination has not yet been scheduled. The final exam will be comprehensive. Please be sure that you will be able to take the exams on those days.

Grading: Fairness in grading is a high priority. We will ensure that examination and homework questions accurately test the material from the lectures and the readings. We will work hard to ensure accurate and fair grading of all submitted work. Fairness dictates that any appeal of grades result in re-grading of the entire exam or problem set in question, rather than only a specific question. Requests for re-grading must be submitted in writing within 48 hours of the work’s return. You will receive a response in writing.

Grades will be based on:

(1) Three problem sets, three memos, and written quest-speaker questions, collectively constituting 10 percent of the final grade

(2) Class attendance and participation, constituting 5 percent of the final grade

(3) Two in-class preliminary examinations, each constituting 25 percent of the final grade (4) A comprehensive final examination, constituting 35 percent of the final grade

Because in-class discussion is important for learning this material, class attendance is critical. The memos must be two to three single-spaced pages, using standard memo format (of your own determination). Exams will include different types of questions, including short answer and multiple choice questions. We will report the class mean and standard deviation from each prelim exam rather than a letter grade. Keeping track of your class performance is important. I am happy to discuss any student’s progress in the class at any time during the semester.

Academic Integrity: The work you submit in PAM 3340 is expected to be the result of your individual effort only, and to conform to the standards of academic integrity as articulated in the Cornell University Code of Academic Integrity. If there are any questions about the code, see:

http://www.cornell.edu/University Faculty/docs/main.html. Although discussion of course material with fellow students is of course heartily encouraged. Fairness to your fellow students requires that late home works and unexcused absences from exams result in zero points.

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Month Day Curriculum Reading Due Work Due

January 21 Introductions, course outline, course structure

Syllabus  

  26 Lecture 1: Firms, corporations, and transaction costs; terminology in corporations

E&F Ch. 1; R. Ch. 1, Part A; Perloff Ch. 20: Contracts & Moral Hazards

    28 Lecture 2: Contracts & Moral Hazards; The

Agency Problem: Costs and Benefits of the Corporate Form

E&F Ch. 1, M&M Ch. 1, M&M, pp. 94-118; Perloff Ch. 20: Contracts & Moral Hazards

February 2 Lecture 3: The Agency Problem: Costs and Benefits of the Corporate Form

E&F Ch. 1, M&M Ch. 1, M&M, pp. 94-118

Memo #1   4 Lecture 4: Limited Liability: Definition and

Implications

E&F Ch. 2; R. Ch. 2.; K     9 Lecture 5: Limited Liability: Definition and

Implications

E&F Ch. 2; R. Ch. 2.     11 Lecture 6: Managerial Risk Preferences,

Voting

E&F Ch. 3; R. Ch. V.B;  

  16 February Break: No Class Meeting    

  18 Lecture 7: Voting E&F Ch. 3; R. Ch. VB;

M&M pp. 122-128

Prob. Set 1   23 Lecture 8: Voting; Fiduciary Principles E&F Ch. 3; R. Ch. VB;

M&M pp. 122-128     25 Lecture 9: The Fiduciary Principle and the

Business Judgment Rule

E&F, Ch. 4  

March 2 PRELIM ONE All Material in Lec. 1 to 9  

  4 Lecture 10: The Definition and Role of Institutional Investors

M&M, pp. 132-215, E&F, Ch. 5 and 7; R. Ch.VIA; A,  

      M & S, GJ  

  9 Lecture 11: Corporate Control Transactions M&M, pp. 132-215, E&F, Ch. 5 and 7; R. Ch.VIA; A, M & S, GJ

    11 Lecture 12: Role of Institutional Investors,

Corporate Control Transactions

M&M, pp. 132-215, E&F, Ch. 5 and 7; R. Ch.VIA; A, M & S, GJ

Memo #2;

  16 Lecture 13: Hostile Takeovers and Defenses H&K, E&F, Ch. 7; R. Ch.

VIB, MJ  

  18 Lecture 14: The Board of Directors R. Ch. VA; M&M, Ch. 3     23 Lecture 15: CEOs: Compensation and

Turnover

H&M, M&M Ch. 4, D Prob. Set 2   25 Lecture 16: Insider Trading E&F, Ch. 10; R. Ch. VIIB  

  30 Spring Break: No Class Meeting    

April 1 Spring Break: No Class Meeting    

  6 Lecture 17: Insider Trading and closed corporations

E&F, Ch. 10; R. Ch. VIIB; E&F Ch. 9  

  8 PRELIM TWO All Material; Lec. 10 to 17  

  13 Guest Speaker: Scott Zuchorski, Fitch

Ratings  

Develop at least two written questions to ask guest speaker   15 Lecture 18: The State Incorporation Debate E&F, Ch. 8; R Sec. IIIA.  

  20 Guest speaker: Randy Stuzin, King Street

Capital Management  

Develop at least two written questions to ask guest speaker   22 Lecture 19: The State Incorporation Debate;

Mandatory Disclosure

E&F, Ch. 8; R Sec. IIIA.; R Sec. IIIB, E&F, Ch. 11

Memo #3   27 Lecture 20: Mandatory disclosure R Sec. IIIB, E&F, Ch. 11  

  29 Lecture 21: Derivative Shareholder Suits    

May 4 Lecture 22: Stout: Mythical benefits;

Ownership concentration

S; Demsetz & Lehn Prob. Set 3   6 Lecture 23: International Corporate

Governance

M&M, Ch. 5  

    Final Examination; Date/time TBD Comprehensive All assigned readings,

lecture notes, and class discussions

Abbreviations for Readings

E&F = Easterbrook and Fischel R = Romano, Foundations

M&M = Robert A.G. Monks and Nell Minow, Corporate Governance.

Please note that journal articles are available online through the Cornell University Library Gateway e- journals collection. They can also be found by going to BlackBoard, to “tools,” and to “course reserves.” URLs for those that are not will be posted on Blackboard, and several will be placed on reserve in Mann Library.

A, M & S = Gregor Andrade, Mark Mitchell, and Erik Stafford, “New Evidence and Perspectives on

Mergers,” Journal of Economic Perspectives (Spring 2001) Vol. 15, no. 2, pp. 103-20.

C = John C. Coates IV, “The Goals and Promise of the Sarbanes-Oxley Act,” Journal of Economic

D = Demski, Joel S., “Corporate Conflicts of Interest,” Journal of Economic Perspectives, Vol. 17, No. 2 (Spring 2003): 51-72.

D&L = Harold Demsetz and Kenneth Lehn, “The Structure of Corporate Ownership: Causes and

Consequences” Journal of Political Economy, Vol. 93, No. 6, (December 1985) 1155-1177.

F&J 1 = Eugene F. Fama and Michael C. Jensen, “Separation of Ownership and Control,” Journal of Law &

Economics Vol. XXVI (June 1983) 301-325.

F&J 2 = Eugene F. Fama and Michael C. Jensen, “Agency Problems and Residual Claims,” Journal of Law

& Economics Vol. XXVI (June 1983) 327-349.

GJ = Gregg A. Jarrell, James A. Brinkley, and Jeffry M. Netter, “The Market for Corporate Control: The

Empirical Evidence Since 1980,” Journal of Economic Perspectives, Vol. 2, No. 1 (Winter 1988) pp.

49-68.

H&K = Bengt Holmstrom and Steven N. Kaplan, “Corporate Governance and Merger Activity in the United

States: Making Sense of the 1980s and 1990s,” Journal of Economic Perspectives (Spring 2001)

Vol. 15, no. 2, pp. 121-44.

H&M = Brian J. Hall and Kevin J. Murphy, “The Trouble with Stock Options,” Journal of Economic

Perspectives,” Vol. 17, No. 3 (Summer 2003), pp. 49-70.

J&M= Michael Jensen and Richard Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs, and

Ownership Structure” Journal of Financial Economics (1976).

K&L = Stacey R. Kole and Kenneth M. Lehn, “Deregulation and the Adaptation of Governance Structure:

The Case of the U.S. Airline Industry,” Journal of Financial Economics Vol. 52 (1999) pp. 79-117.

K = “The Key to Industrial Capitalism: Limited Liability,” The Economist, December 25, 1999.

MJ = Michael C. Jensen, “Takeovers: Their Causes and Consequences,” Journal of Economic Perspectives,

Vol. 2, No. 1 (Winter 1988) pp. 21-48.

R = Roberta Romano, Foundations of Corporate Law (Foundation Press 1993).

S = Lynn A. Stout, “The Mythical Benefits of Shareholder Control,” Virginia Law Review (2007), Vol. 93,

pp. 789-809.

Guest Speaker Bios:

Scott  Zuchorski,  Senior  Director-­‐Fitch’s  Global  Infrastructure  and  Project  Finance  Group  

scott.zuchorski@fitchratings.com  

Scott  is  the  co-­‐lead  of  Fitch’s  US  Transportation  team.  He  covers  a  variety  of  transportation  and   infrastructure  transactions  including  airports,  seaports,  toll  roads,  privately  financed  sports   stadiums,  and  public-­‐private  partnerships  (P3s).  Scott’s  experience  in  infrastructure  P3  projects   comprises  several  recently  rated  transactions  including  Presidio  Parkway,  Mid  Town  Tunnel  in   Norfolk  VA,  the  Carlsbad  Desalination  Plant,  the  Indiana  portion  of  the  Ohio  River  Bridges   project  and  the  Goethals  Bridge  Replacement  project.    Prior  to  joining  Fitch,  Scott  was  a  First   Vice  President  at  Ambac  Assurance  Corporation.    He  began  his  career  as  a  management   consultant  with  Arthur  Andersen  LLP’s  Government  Services  Practice  in  Washington,  DC.  Scott   received  his  BS  from  Cornell  University  (CALS)  and  his  Masters  of  Public  Administration  from  the   Maxwell  School  at  Syracuse  University.  A

brief bio for Randy Stuzin is available here: