Among financial economists, the dominant approach to the study of executive compensation views managers' pay arrangements as a (partial) remedy to the agency problem. Under this approach, which we label the “optimal contracting approach,” boards are assumed to design compensation schemes to provide managers with efficient incentives to maximize shareholder value. Financial economists have done substantial work within this optimal contracting model in an effort to understand executive compensation practices; recent surveys of this work include Murphy (1999) and Core, Guay and Larcker (2001). To some researchers working within the optimal contracting model, the main flaw with existing practices seems to be that, due to political limitations on how generously executives can be treated, compensation schemes are not sufficiently high-powered (Jensen and Murphy, 1990).

Another approach to studying executive compensation focuses on a different link between the agency problem and executive compensation. Under this approach, which we label the “managerial power approach,” executive compensation is viewed not only as a potential instrument for addressing the agency problem but also as part of the agency problem itself. As a number of researchers have recognized, some features of pay arrangements seem to reflect managerial rent-seeking rather than the provision of efficient incentives (for example, Blanchard, Lopez-de-Silanes and Shleifer, 1994; Yermack, 1997; and Bertrand and Mullainathan, 2001). We seek to develop a full account of how managerial influence shapes the executive compensation landscape in a forthcoming book (Bebchuk and Fried, 2004) that builds substantially on a long article written jointly with David Walker (Bebchuk, Fried and Walker, 2002).

Introduction

Corporate ownership and governance differ among the world's advanced economies. Some countries' corporations are diffusely owned with managers firmly in control, other countries' corporations have concentrated ownership, and in still others, labor strongly influences the firm. During the past half-century since World War II, economies, business practices, and living standards have converged in Western Europe, the United States, and Japan. But their corporate ownership structures have remained different, and different degrees of ownership concentration and labor influence have persisted. What explains these differences? And should they be expected to persist or to disappear?

We show that there are significant sources of path dependence in a country's patterns of corporate ownership structure. Because of this path dependence, a country's pattern of ownership structures at any point in time depends partly on the patterns it had earlier. Consequently, when countries had different ownership structures at earlier points in time – because of their different circumstances at the time, or even because of historical accidents – these differences might persist at later points in time even if their economies have otherwise become quite similar.

In section I, we describe our inquiry. Why, against the background of the forces for global convergence, do the advanced economies differ so much in their corporate ownership structures? For concreteness, our analysis focuses on one important dimension of differences among countries: whether their corporations commonly do or do not have a controlling shareholder.

We distinguish in section I between two sources of path dependence.

Introduction

The concern of this chapter is the way in which corporate reorganizations divide the reorganization pie. The chapter puts forward a new method for making the necessary division. This method can address some major efficiency and fairness problems long thought to be inherent in corporate reorganizations. Although the method is proposed as a basis for law reform, it can also be used under the existing rules.

Reorganization is one of the two routes that a corporation bankruptcy may take. When a corporation becomes insolvent and bankruptcy proceedings are commenced, the corporation is either liquidated or reorganized. In liquidation, which is governed by chapter 7 of the Bankruptcy Code, the assets of the corporation are sold, either piecemeal or as a going concern. The proceeds from this sale are then divided among those who have rights against the corporation, with the division made according to the ranking of these rights.

Reorganization which is governed by chapter 11 of the Bankruptcy Code, is an alternative to liquidation. Reorganization is essentially a sale of a company to the existing “participants” – all those who hold claims against or interests in the company. This “sale” is of course a hypothetical one. The participants pay for the company with their existing claims and interests; in exchange, they receive K “tickets” in the reorganized company – that is, claims against or interests in this new entity.

Drafts of all the articles in this volume were presented in a conference at Harvard Law School in November 1986. The conference was sponsored by the Harvard Law School Program in Law and Economics. I wish to thank the John M. Olin Foundation which, through its generous grant to the Law and Economics Program, made possible the organization of the conference and the preparation of this volume.

The purpose of the conference and of this volume has been to put together research work at the frontier of the economic analysis of corporate law, especially work on the main policy questions now confronting this area of the law. The last decade has brought certain corporate transactions and arrangements to the forefront of public attention and public debate. At the same time, the last decade has been one in which a new mode of corporate law analysis has developed – one that uses the tools of economics to study the consequences and desirable features of corporate rules and regulations. The present collection should provide readers with a good sense of the power, current state, and future direction of work in economic analysis of law.

The first five articles in the volume focus directly on those transactions in corporate control and structure that have attracted much interest and controversy in the past decade – corporate takeovers, buyouts, recapitalizations, and reorganizations. These transactions have had great impact on the way in which capital markets – and the public companies traded in them – operate.

Introduction

The concern of this article is the way in which corporate reorganizations divide the reorganization pie. The article puts forward a new method for making the necessary division. This method can address some major efficiency and fairness problems long thought to be inherent in corporate reorganizations. Although the method is proposed as a basis for law reform, it can also be used under the existing rules.

Reorganization is one of the two routes that a corporation in bankruptcy may take. When a corporation becomes insolvent and bankruptcy proceedings are commenced, the corporation is either liquidated or reorganized. In liquidation, which is governed by Chapter 7 of the Bankruptcy Code, the assets of the corporation are sold, either piecemeal or as a going concern. The proceeds from this sale are then divided among those who have rights against the corporation, with the division made according to the ranking of these rights.

Reorganization, which is governed by Chapter 11 of the Bankruptcy Code, is an alternative to liquidation. Reorganization is essentially a sale of a company to the existing “participants” – all those who hold claims against or interests in the company. This “sale” is of course a hypothetical one. The participants pay for the company with their existing claims and interests; in exchange, they receive “tickets” in the reorganized company – that is, claims against or interests in this new entity.