Political Economy 6000

Political Economy of Corporate Governance

Professor: Douglas Nelson

Office: Tilton 108 (Murphy Institute), Phone: 865-5317

Office Hours: Tuesday and Thursday, 3:30-5:30

Phone: 865-5317

Webpage: http://www.tulane.edu/~dnelson/

Much of modern political economy, and the political economy of globalization in particular, focuses on labor markets. This literature recognizes the fundamental importance of financial markets, but does so in an essentially ad hoc way. In this course we try to build toward an analysis of globalization focused on financial markets and corporate governance. Thus, we will begin with the firm and it’s relationship to financial markets. In the second part of the course we take a comparative perspective on corporate governance that draws on research in comparative law, economics and politics. We will conclude with analysis of the effects of globalization.

Readings for the course will be drawn from a large number of articles, available online, and:

Xavier Vives, ed. (2006). Corporate Governance: Theoretical and Empirical Perspectives. Cambridge: CUP. [Vives]

Mark Roe (2003). Political Determinants of Corporate Governance. Oxford: OUP. [Roe]

Peter Gourevitch and James Shinn (2005). Political Power and Corporate Control: The New Global Politics of Corporate Governance. Princeton: PUP. [Gourevitch & Shinn]

All readings on this syllabus are required. For more references, see the extended syllabus for this course at: http://www.tulane.edu/~dnelson/COURSES/PE_CorpGov/Syl_Corp_Gov.htm

Surveys and Textbooks: There have been a large number of survey articles and textbooks related to the material we will cover in this course. Among the best are:

Paul Milgrom and John Roberts (1988). “Theories of the Firm: Past, Present and Future”. Canadian Journal of Economics; V.21-#3, pp. 444-458.

Bengt Holmström and Jean Tirole (1989). “The Theory of the Firm”. In Richard Schmalensee and Robert Willig, eds. Handbook of Industrial Organization, Vol. 1. Amsterdam: North Holland, pp. 61-133.

Oliver Williamson (1989). “Transaction Cost Economics”. In Richard Schmalensee and Robert Willig, eds. Handbook of Industrial Organization, Vol. 1. Amsterdam: North Holland, pp. 135-182.

Milton Harris and Arthur Raviv (1991). “The Theory of Capital Structure”. Journal of Finance; V.46-#1, pp. 297-355.

Roy Radner (1992). “Hierarchy: The Economics of Managing”. Journal of Economic Literature; V.30-#3, pp. 1382-1415.

Andrei Shleifer and Robert Vishny (1997). “A Survey of Corporate Governance”. Journal of Finance; V.52-#2, pp. 737-783.

Jean Tirole (1999). “Incomplete Contracts: Where Do We Stand?”. Econometrica; V.97-#4, pp. 741-781.

Luigi Zingales (2000). “In Search of New Foundations”. Journal of Finance; V.55-#4, pp. 1623-1654.

John Cioffi (2000). “State of the Art: A Review Essay on Comparative Corporate Governance”. American Journal of Comparative Law; V.48-#3, pp. 501-534.

Richard Lambert (2001). “Contracting Theory and Accounting”. Journal of Accounting and Economics; V.32-#1-3, pp. 1-87. [comment by Magee]

Robert Bushman and Abbie Smith (2001). “Financial Accounting Information and Corporate Governance”. Journal of Accounting and Economics; V.32-#1-3, pp. 237-333. [comment by Sloan]

Peter Gourevitch (2002). “The Politics of Corporate Governance Regulation”. Yale Law Journal; V.112-#7, pp. 1829-1880.

Marco Becht, Patrick Bolton and Ailsa Röell (2003). “Corporate Governance and Control”. In G.M. Constantinides, M. Harris, and R. Stulz, eds. Handbook of Economics and Finance. Amsterdam: Elsevier, pp. 1-109.

Jeremy Stein (2003). “Agency, Information and Corporate Investment”. In G.M. Constantinides, M. Harris, and R. Stulz, eds. Handbook of Economics and Finance. Amsterdam: Elsevier, pp. 111-165.

Paul Milgrom and John Roberts (1992). Economics, Organization and Management. Upper Saddle River, NJ: Prentice Hall.

Kevin Keasey, Steve Thompson, and Michael Wright (2005). Corporate Governance: Accountability, Enterprise, and International Comparisons. Wiley.

Thomas Copeland, J. Fred Weston and Kuldeep Shastri (2005). Financial Theory and Corporate Policy. Boston: Pearson/Addison Wesley.

Patrick Bolton and Mathias Dewatripont (2005). Contract Theory. Cambridge: MIT Press.

Jean Tirole (2006). The Theory of Corporate Finance. Princeton: PUP.

Capstone courses. This course is a senior seminar for the Murphy Institute. 1) Prerequisites. In addition to the exposure to a broad range of perspectives in the Murphy core courses, I will presume familiarity with microeconomics at the intermediate level (i.e. Economics 3010) and a level of familiarity (and comfort) with formal and statistical analysis at the same level. 2) Participation. This course will be run as a seminar which means attendance and active participation are mandatory. I will expect all members of the seminar to have read, and be prepared to discuss, all the assigned readings before the date on which we discuss them. The analytical comments (see below) are an aid to this.

Evaluation: Your performance in this course will be evaluated on the basis of 10 analytical comments (worth 100 points total); and 1 analytical review essay (worth 100 points). To receive an A, you must earn at least 90 percent of the points available. To pass the course you must earn at least 60 percent of the points available. Grades between these limits will be determined on the basis of your performance relative to that of the class as a whole.

Policy on analytical comments. The analytical comments are written assignments consisting of two parts: a comment on the assigned reading for the week (7 of 10 points); and 5 questions raised by the assigned reading for the week (3 of 10 points). The comment should be about 3 double-spaced pages long. Do not waste time summarizing the reading. The goal is to identify some aspect of the reading that strikes you as particularly interesting and to explain why you find it interesting. The questions should identify things you would like to see discussed in class. The comments are due on, or before, the start of the class in which the material is discussed. Late comments will not be accepted.

Review essays. Every member of the class is required to produce a review essay on one of the major topics in law & economics or political economy (i.e. Topics III-V, not theory of the firm). Broadly speaking, I expect papers in the 15-20 page range [if you have picked a topic that can be effectively exhausted in 10 pages, you have picked too narrow a topic]. These papers will involve extensive review of the literature on one of the major topics (involving, but not limited to, the non-required readings on the topic). A grade in the A-B range [i.e. 80-100] can only be earned by a paper that provides a synthesis of the literature under review. That is, if you only summarize the literature the best grade you can earn will be a C [note well: this is a maximum, you can earn a lower grade by doing a bad job of summarizing.]

To ensure that topics are well-established and suitable for the course, I require a proposal due no later than 23 September. Late proposals will result in a 10 point penalty to be assessed on the paper’s final score. If you change your paper topic without my approval, 20 points will be deducted from your final mark. Review essays are due at the last regular meeting of the course (6 December). Late papers will not be accepted, and will earn a score of 0 points.

These papers must be original work, plagiarism will not be tolerated. This includes: unattributed appropriation of someone else’s work; and excessive use (whether or not attributed) of a secondary source [including, in particular, any of the above survey articles.] If you are unclear as to what constitutes plagiarism, consult the Tulane University Honor Code on plagiarism.

SACS-Related Material

I am aware that Tulane students are able to read a standard university syllabus and determine the content of the course and its relation to the major and the individual student’s course of study. However, the administration of Tulane University, along with the Southern Association of Colleges and Schools (SACS–which “accredits” primary and secondary schools as well as all varieties of 2 and 4 year undergraduate programs [with very little in the way of adjustment in rubrics, metrics, etc.]), has determined that you require additional information. I collect this material in a separate section so that you can refer to it, or discard it, as you consider appropriate.

STUDENT OBJECTIVES/OUTCOMES: By the end of the course, the student should be able to think, speak, and write fluently and competently about the ideas and issues covered in the course (as reflected in the course description and the syllabus). The student should have a solid understanding of the social, political, economic, and philosophical significance of ideas and concepts in the analysis of social networks and they should be familiar with major ideas and theories regarding explanations, interpretations, applications, and criticisms of work on social networks. The student should be able to formulate critical views concerning these issues and respond fluently and competently to questions concerning these views.

1. Students will be able to identify and recognize major themes, ideas, and concepts.

2. Students will analyze, interpret, and discuss these ideas in a scholarly and coherent manner.

3. Students will construct, formulate, and develop creative and critical scholarly assessments.

4. Students will appraise, evaluate, and appreciate the values and consequences of these ideas.

PECN 6000 SYLLABUS Fall 2013

Topic I. Theory of the Firm

● 26 August: Transaction costs and the firm

■ Ronald Coase (1937). “The Theory of the Firm”. Economica; V.4-#16, pp. 386-405.

■ Benjamin Klein, Robert Crawford and Armen Alchian (1978). “Vertical Integration, Appropriable Rents and the Competitive Contracting Process”. Journal of Law and Economics; V.21-#2, pp. 297-326.

■ Oliver Williamson (2002). “The Theory of the Firm as a Governance Structure: From Choice to Contract”. Journal of Economic Perspectives; V.16-#3, pp. 171-195.

● 9 September: Agency, Incomplete contracts, etc.

■ Armen Alchian and Harold Demsetz (1972). “Production, Information Costs, and Economic Organization”. American Economic Review; V.62-#5, pp. 777-795.

■ Michael Jensen and William Meckling (1976). “Theory of the Firm: Managerial Behavior, Agency Costs and Capital Structure”. Journal of Financial Economics; V.3-#4, pp. 305-360. [required: pp. 305-333]

■ Oliver Hart (1989). “An Economist’s Perspective on the Theory of the Firm”. Columbia Law Review; V.89-#7, pp. 1757-1774.

● 16 September: Why does capital hire labor?

■ Gregory Dow and Louis Putterman (1999). “Why Capital (Usually) Hires Labor: An Assessment of Proposed Explanations”. in M. Blair and M. Roe, eds. Employees and Corporate Governance. Washington, DC: Brookings, pp. 17-57.

■ Freeman, Richard B. and Edward P. Lazear (1995). “An Economic Analysis of Works Councils,” in J. Rogers and W. Streeck eds, Works Councils: Consultation, Representation, and Cooperation in Industrial Relations. Chicago: University of Chicago Press/NBER, 27-50.

■ Faleye, Olubunmi; Vikas Mehrotra and Randall Morck. 2006. “When Labor Has a Voice in Corporate Governance.” Journal of Financial and Quantitative Analysis, 41(3), 489-510.

Topic II. Law and Economics of Corporate Governance

● 23 September: Separation of ownership and control

■ Eugene Fama (1980). “Agency Problems and the Theory of the Firm”. Journal of Political Economy; V.88-#2, pp. 288-307.

■ Eugene Fama and Michael Jensen (1983). “Separation of Ownership and Control”. Journal of Law and Economics; V.26-#2, pp. 301-325.

■ Oliver Williamson (1983). “Organization Form, Residual Claimants and Corporate Control”. Journal of Law and Economics; V.26-#2, pp. 351-366.

■ Benjamin Klein (1983). “Contracting Costs and Residual Claims: The Separation of Ownership and Control”. Journal of Law and Economics; V.26-#2, pp. 367-374.

● 30 September: Capital markets and managerial control

■ Hart, Oliver. 1993. “Theories of Optimal Capital Structure: A Managerial Discretion Perspective,” in M. M. Blair ed The Deal Decade: What Takeovers and Leveraged Buyouts Mean for Corporate Governance. Washington, D.C.: Brookings Institution, 19-43.

■ Michael Jensen (1986). “Agency Costs of Free Cash Flow: Corporate Finance and Takeovers”. American Economic Review; V.76-#2, pp. 323-329.

■ Frederick Scherer (1988). “Corporate Takeovers: The Efficiency Arguments”. Journal of Economic Perspectives; V.15-#2, pp. 69-82.

■ Shleifer, Andrei and Robert Vishny (1990). “The Takeover Wave of the 1980s”. Science; V.249-#4970 (August 17), pp 745-749.

■ Bengt Holmström and Steven Kaplan (2001). “Corporate Governance and Merger Activity in the US: Making Sense of the 1980s and 1990s”. Journal of Economic Perspectives; V.15-#2, pp. 121-144.

● 7 October: Boards, Compensation and Control

■ Adams, Renee B.; Benjamin E. Hermalin and Michael S. Weisbach. 2010. “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48(1), 58-107.

■ Bebchuk, Lucian A. and Jesse M. Fried. 2003. “Executive Compensation as an Agency Problem.” Journal of Economic Perspectives, 17(3), 71-92.

■ Frydman, Carola and Dirk Jenter. 2010. “CEO Compensation.” Annual Review of Financial Economics, 2(1), 75-102.

● 14 October: Germany–Banks, Co-Determination and all that

■ Pistor, Katharina. 1999. “Codetermination: A Sociopolitical Model with Governance Externalities,” in M. M. Blair and M. J. Roe eds, Employees and Corporate Governance. Washington, DC: Brookings Institution Press, 163-93.

■ Addison, John T.; Claus Schnabel and Joachim Wagner. 2004. “The Course of Research into the Economic Consequences of German Works Councils.” British Journal of Industrial Relations, 42(2), 255-81.

■ Franks, Julian and Colin Mayer. 2001. “Ownership and Control of German Corporations.” Review of Financial Studies, 14(4), 943-77.

■ Goergen, Marc; M. C. Manjon and Luc Renneboog. 2008. “Recent Developments in German Corporate Governance.” International Review of Law and Economics, 28(3), 175-93.

Topic III. Macro Analysis of Corporate Governance

● 21 October: Legal foundations of corporate governance

■ Franklin Allen and Douglas Gale (2000). “Corporate Governance and Competition”. Chapter 2 in Vives.

■ Frank Easterbrook (1997). “International Corporate Differences: Markets or Law?”. Journal of Applied Corporate Finance; V.9-#4, pp. 23-30.

■ La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer (1999). “Corporate ownership around the world.” Journal of Finance 54 (2):471-517.

■ Julian Franks, Colin Mayer, and Hannes F. Wagner (2006). “The Origins of the German Corporation – Finance, Ownership and Control”. Review of Finance; V.10-#4, pp. 537-585.

■ Franks, Julian, Colin Mayer and Stefano Rossi (2009). “Ownership: Evolution and Regulation.” Review of Financial Studies, 22(10), 4009-56.

● 28 October: Quality of law and corporate governance

■ Rafael LaPorta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny (2000). “Investor Protection and Corporate Governance”. Journal of Financial Economics; V.58-#1/2, pp. 3-27.

■ Mark Roe (2003). Political Determinants of Corporate Governance. Oxford: OUP. [Section VI, pp. 159-196 for this topic.]

● 4 November: Legal structure, financial systems and growth

■ Wendy Carlin and Colin Mayer (2000). “How Do Financial Systems Affect Economic Performance?”. Vives, Chapter 4.

■ Raghuram Rajan and Luigi Zingales (2001). “Financial Systems, Industrial Structure and Growth”. Oxford Review of Economic Policy; V.17-#4, pp.

■ Thorsten Beck, Asli Demirgüç-Kunt, and Ross Levine (2001). “Legal Theories of Financial Development”. Oxford Review of Economic Policy; V.17-#4, pp. 483-501.

■ Randall Morck, Daniel Wolfenzon and Bernard Yeung (2005). “Corporate Governance, Economic Entrenchment and Growth”. Journal of Economic Literature; V.43-#3, pp. 655-720.

■ La Porta, Rafael; Florencio Lopez-de-Silanes and Andrei Shleifer (2008). “The Economic Consequences of Legal Origins.” Journal of Economic Literature, 46(2), 285-332.

■ Ross Levine (1997). “Financial Development and Economic Growth: Views and Agenda”. Journal of Economic Literature; V.35-#2, pp. 688-726.

Topic IV. Political Economy of Corporate Governance

● 11 November March: PE of Corporate Governance, I

■ Mark Roe (2003). Political Determinants of Corporate Governance. Oxford: OUP. [Pages 1-107 for this topic.]

■ Gourevitch & Shinn, Chapter 2-4

■ Raghuram Rajan and Luigi Zingales (2003). “The Great Reversals: The Politics of Financial Development in the Twentieth Century”. Journal of Financial Economics; V.69-#1, pp. 5-50. [Pages 1-17 for this topic.]

● 18 November: PE of Corporate Governance, II

■ Gourevitch & Shinn, Chapter 5

■ Mark Roe (2003). Political Determinants of Corporate Governance. Oxford: OUP. [Pages 109-158 & 197-204 for this topic.]

● 25 November: PE of Corporate Governance, III

■ Gourevitch & Shinn, Chapters 6 & 7

● 2 December: PE of Corporate Governance, IV

■ Martin Hellwig (2006). “On the Economics and Politics of Corporate Finance and Corporate Control”. Chapter 3 in Vives.

■ Marco Pagano and Paolo Volpin (2001). “The Political Economy of Finance”. Oxford Review of Economic Policy; V.17-#4, pp. 502-519.

PECN 6000: Political Economy of Corporate Governance