nep-law New Economics Papers
on Law and Economics
Issue of 2018‒05‒14
fourteen papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Financial Impact of Regulatory Sanctions on French Listed Companies By Laure de Batz
  2. Consolidated democracy, constitutional stability, and the rule of law By Naqvi, Nadeem; Neumärker, Bernhard; Pech, Gerald
  3. The non-frustration rule and the mandatory bid rule – cornerstones of European takeover law? By Habersack, Mathias
  4. Legal Opinion on the Proposed Inter-Institutional Agreement for a Mandatory Transparency Register in the European Union By Alemanno, Alberto
  5. Is there a safety premium in the design of corporate bond contracts? By Takaoka, Sumiko
  6. Seeking shelter in personal insolvency law: recession, eviction and bankruptcy’s social safety net By Spooner, Joseph
  7. Buying the Verdict By Lauren H. Cohen; Umit G. Gurun
  8. Pre-release leaks as one-time incentives for switching to unauthorised sources of cultural content By Wojciech Hardy
  9. Economic Sanctions and Human Rights: Quantifying the Legal Proportionality Principle By Jerg Gutmann; Matthias Neuenkirch; Florian Neumeier; Armin Steinbach
  10. What we still need to know about the impacts of medical marijuana laws in the United States? By Chu, Yu-Wei Luke
  11. Law and political economy By Wilkinson, Michael; Lokdam, Hjalte
  12. Trade law and trade fl ows By Salvador Gil-Pareja; Rafael Llorca-Vivero; Jordi Paniagua
  13. When do developing countries negotiate away their corporate tax base? By Hearson, Martin
  14. On Esteem-based Incentives By Ali Mazyaki; Joel (J.J.) van der Weele

  1. By: Laure de Batz (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Laboratory of Excellence for Financial Regulation (LabEx-ReFi), Centre d’Economie de la Sorbonne (CES), University Paris 1 Panthéon-Sorbonne)
    Abstract: This paper assesses the information content of sanctions of listed companies pronounced by the French Financial Market Authority, through reactions from financial markets over the period 2004 to 2016. We answer whether, for a listed company, being named in a sanction report, as an offender, an acquitted, or a victim of others’ financial misconduct conveys information to the market using an event-study methodology, complemented with cross-sectional regression analysis: do investors react to such news, and if so, at which stage of the procedure, to what extent, and why? We find that the markets do react accordingly to the information content of the sanctions. Guilty listed companies experience significant negative abnormal returns after both the sanction decision, and its publication (respectively -0.9% and -1.1% from the day preceding the event until 3 days after), though to a limited extent in absolute and relative terms. Some factors will contribute to stronger underperformances such as being investigated, longer procedures, being a smaller company possibly from financial or technological sectors, stronger media coverage of the sanctions, and better economic activity. The markets also incorporate the information content of the decision: no statistically significant abnormal reaction follows the publication of anonymized sanctions; market reactions vary depending on the regulatory breaches, being stronger for third party offenses; and, to some extent, the severity of the decision influences the magnitude of abnormal returns. Settlements do not convey information to the market, being a lighter and shorter procedure, associated with lower sanctions. Being sentenced non-guilty implies a mixed correction on the market, depending on the step of the procedure. Finally, companies named in a sanction report as victims of others’ regulatory breaches also suffer negative abnormal returns after the sanction, suggesting double punishment.
    Keywords: Sanction, Financial Markets, Event Study, Regulation, Fraud, Information and Market Efficiency, Listed Companies
    JEL: G14 G18 K42 N24
    Date: 2018–04
  2. By: Naqvi, Nadeem; Neumärker, Bernhard; Pech, Gerald
    Abstract: What sets a consolidated democracy apart? We argue that the expectation that under the rule of law a law-abiding government will not enforce the unlawful acts of its predecessor creates incentives for agents - such as members of the civil service or law enforcement agencies - not to comply with such acts. Thus, even an opportunistic government may find it in its best interest to abide by constitutional rules or, once it has been in violation, to reinstate the legal order. If so, the government contributes to its own punishment and agents’ expectations are self-fulfilling. Thus the rule of law has instrumental value in stabilizing the constitutional order. We also provide a theoretical explanation of the empirical distinction between consolidated and transitory liberal democracies and we explain why consolidated democracies are likely to stave off populist challenges.
    Keywords: Constitution, dynamic policy constraints, enforcement mechanism, populism
    JEL: D2 D78 K10 K42
    Date: 2018–04–22
  3. By: Habersack, Mathias
    Abstract: With the non-frustration rule (“NFR”) and the mandatory bid rule, the Takeover Bid Directive contains two principles which have strongly influenced British takeover law for approximately 50 years. However, the changes of the economic and legal framework of the market for corporate control which have occurred since the adoption of the Directive call into question the legitimacy of both principles. Although the NFR is capable of disciplining board members, it generates misguided incentives and is, at the most, suitable as a disciplining tool of last resort. The idea that in the alternative we would rely on increasing shareholder activism and of trusting the shareholders to discipline the board (also in a company with dispersed ownership) is compelling in principle; however, as active shareholders often seek the short-term maximisation of returns, misguided incentives cannot be avoided in this context either. In view of these findings, the article explores the ways of structuring NFR optionality. It submits that only the shareholders should be given the option of opting out of the strict NFR – which would continue to serve as the default rule – and that such an opt out should only be possible for a limited period of time. With respect to the mandatory bid rule, its justification is becoming increasingly difficult since the exploitation of the offeree company by the controlling shareholder is more or less excluded by obligations to disclose information, by shareholder activism and by the reform of the Shareholder Rights Directive. In view of the foregoing, this paper argues for reform of the Directive’s mandatory bid rule, making it a mere default rule.
    JEL: F3 G3
    Date: 2017–06–27
  4. By: Alemanno, Alberto
    Abstract: This paper discusses the legal implications deriving from the choice of an interinstitutional agreement to regulate interest representation activities in the European Union. In particular, it focuses on whether this instrument may validly allow the European Parliament to impose a set of requirements on its Members (in relation to their free and independent mandate), the political groups, the intergroups and other informal groupings of Members, and on the accredited parliamentary assistants (APAs). It concludes that, given its legal status, the proposed IIA operationalises rather than extending the existing transparency obligations stemming from the Treaty and its requirements are proportionate to the aims pursued. As such it does not affect the free and independent mandate of Members as it is defined in the Members’ Statute nor it conflicts with the prerogatives of other internal actors. The proposed IIA intends to develop and complement obligations of primary law, such as the duty of openness and transparency that already govern the Statute and its interpretation, without compromising the substantive rights and obligations provided by the former. These obligations of primary law already put limits on the freedom and the independence of the Members enshrined in Article 2 (1) of the Statute as well as that of other internal actors. Additionally, the proposed mandatory Transparency Register also allows Members to easily identify the identity of interest representatives they meet, thus enhancing the Member’s ability to inform themselves.
    Keywords: Open government; Transparency; Participation; Civic empowerment; Legitimacy; Accountability; Civil society; European Union; Good governance
    JEL: K19 K33
    Date: 2017–07–01
  5. By: Takaoka, Sumiko
    Abstract: This study examines empirically whether there is a safety premium in the design of bond contracts by highlighting a safety attribute of general mortgage bonds in Japan, which can give especially strong protection to bondholders, who would have priority in the event of legal liquidation. The effects of a safety attribute were not prominent at first in difference-in-differences analysis. However, the methods for analyzing selectivity bias allow us to provide a safety premium in the design of bond contracts, such as lower spread, lower commission, and larger issue size. The resulting bias would depend on the reputation of the bookrunner. This study uncovers the underlying link for the connection between a safety attribute and the observed and unobserved issuer and bookrunner characteristics, to indicate that a safety premium is related to various terms of bond contracts, including the bookrunner-issuer match.
    Keywords: Corporate bonds, general mortgage bonds, Japan, safety premium, special Acts.
    JEL: G10 G24 K20
    Date: 2018–04–25
  6. By: Spooner, Joseph
    Abstract: Many legal systems understand consumer insolvency laws as social insurance, providing relief and a “fresh start” to over-indebted households who fall through gaps in the social safety net. Personal insolvency law in England and Wales in practice functions similarly, but in terms of legal principle and policy is ambivalent - sometimes emphasising household debt relief, other times creditor wealth maximisation. This paper assesses, in the context of novel debt problems brought to prominence by recession and austerity, the extent to which the law has embraced personal insolvency’s social insurance function. The discussion is framed particularly by the escalating UK housing crisis and the case of Places for People v Sharples concerning consumer bankruptcy’s (non) protection of debtors from eviction. The analysis illustrates how tensions between conceptual understandings and personal insolvency law’s practical operation undermine the law’s ability to fulfil its potential to produce positive policy responses to contemporary socio-economic challenges.
    JEL: F3 G3
    Date: 2017–09–01
  7. By: Lauren H. Cohen; Umit G. Gurun
    Abstract: We document evidence that firms systematically increase specialized, locally targeted advertising following the firm being taken to trial in that given location - precisely following initiation of the suit. In particular, we use legal actions brought against publicly traded firms over the 20 year sample period that progress to trial from 1995-2014. In terms of magnitude, the increase is sizable: targeted local advertising increases by 23% (t=4.39) following the suit. Moreover, firms concentrate these strategic increases in locations where the return on their advertising dollars are largest: in smaller, more concentrated advertising markets where fewer competitor firms are advertising. They focus their advertisement spikes specifically toward jury trials, and in fact specifically toward the most likely jury pool. Lastly, we document that these advertising spikes are associated with verdicts, increasing the probability of a favorable outcome.
    JEL: D22 G30 K41 K42 L14 M21 M37
    Date: 2018–04
  8. By: Wojciech Hardy
    Abstract: Pre-release leaks of cultural content incentivise consumers to look for unauthorised sources. I find that such events may induce some television viewers to switch to unauthorised sources to gain access even to content that had not been leaked. To demonstrate that this is the case, I use a unique dataset on a sample of TV shows aired around the time of a pre-release leak of a very popular TV show (Game of Thrones). The results of a difference-in-differences analysis indicate that the leaked TV show lost viewership for both the leaked episodes and those that followed. Moreover, the event also had negative effects for other TV shows that may share an audience with the leaked show. Finally, my results for the shows with a shared audience are corroborated by evidence of an increase in Google searches for phrases including the show names and the words “watch online”, after the leak. I argue that the one-time incentive to use unauthorised sources caused some viewers to engage in unauthorised consumption even of shows not affected directly by the leak. These conclusions are consistent with the existence of one-time costs of switching channels of content acquisition.
    Keywords: file-sharing, copyright, intellectual property rights, tv, piracy, Game of Thrones
    JEL: D12 K42 L82 O34 Z11
    Date: 2018–04
  9. By: Jerg Gutmann; Matthias Neuenkirch; Florian Neumeier; Armin Steinbach
    Abstract: The proportionality principle, as the cardinal principle of international law, includes a necessity and a proportionality test, both of which rest on empirical premises. The necessity test involves an assessment of whether a legal sanction is well-suited to achieve its objective. The proportionality test questions the causal link between the sanction and the human rights situation in the country against which the sanction is aimed. This study analyzes the empirical basis of the proportionality principle by examining the consequences of economic sanctions for the target country’s human rights situation. We use endogenous treatment-regression models to test the empirical basis of the proportionality principle by estimating the causal average treatment effect of US economic sanctions on different types of human rights within a uniform empirical framework. We find that economic sanctions do not pass the legal necessity test in cases where the purpose of the sanctions is to improve the human rights situation. On the contrary, we find that such sanctions actually lead to a deterioration of the human rights situation. Moreover, our finding that the sanctions have no effect on basic, economic, and emancipatory human rights calls into question the dominant view that economic sanctions are disproportionate. On a general note, our study underscores the empirical contingencies of a core legal principle under international and national law.
    Date: 2018
  10. By: Chu, Yu-Wei Luke
    Abstract: Past-month marijuana use among adolescents does not increase after the passage of medical marijuana laws in the U.S. It is crucial for future research to explore causal mechanisms affecting different types of marijuana users to bring a deeper understanding of behavioral responses to marijuana polices.
    Keywords: Marijuana, Medical marijuana law, Marijuana use,
    Date: 2018
  11. By: Wilkinson, Michael; Lokdam, Hjalte
    Abstract: ‘Law and Political Economy’ surveys recent approaches to the study of phenomena at the intersection of law, politics and the economy. These take an interdisciplinary perspective, viewing markets as fields of social power that are not spontaneous but created and reproduced in the meeting of legal norms, political action and economic activity. Through regulating economic relationships, the politico-legal order constitutes and reconstitutes the power relations that make up society. This, in turn, is driven by the formation of class, sectoral and geopolitical interests, as well as ideological convictions, which harness political and legal authority. We present these inter-related processes through exploring contemporary debates on inequality, inter-personal market relations, the relation between the state and market, and the effects of economic integration and globalisation on democracy and political self- determination.
    JEL: J1
    Date: 2018–04–06
  12. By: Salvador Gil-Pareja (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).); Rafael Llorca-Vivero (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).); Jordi Paniagua (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia (Spain).)
    Abstract: This paper performs a structural gravity estimation of the effect of commercial law conventions on international trade flows. We focus on trade law agreements aimed to privately resolve disputes among partners: international commercial arbitration, model law and conciliation. Our results suggest three interesting traits. First, international dispute resolution mechanisms have a moderate positive impact on trade, which is stronger for similar country-pairs in terms of income. Second, this effect is not observed in agreements which do not tackle private resolution mechanisms. Third, international commercial arbitration is the most effective tool to promote trade.
    Keywords: international trade law, international commercial arbitration, model law, conciliation, international trade, structural gravity
    JEL: F14 K12
    Date: 2018–04
  13. By: Hearson, Martin
    Abstract: Developing countries have concluded thousands of bilateral tax treaties, which restrict their ‘taxing rights’ over international investment. Qualitative case studies of these negotiation outcomes emphasize power politics, knowledge asymmetries and negotiating capability in the eventual distribution of taxing rights between signatories, yet such insights are absent from cross‐country quantitative work. This paper bridges the gap by replicating two quantitative studies, introducing new data on countries' ability to mobilize tax revenue and the outcomes of tax treaty negotiations. It provides statistical support for the insights from qualitative research. The size of a government's revenue base, and its reliance on corporate tax, might affect the salience of the revenue sacrifice in policy makers' minds. These variables influence the likelihood of signing a tax treaty and the particular concessions made. Power asymmetries between signatories lead to more unequal distributions of taxing rights away from developing countries, in contrast to the findings of earlier studies. Developing countries also become better negotiators as they gain experience.
    Keywords: developing countries; foreign direct investment; corporate taxation; double taxation; treaties; multinational corporations
    JEL: F53 H25 K34 O23
    Date: 2018–03–13
  14. By: Ali Mazyaki (Allameh Tabataba’i University); Joel (J.J.) van der Weele (Universiteit van Amsterdam; Tinbergen Institute, The Netherlands)
    Abstract: Incentives based on esteem, honor and shame are increasingly popular and easy to use due to modern surveillance techniques. However, the use of shaming is controversial: critics argue that delegating punishment to a crowd can lead to mob justice and a loss of control over the size of the sanction. We use the signaling model of social behavior by Bénabou and Tirole (2011) to explore the effect of esteem-based incentives and their interaction with traditional monetary incentives. We show that esteem-based incentives can indeed lead to a loss of control by generating multiple equilibria, some of which feature high levels of stigma. Monetary and esteem incentives are interdependent. Moreover, if both types of incentives are costly to implement, the optimal incentive mix includes both instruments. In equilibrium, esteem-based incentives will be used relatively more for rare behaviors and in societies that have more heterogenous values.
    Keywords: prosocial behavior; signaling; incentives; esteem.
    JEL: D02 H41 K42
    Date: 2018–05–04

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