Three Essays in Law and Finance
Date of Award
Spring 2023
Document Type
Dissertation
Degree Name
Doctor of Philosophy (PhD)
Department
Management
First Advisor
Tookes, Heather
Abstract
This dissertation explores three topics at the intersection of law and finance. It emphasizes how the structure of the legal profession and contractual choices made in bylaws and charters have significant effects on corporate governance. The first essay, “The Market for General Counsel,” studies the hiring, firing, demographics, and politics of general counsels (GCs) in American public companies. I use an original dataset tracking the background and career trajectories of over three thousand GCs at publicly traded U.S. companies to establish that a majority of inhouse counsel are outsiders without previous connections to their employers. I also document several trends in the market for GCs, including the rise of women GCs and the increasing Democratic tilt of inhouse counsel. GCs are twice as likely to be terminated from their position as CEOs, and their tenures have substantially decreased since the 1990s. Outsider GCs are more likely to be fired at any point in their tenure than insiders or pseudo-outsiders, and this relationship between insider status and firing persists after controlling for litigation around the time of the GC’s departure.The second essay, “Does Bankruptcy Priority Matter? Evidence From India” examines the effect of a 2019 decision by the Indian Supreme Court introducing bankruptcy priority. I find that banking stocks exhibited positive abnormal returns around the time of the decision. This effect was concentrated in banks with toxic balance sheets as well as state-operated banks. Debtors also seemed to have benefitted from the advent of absolute priority: firms with high costs of debt had positive abnormal returns around the time of the court’s decision. This evidence is consistent with the salutary effects of strong creditor rights predicted by economic theory, and could inform U.S. debates about the desirability of bankruptcy priority. The final essay, “The Rise of Dual-Class Stock IPOs is co-authored with Ofer Eldar, Yael Hochberg, and Lubomir Litov. In this essay, we create a novel dataset to examine the recent increase in the popularity of dual-class stock IPOs. We create a novel taxonomy for controlling shareholders at dual-class firms, and show that the rise of dual-class stock IPOs has been driven by founder-controlled firms. Founders’ wedge has increased over time with an increase in founder bargaining power, as proxied by greater availability of private capital and technological shocks that reduced firms’ need for external financing. Chapter One: The Market for General Counsel This paper presents the first systematic descriptive study of the market for general counsel (GCs) in publicly traded U.S. companies. Using a hand-collected dataset, I track the backgrounds and careers of 3,409 GCs, and establish basic facts about the hiring, firing, demographics, and politics of inhouse counsel. Most GCs are outsiders to their companies, not having previously worked in subordinate positions within the legal department or served as external counsel. I find that the share of women GCs has risen sharply over time, with GCs now about five times as likely to be female as chief executive officers (CEOs). GCs have also become more Democratic-leaning over time, in sharp contrast to business-side employees such as CEOs. GC tenures have decreased over time, and GCs are twice as likely to be fired from their positions as CEOs. Outsider GCs are especially likely to be fired from their position, controlling for biographical details, firm financials, and securities litigation against the firm. Chapter Two: Does Bankruptcy Priority Matter? Evidence from IndiaThis paper offers empirical evidence to demonstrate the economic value of bankruptcy priority. Since bankruptcy priority has been the law of the land in the United States for eight decades, most existing arguments for or against bankruptcy priority have been theoretical. I exploit the quasi-natural setting of a 2019 decision by the Indian Supreme Court to investigate the effects of the introduction of bankruptcy priority. I find that banking stocks exhibited positive abnormal returns around the time of the decision. This effect was concentrated in banks with toxic balance sheets as well as state-operated banks. Debtors also seem to have benefitted from the introduction of absolute priority: firms with higher cost of debt experienced positive abnormal returns around the time of the decision. This evidence is consistent with the salutary effects of strong creditor rights predicted by economic theory, and could inform U.S. debates about the desirability of bankruptcy priority. Chapter Three: The Rise of Dual-Class Stock IPOs We create a novel dataset to examine the recent rise in dual-class IPOs. We document that dual-class firms have different types of controlling shareholders and wedges between voting and economic rights, and that the increasing popularity of dual-class structures is driven by founder-controlled firms. We find that founders’ wedge is greater when founders have stronger bargaining power. The increase in founder control over time is due to greater availability of private capital and technological shocks that reduced firms’ needs for external financing. Stronger bargaining power is also associated with a lower likelihood of sunset provisions that terminate dual-class structures.
Recommended Citation
Aggarwal, Dhruv Chand, "Three Essays in Law and Finance" (2023). Yale Graduate School of Arts and Sciences Dissertations. 1060.
https://elischolar.library.yale.edu/gsas_dissertations/1060
