Paul G. Mahoney

The Common Law and Economic Growth: Hayek Might be Right

Recent finance scholarship finds that countries with legal systems based on the common law have more developed financial markets than civil‐law countries. The present paper argues that finance is not the sole, or principal, channel through which legal origin affects growth. Instead, following Hayek, I focus on the common law’s association with limited government. I present evidence that common‐law countries experienced faster economic growth than civil‐law countries during the period 1960–92 and then present instrumental variables results that suggest that the common law produces faster growth through greater security of property and contract rights.

Manager-Investor Conflicts in Mutual Funds

Half of all of U.S. households own shares in one or more mutual funds, either directly or through personal or employer-sponsored retirement accounts. This article describes the structure and regulation of mutual funds and the resulting incentives facing those who make decisions for the funds. After providing some basic institutional details, it focuses on the cash flows from mutual fund investors to fund managers, brokers, and other third parties and the associated conflicts of interest. The article concludes with a summary of recent legal proceedings against mutual fund managers and brokers based on improper trading practices and regulatory proposals to curb those practices.

The Development of Securities Law in the United States

Given the existence of contract, property, fraud, and company law, what is the purpose of securities laws? Broadly speaking, they can serve either of two functions, or some mix of both. The first is to facilitate contracting among entrepreneurs, managers, shareholders, and financial intermediaries by providing a standardized set of rights and obligations (La Porta et al. 2005). Such laws are motivated by the desire to reduce transaction costs where contracting parties are widely dispersed and both writing complete contracts ex ante and renegotiating ex post are difficult. A second possible function is to restrict contracting by limiting the set of legally available terms. Such laws reflect the view that securities markets are beset by market failures stemming from externalities or investor irrationality (Coffee 1984; Fox 1999; Langevoort 2002). For the sake of simplicity, we can call the first a “contracting” paradigm and the second a “regulatory” paradigm.

The Origins of the Blue‐Sky Laws: A Test of Competing Hypotheses*

Between 1911 and 1931, 47 of the 48 states adopted state securities, or “blue‐sky,” laws. This paper employs an event history analysis to analyze public interest, public choice, and ideological explanations for the enactment of blue‐sky laws. The data suggest that the decision to adopt a blue‐sky law was heavily influenced by the strength of progressive lobbies. However, the type of law adopted was more strongly influenced by the prevalence of small banks that faced competition for depositors’ funds from securities salesmen. I also provide evidence that more stringent blue‐sky laws increased small‐bank profits.

Mandatory vs. Contractual Disclosure in Securities Markets: Evidence from the 1930s

This paper studies mandatory disclosure documents filed during the period 1933-35 in response to the Securities Act of 1933 and the Securities Exchange Act of 1934. Our sample companies are all listed on the New York Stock Exchange (NYSE) and therefore subject to the NYSE’s disclosure requirements at the time of the regulatory filings. We ask whether the additional disclosures contained in the filed documents constitute information. Using newly-available daily price, volume, and bid and ask quotation data, we test whether the filings are associated with changes in bid-ask spreads, return autocovariance, turnover, volatility, or no-trade days. We find almost no evidence that the new disclosures required by the securities laws—principally having to do with management compensation and large shareholdings—reduced informational asymmetry. We also find no evidence that earnings reports were more informative after enactment of the securities laws.

The Value of Judicial Independence: Evidence from 18th Century England

This paper assesses the impact of changes in judicial independence on equity markets. North and Weingast (1989) argue that judicial independence and other institutional changes inaugurated by the Glorious Revolution of 1688-89 improved public and private finance in England by putting restraints on the government. We calculate abnormal equity returns at critical points in the passage of statutes giving judges greater security of tenure and higher salaries. Early eighteenth-century legislation granting tenure during good behavior is associated with large and statistically significant positive abnormal returns. Other statutes had positive but generally insignificant effects.

Information Technology and the Organization of Securities Markets

remarkably broad subject. In an effort to maintain focus, I pose two questions related to the issue of technology and its implications for the future of securities markets. First, will technology tend to increase or decrease the importance of securities as a financing vehicle in comparison to alternative vehicles such as bank loans, capital leases, and franchising relationships? Second, what changes will technology produce in the structure of primary and secondary securities markets? I take up these questions in order.

The Public Utility Pyramids

AbstractIn the 1920s and 1930s, many public utilities in the United States were controlled by holding companies organized in pyramid form. This structure can add value to subsidiaries but can also facilitate extraction of wealth from the subsidiaries’ public shareholders. I examine the effects of the Public Utility Holding Company Act of 1935 (PUHCA), which outlawed pyramid structures. The value of both top holding companies and their subsidiaries fall (rise) around the time of key legislative events favorable (unfavorable) to the enactment of PUHCA, supporting the hypothesis that public shareholders benefited from the presence of a controlling shareholder.

Adam Smith, Prophet of Law and Economics

Law and economics scholars do not normally identify Adam Smith as an important figure in the field. However, his Lectures on Jurisprudence contain a wealth of insights and analytical techniques that law and economics scholars of the late 20th century would repeat. This paper argues for Smith’s place in law and economics, identifying some of his most important arguments and emphasizing their contributions to legal theory. It also argues that economic arguments play a central role in Smith’s theory of justice. Indeed, Smith’s jurisprudence provides an important bridge between his moral and economic theories.

Adam Smith, Prophet of Law & Economics

Adam Smith is not normally identified as an important figure in law and economics. However, his Lectures on Jurisprudence contain a surprising number of insights that would be repeated by law and economics scholars of the late twentieth century. This essay argues for Smith’s place in law and economics, identifying some of his most important arguments and emphasizing their contribution to legal theory. It also suggests reasons why Smith’s ideas did not lead immediately to the widespread adoption of efficiency-based explanations for legal rules.