Would 'Junkholder Primacy' Reduce Junk Corporate Governance?
84 Pages Posted: 29 May 2011 Last revised: 2 Apr 2013
Date Written: August 6, 2012
Abstract
Government policies’ unintended consequences permitted corporate agents to disconnect economic ownership from control, exploit corporate governance doctrine, and alter historic capital extraction methods throughout the past thirty years. From 1981-2011, market returns reflected these problems and defied existing risk / return theories. Simply put, bonds counterintuitively outperformed stocks for a generation.
This Article develops a paradigm-shifting framework in the scholarship concerning investor capital returns and corporate governance control mechanisms. To understand material causes of the problem, this Article examines empirical and theoretical data drawn from legal, economic, and financial literature to analyze a combination of primacy, corporate governance, agency costs, and value drivers.
The analysis suggests that stockholders’ failure to exert sufficient greed in the face of statutory, regulatory, judicial, and other structural reforms led to the death of shareholder primacy. Because stockholders lost the fight for meaningful control of corporate governance and squandered their future ability to efficiently extract historically expected value from corporations, something must fill that void.
To spur further research and dialogue on these matters, this Article forwards a disruptively innovative paradigm of junkholder primacy. Specifically, this Article concludes that ex ante negotiated junk bond contracts permit investors to assert primacy, regain governance controls, reduce agency costs, and extract high returns.
Keywords: Berle and Means, Citizens United, Sarbanes-Oxley, Defined Contribution Plans, corporate agency, shareholder primacy
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