The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top.

id=851545). This study involved a sample of 989 companies across ten industries. Id. at 11. 166 Id. at 29 ("[W]e document that dedicated guiders invest less in RD this will lead to superior outcomes, because if investors are confident that their reasonable expectations will be secured by law they will invest at a lower cost to entrepreneurs. 167 Thus, investor protection is associated with higher economic growth.168 One study found that companies with superior corporate governance measures (based upon an assessment of twenty-four different corporate governance elements that affect shareholder rights) enjoyed superior stock market valuations.' 69 Weak investor protection leads to a shift in the corporate balance of power in favor of management which will increase self-dealing and lead to higher compensation for executives. 170 If executive compensation is the "canary in the coal mine" signaling pervasively 167 When their rights are better protected by the law, outside investors are willing to pay more for financial assets such as equity and debt. They pay more because they recognize that, with better legal protection, more of the firm's profits will come back to them as interest or dividends as opposed to being expropriated by the entrepreneur who controls the firm. By limiting the expropriation, the law raises the price that securities fetch in the marketplace. In turn, this enables more entrepreneurs to finance their investments externally, leading to the expansion of financial markets. Rafael La Porta et al., Investor Protection and Corporate Valuation, 57 J. FIN. 1147 (2002). Financial market development is key to economic growth. See supra note 160. 168 Rui Castro, Gian Luca Clementi & Glenn MacDonald, Investor Protection, Optimal Incentives, and Economic Growth, 119 Q.J. ECON. 1131, 1131-35, 1166-67 (2004) ("[W]e employ standard techniques from the empirical growth literature to investigate the nature of the relation between investor protection and growth. Consistent with earlier studies we find a positive association."). Id. at 1133. 169 Paul Gompers et al., Corporate Governance and Equity Prices, 118 Q.J. ECON. 107, 10809 (2003). The index used in this study consisted of twenty-four factors of corporate governance that the authors broke down into five groups: (i) factors associated with delaying hostile threats to corporate control; (ii) factors associated with voting rights; (iii) factors designed to protect officers and directors from liability or termination; (iv) other anti-takeover protections; and (v) state laws bearing upon takeovers. Id. at 110-14. One of the factors included in this study is the existence of charter amendments to limit director liability for breach of the duty of care. Id. at 148-49. Prior studies also found that this particular factor is destructive of shareholder value. Bradley & Schipani, supra note 118, at 43. Other studies link various indices of shareholder rights to financial performance. See Lucian Bebchuk et al., What Matters in Corporate Governance?, Harvard John M. Olin Center for Law, Economics, and Business, Discussion Paper No. 491, 2005, at 4, available at http://papers.ssrn.com/sol3/papers.cfm?abstractid=593423 (finding that staggered boards, supermajority voting requirements, poison pills, golden parachute provisions, and limits on shareholder voting power, all of which entrench management, accounted for most of the drag on financial performance attributable to weak corporate governance); Lawrence D. Brown & Marcus L. Caylor, Corporate Governance and Company Performance 3 (December 7, 2005) (unpublished manuscript, available at http://www.issproxy.com/pdf/Corporate%20Governance%2Study%201.04.pdf) (finding that a governance index based upon fifty-one elements influences operating performance, valuation, and cash payouts to shareholders). 170 Marco Becht, Patrick Bolton & Ailsa Roell, Corporate Governance and Control, in I A HANDBOOK OF THE ECONOMICS OF FINANCE I (George M. Constantinides, Milton Harris & Rent M. Stulz eds., 2003) (stating that corporate governance must stem self-dealing by managers and that soaring executive compensation in the United States is difficult to justify). HeinOnline -24 Yale J. on Reg. 337 2007 Yale Journal on Regulation Vol. 24:2, 2007 weak corporate governance, then there is cause for serious concern in the United States, where CEO compensation relative to earnings has doubled over the past ten years. 171 In the long run, securing the reasonable expectations of investors through legal protection serves the economy in general, and entrepreneurs in particular, while also operating to limit agency costs. Investor protection entails mandatory disclosure of material information to the investing public, such as that traditionally required under the federal securities laws in the United States. 72 To the extent investors have access to reliable investment information, they should theoretically be more willing to invest, meaning entrepreneurs and businesses will enjoy a lower cost of capital. 173 While one may expect private contracts to be the most effective way to assure an efficient means of securing appropriate information flows, in fact such contracting appears prohibitively costly.I14 Beyond that, management is likely to be more focused on shareholder maximization if they are required to disclose financial information periodically. 175 Empirical evidence now supports these theoretical conclusions. Specifically, Professors Greenstone, Oyer, and Vissing-Jorgensen found that when the applicability of the federal mandatory disclosure regime was extended to firms traded in over-the-counter markets in 1964, those firms enjoyed excess returns and gains in operating performance when they commenced compliance as well as in the period following the relevant legislative proposals. 176 "Overall, the results suggest that the benefits 171 Bebchuk & Grinstein, supra note 150, at 297 (2005) (finding that the proportion of S&P 500 profits going to top executive compensation approximately doubled as a percentage of profits from 1993 to 2003). More than excess compensation may result from weak corporate governance. For example, the Gompers study found that weak corporate governance was also associated with inferior investment outcomes, as unconstrained CEOs engaged in acquisitions and investments that did not maximize shareholder value. Gompers et al., supra note 169, at 132-37. 172 Michael Greenstone et al., Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments, 121 Q.J. ECON. 399, 447 (2006) (noting that "these results should cause policymakers to question the basis of recent calls to repeal U.S. federal mandatory disclosure requirements").