Title: Essays on Law and Economics
Description: This dissertation analyzes the interaction between individuals and institutions, with a particular focus on how individuals make economic decisions within legal frameworks. It uses quasi-natural experiments and descriptive analyses to provide direct empirical evidence on these decisions. Chapter 1 investigates the extent to which mutual funds represent individual investors. Although mutual funds have widely varying voting patterns and predictable ideological disagreements, little is known about whether their underlying investors have similar preferences or sort by ideology into funds. I provide the first systematic documentation comparing the voting preferences of individual investors in the United States to those of the mutual funds they invest in. I find that individual investors are highly ideological in their voting and that Environmental, Social, and Governance (ESG) funds have an ideologically distinct shareholder base of individual investors whose preferences are reflected in the votes of the ESG funds.

ESG funds are unique in this respect; although funds have distinct voting ideologies, as do individual investors, a mutual fund’s voting choices generally have little or no relationship with those of its underlying investors. Chapter 2 —joint work with Alon Brav and Matthew Cain— studies retail shareholder voting using a nearly comprehensive sample of U.S. ownership and voting records over the period 2015–2017. Analyzing turnout within a rational choice framework, we find that participation increases with ownership and expected benefits from winning and decreases with higher costs of participation. Even shareholders with negligible likelihood of affecting the outcome have non-zero turnout, consistent with consumption benefits from voting. Conditional on participation, retail shareholders punish the management of poorly performing firms and are more likely to exit the firm after voting against incumbent management. We show that retail voting decisions are impactful, altering proposal outcomes as frequently as those of the “Big Three” institutional investors.

Overall, our evidence provides support for the idea that retail shareholders utilize their voting power as a means to monitor firms and communicate with incumbent boards and managements. Chapter 3 studies the effects of a selective tax on contract design and tax timing. Taxation affects income via both a compensation contract response and a worker response. I show that executive contracts adjust to a tax on severances, and executives shift their taxable income timing in response to the interaction of tax and contract. In particular, “golden parachute” severances tend to bunch at a threshold (tied to taxable income) where the tax rate discontinuously increases, and CEOs exercise stock options in bulk to raise their taxable income and boost their threshold. Identification comes from a bunching analysis exploiting a discontinuous change in exercise incentives over time and variation across CEOs in contract incentives and deal timing. The chapter demonstrates the role of contract structure in tax avoidance and additionally shows how contract structure affects worker behavior.