Comentario en inglés acerca de «Firms Decisions where to incorporate» de Lucian A. Bebchuk y Alma Cohen

— por José Parra (Uni ZH) de © PuntoLatino 

— El Prof. Lucian Bebchuk (Harvard University) [foto 1] y l Alma Cohen [foto 2], profesora visitante en Harvard, publicaron en «Law & Economics» de la Universidad de Zurich «Firms Decisions where to incorporate». José Parra comenta ese trabajo en las siguientes líneas, haciendo hincapié en la desregulación de los mercados financieros».

— El comentario empieza con la conclusión del articulo de Bebchuk y Cohen: los estados norteamericanos con más regulaciones sobre las adquisiciones tienen, en general, más éxito para atraer y retener compañías en sus territorios. En otras palabras, más regulaciones tienen en este caso un efecto positivo en el mercado. Considerando la replicabilidad de este caso particular, uno se tiene que preguntar después de la última crisis financiera si más regulaciones no puede mejorar la resistencia del sistema financiero, ayudando a prevenir crisis en el futuro.

— Presentando opinions de expertos a favor y en contra de más regulación en la economía, José Parra muestra que aunque una mayoría de economistas se pronuncia en favor de un sistema financiero más regulado, aún no existe consenso sobre este tema básico. Si uno considera que el sistema ha fallado, entonces éste necesita ser mejorado con regulaciones más estrictas, mayores requerimientos de capital para los bancos o una re-orientación de los objetivos de crecimiento. Si al revés se considera que el fracaso no ha sido de naturaleza sistemática, no hace falta cambiar el sistema actual. En todo caso, concluye José Parra, es imperativo que los expertos de ámbitos jurídicos así cómo económicos se comprometan a dar una respuesta satisfactoria a la sociedad en este asunto. [Michaël Tuil, Uni SG / Esade Barcelona].

Commentary about «Firms Decisions where to incorporate» from Lucian Arye Bebchuk and Alma Cohen in «Law & Economics» University of Zurich by Prof. Dr. Rolf H. Weber, Dr.Oec.Publ. Mark Steiner.

“States that offer stronger antitakeover protections are substantially more successful both in retaining in-state firms and in attracting out-of-state incorporations. Comparing with adopting no antitakeover protections, adopting all standard antitakeover statutes enabled the adopting states to more than double the percentage of local firms that incorporated in state.”

This is the main conclusion of the paper “Firms Decisions where to incorporate” written by Bebchuk and Cohen in the year 2003. This Paper uses assessed data on firm’s incorporation choices to study the market for corporate law in the United States. Using multiple multivariate regression models, the authors analyze different aspects that might have an influence on the incorporation rate in a state. Most of the variables used in their model present legal aspects, which makes this paper a great combination between Law and Economics. As exposed in the first paragraph, the conclusion of Bebchuk and Cohen is that a strong legal regulation in some areas can influence the efficiency of a market positively and create a legal frame to improve the economical interaction between the agents in a state or a country (Bebchuk, Cohen 2003).

This commentary on the mentioned paper focuses on the conclusion of Bebchuk and Cohen: more regulation can have a positive influence in a market. Using this paper as a guideline, the presented commentary will expose the opinions and arguments of various experts and institutions on the legal regulation of the financial markets, to synthesize one of the newest thinking-trends given in the economy: more regulation will improve the strength and efficiency of the financial system, and will help to avoid future crisis. As the extension of this comment is limited, the objective is not to prove this statement, but to set the basis for further work and investigation in this area.

In this commentary, the conclusion of Bebchuk and Cohen is applied to the financial markets, because nowadays the question if more regulation would improve the efficiency of those markets is not answered and in the opinion of the author of this commentary, it is necessary to answer this question, before the countries and institutions can definitively leave the current crisis and the fear and panic of the agents disappear. The commentary follows a clear structure: First of all, the claims of many economical and political experts are presented, in order to prove that there is a problematic in the current financial system and it is necessary to improve it. After having presented those claims, the second part synthesizes the propositions of many experts to improve the system. Finally, a summary about this subject is presented, to encourage the reader to think about this problem and to try to come up with a possible solution. Every part of this comment is connected with the paper of Bebchuk and Cohen, which conclusion is the basis of this commentary.

More Law in Economics?
Within the last three years, the happenings of the financial crisis have urged world leaders, economic experts and politicians to adjust their agendas and behaviour to react optimally. Both, persons -such as George Soros and Bern Bernanke- and international organism –for instance the IMF or the G20- have claimed for more regulation in the financial markets. One example of these claims is the speech of Barack Obama, given to the Cooper Union in May 2008: «Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, open and honest.»

The declarations of Ben Bernanke to the American Economic Association support Obama ?s arguments by saying that “Stronger regulation should be the first line of defense against excessive speculation that could send the economy into a new crisis.”

The IMF Survey Magazine goes even further in an essay dealing with the financial crisis (sep. 2008): «It’s because there were no regulations or controls, or not enough regulations or controls, that this situation was born»

Something that also supports those arguments, is the declaration of Angela Merkel abuts the creation of a saving fond for states: «If we don’t arrive at a sustainable growth path, but instead just generate puffed up growth, we will pay for that with another crisis.”

After having worked and succeeded in the financial market for decades, George Soros puts forward that no efficient equilibrium in the financial markets will be achieved. He expose, that periodical crisis must be followed by regulatory reforms and that this, the only way to improve the system is (Soros, 2008). The idea of Soros is strongly related to the concept of falsification that was introduced in the XX Century by Karl Popper(1).

Currently, the claims asking for a regulation of the economy start to raise, and are becoming more consistent. Nevertheless it would be cynical not to refer to the contrary point of view. These opposed opinions represent a more traditional way of thinking and they suggest avoiding a strong regulation in the economic system, to approach to an efficient equilibrium lead by the “invisible hand”(2).

Some examples of this opinions are the American Bancs Association president’s position about a potential financial reform: «We are going to oppose it and we are going to make all kinds of excuses for not doing this, and we are going to lay down in the road, and we are really not going to come in and sit down and talk about how to resolve the issues.”

Prof. Dr. Hans-Werner Sinn proposes in his book “Casino-Capitalism that banks hold a greater capital reserve for their transactions, in order to return to a more sustainable business model, instead of inducing a stronger regulation of the markets (Sinn, 2010).

Looking at both presented parts, it is easy to recognize that the question of more regulation in the financial markets is asked and that the only common baseline of all positions seems to be that today’s society needs to find an answer to the question more law in economics (3)?, in order to find a new economic schema that fits in the “after-crisis” situation.

Going back to the paper of Bebchuk and Cohen, one can retrieve the same problematic nature in their paper: two opinions on what is more efficient. The thesis proposed and proved with the empirical work of Bebchuk and Cohen is that “the effects of antitakeover statutes on states succeed in attracting incorporations.” To accomplish proof, the authors tested among others, the effect of Standard Antitakeover Statutes as well as the effect of Extreme Antitakeover Statutes. The results of this test (at a 99% significance level) show that the states that regulated the incorporation market, improved the condition of incorporations, which implied a higher rate of incorporation and retention of firms in this state. In other words, more firms went to the state with strong regulation to incorporate, providing job creation and wealth. This is a clear example of a regulation with positive influence in a market.

Hints to find the answer
After having seen the example on how regulation can be enriching for a market (the States Incorporations Market in this case) it is necessary to give further evidence by experts who operate in the area of regulation in financial markets. By doing so, it will be easier to approach a possible answer to the question that has risen earlier in this work, or at least provide additional background information subject, in case that an appropriate answer can not be found yet. Some regulation possibilities are presented in the following paragraphs.

The thesis of Möslin, Hofmann and Grundmann (published in 2009) is very applicable to the issue of more regulation in financial markets. They go one step further and don’t even ask themselves if there should be more regulation after the crisis or not, but how this regulation should be. Therefore, the regulation of the economic system is a given proposition; only the design is questionable. According to their paper, the aim should be to achieve more transparency in the economy, especially when mortgages are given and when financial products are sold. To achieve transparency, regulation is absolutely necessary (Möslin, Hofmann & Grundmann, 2009). To mention this paper here is very adequate to illustrate how some economists and lawyers are now looking for improvements in the current system, and thus answering “yes” to the initial question.

Following up the idea of transparency, Walter Wittmann presents the cutback of information asymmetries as the solution for the lack of information given in the markets, which -in his opinion- caused the world to result in this crisis. Besides, the theory of Wittmann is especially interesting, since he proposes interference in the private, as well as in the public sector; he suggests a regulation made at any level of the economy (Wittmann 2009).
A different opinion on the regulation is provided by Monica Prasad, professor at Northwestern University, who doesn’t think that the crisis has shown a “deep flaw in capitalism” and still believes in the equilibrium of the liberal markets. In her opinion, the sub-prime mortgage and the failure of the rating agencies pulled the trigger of this crisis. She believes that “regulation in the U.S. will become more strict and cautious” but also that a correct interpretation of this crisis should pay more attention to the reorientation of the growth of the developed world toward meeting internal demand, which implies a change in the economical objectives of the countries but not a change in the system itself (Prasad, 2009). This Change in the growth-objectives is very similar to the approach made by Angela Merkel, when she spoke about the creation of a saving fond for nations, presented earlier in this work.

John Howard, the Australian prime Minister has a similar opinion as professor Prasad. He defends the keeping of the existing economic model saying: “It was a laudable social goal to spread home ownership as widely as possible. I do not seek to defend the excesses on Wall Street and elsewhere. However, these failures and the challenges we face do not represent a systemic failure of capitalism or indeed of the market system” (Howard 2009).

Food for thought
One inside that is gained after reading the opinions of different experts exposed in this commentary, is that currently, the question of more regulation in the economy isn’t solved, even if the majority of the economical decision-makers are approaching a more regulated system.

As mentioned before, Bebchuk and Cohen have shown in their paper that regulation can have a positive impact on the liberal system in a specific area. Of course, this doesn’t imply that regulation would work at any level; it is a precedent case where such a regulation worked. It is important to remark that all experts mentioned here talk about the regulation of the liberal economic system, for improving the system itself and for avoiding further crisis. The opinions mentioned here are not intended for an approach on regulated markets such as China or Cuba.

Based on the falsification position of George Soros it is necessary to recognize that the system has failed and that it needs to be improved. Some possible solutions are:

• A more strict legal regulation, like Soros, Wittmann, Möslin, Hofmann or Grundmann state.

• The holding of greater capital reserves for bancs, as Sinn proposes.

• The reorientation of the growth-objectives of developed lands, following the advices of Prasad and Merkel.

The alternative possibility is to leave the system and his regulation as it is, because the failure of the system hasn’t been systematic (Howard).

However, society is grappled by the issue of more regulation in the financial markets and the task of the economists, lawyers and politicians is to give answers to this demanding society. All together are trying to find a way out of the crisis and want to think that improvements can be made by reconsidering the model. The situation is asking for somebody to solve the problem. Counting on this, the frame for somebody to find the answer is set.

1) The falsification-concept promotes the idea that any model must be adjusted and changed after it shows an error, so every model is better that the one that came before.
2) The “Invisible Hand” is the theory of Adam Smith, talking about the equilibrium reached in the markets, when no regulation takes places.
3) The question more law in economics? means in this commentary more regulation in the financial markets.

American Bancs Association Letters called at Nov 9th from

Bebchuk, L. & Cohen, A. (2003). Firms Decisions where to incorporate, Journal of Law and Economics, vol XLVI

Bernanke, B. Speech to the American Economic Association called Nov 8th from http://www.usatoday.com/money/economy/fed/2010-01-03-bernanke-regulation_N.htm

Grundmann, S. Hofmann, C. & Möslin, F (2009). Schriften zum europäischen und internationalen Privat-, Bank- und Wirtschaftsrecht (1st Edition) Berlin: De Gruyet Verlag
IMF Survey Magazine, called Nov 9th from http://www.imf.org/external/pubs/ft/survey/so/home.aspx

Merkel, A. Declarations about the creation of a saving fond for states. Called Nov 10th from http://www.euractiv.com/en/merkel-sarkozy-renew-call-tougher- regulation-ahead-g20-news-495453

Obama, B. (2008). Renewing the American Economy called Nov. 9th form http://www.usatoday.com/news/mmemmottpdf/obama-econ-speech-3-27-2008.pdf

Parkinson, M. The Role of the G-20 in the global Financial Architectur called Nov 9th from http://www.g20.org/Documents/role_g20_global_fin_arch_091006.pdf

Popper, K. (2007) Logik der Forschung (1st Edition) Berlin: Akademie Verlag Prasad, M. (2009). Three theories about the crisis, ASA Economic Sociology Newsletter Volume 8, Issue 2.

Sinn, H. (2009). Kasino-Kapitalismus (2nd Edition) Berlin: Econ

Soros, G (2008) Das Ende der Finanzmärkte und ihre Zukunft (1st Edition) München: Finanzbuchverlag

Wittmann, W. (2009) Finanz Krisen (2nd Edition) Zürich: Orell Füssli Verlag

José Parra Moyano, estudiante de economía de la Universidad de Zúrich y directivo y redactor de PuntoLatino. José es también directivo de la Junta Joven de la Cámara de Comercio Latinoamericana en Suiza y Presidente de la Asociación Latina de estudiantes de la UZH/ETH. Se desempeña como asistente en matemáticas en su universidad y escribe en PL tanto para la sección Economia como para la sección Cultura.

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