Showing papers by "Stephen J. Choi published in 2004"

Choosing the Next Supreme Court Justice: An Empirical Ranking of Judicial Performance

Abstract: The judicial appointments process has grown increasingly frustrating in recent years. Both sides claim that their candidates are the "most meritorious" and yet there is seldom any discussion of what constitutes merit. Instead, the discussion moves immediately to the candidates' likely positions on hot-button political issues like abortion, gun control, and the death penalty. One side (these days, the Republicans) claims that it is proposing certain candidates based on merit, while the other (the Democrats) claims that the real reason for pushing those candidates is their ideology and, in particular, their likely votes on certain key hot-button issues. With one side arguing merit and the other side arguing ideology, the two sides talk past each other and the end result is often an impasse. To get past the impasse, we propose placing judges in a tournament based on relatively objective measures of judicial merit and productivity. A tournament allows the public to test the politicians' claims of merit. Being able to test those claims helps make transparent the occasions on which the real debate is over ideology. It is harder to disguise a purely ideological candidate as the best from a "merit" standpoint when the candidate performs poorly relative to many other judges based on objective factors. Once merit-based arguments have been isolated (or at least reduced in scope) to factors related to the tournament, it should be possible to have a transparent and meaningful debate over ideology. The Article runs such a tournament using data on opinions authored by active federal circuit court judges from one common time period: the beginning of 1998 to the end of 2000. The focus on a common time period helps put judges in the tournament on a level playing field. We then generate a series of measures of merit focusing on (a) productivity, (b) opinion quality, and (c) judicial independence. While not perfect, our measures interject a greater focus on merit in the current nomination process (thereby flushing out previously non-transparent motives based on ideology). With our data, we are able to test the claims of merit that the next President will inevitably make when he announces one or the other of his favorite circuit court judges as the nominee for the Supreme Court.

Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds

Abstract: Network externalities may lead contracting parties to stay with a standardized term despite preferences for another term. Using a dataset of sovereign bond offerings from 1995 to early 2004, we test the importance of standardization for the modification provisions relating to payment terms. We provide evidence that (a) standardization may lead parties to adopt provisions not necessarily out of preference and (b) standards, nonetheless, may change. The process of change, however, is not necessarily quick or straightforward. In the sovereign bond context, change came by way of an interpretive shock. Contracts with modification provisions requiring the unanimous consent of bondholders (UACs) suddenly became vulnerable to change with less than unanimous approval through the unexpected use of exit consents. After the shock, sovereigns and investors did not initially react with a significant shift in contract terms. However, we provide evidence that after this initial lull (once investors and sovereign gained experience on the value of allowing modification of payment terms with less than unanimous consent), large shifts in contract terms followed, moving sovereign bond contracts even further away from UACs toward collective action clauses (CACs). We also report evidence that issuer's attorneys dealing with a high volume of sovereign offerings were the driving factor behind this delayed large shift in contract terms.

The Evidence on Securities Class Actions

Abstract: This article examines the theoretical issues and surveys the evidence on the desirability of securities class actions. Class actions offer the promise of energizing private enforcement of the securities laws, including in particular antifraud liability. For shareholders of large, publicly-held corporations, the individual benefits of pursuing a fraud action are often outweighed by the considerable costs of litigation. Without a class action, many potential fraud lawsuits may simply not get litigated. Nonetheless, the article explores three related problems with class actions: (a) the problem of frivolous suits (and the need to allow meritorious suits); (b) the lack of incentives on the part of plaintiffs' attorneys to focus on smaller companies; and (c) the agency problem between plaintiffs' attorneys and the plaintiff class. The article then assesses the existing evidence from the United States (in particular on the impact of the Private Securities Litigation Reform Act of 1995) in addressing these problems and proposes future avenues for research. Understanding the impact of class actions is important not only for the U.S. but also for countries considering the adoption of a U.S.-style securities class action system. As an example, the article discusses whether securities class actions would be beneficial in South Korea, a country with a smaller capital market and fewer large companies compared with the United States.

The Evidence on Securities Class Actions

Abstract: This article examines the theoretical issues and surveys the evidence on the desirability of securities class actions. Class actions offer the promise of energizing private enforcement of the securities laws, including in particular antifraud liability. For shareholders of large, publicly-held corporations, the individual benefits of pursuing a fraud action are often outweighed by the considerable costs of litigation. Without a class action, many potential fraud lawsuits may simply not get litigated. Nonetheless, the article explores three related problems with class actions: (a) the problem of frivolous suits (and the need to allow meritorious suits); (b) the lack of incentives on the part of plaintiffs' attorneys to focus on smaller companies; and (c) the agency problem between plaintiffs' attorneys and the plaintiff class. The article then assesses the existing evidence from the United States (in particular on the impact of the Private Securities Litigation Reform Act of 1995) in addressing these problems and proposes future avenues for research. Understanding the impact of class actions is important not only for the U.S. but also for countries considering the adoption of a U.S.-style securities class action system. As an example, the article discusses whether securities class actions would be beneficial in South Korea, a country with a smaller capital market and fewer large companies compared with the United States.

Choosing the Next Supreme Court Justice: An Empirical Ranking of Judicial Performance

Abstract: Author(s): Choi, Stephen | Abstract: The judicial appointments process has grown increasingly frustrating in recent years. Both sides claim that their candidates are the "most meritorious" and yet there is seldom any discussion of what constitutes merit. Instead, the discussion moves immediately to the candidates' likely positions on hot-button political issues like abortion, gun control, and the death penalty. One side (these days, the Republicans) claims that it is proposing certain candidates based on merit, while the other (the Democrats) claims that the real reason for pushing those candidates is their ideology and, in particular, their likely votes on certain key hot-button issues. With one side arguing merit and the other side arguing ideology, the two sides talk past each other and the end result is often an impasse. To get past the impasse, we propose placing judges in a tournament based on relatively objective measures of judicial merit and productivity. A tournament allows the public to test the politicians' claims of merit. Being able to test those claims helps make transparent the occasions on which the real debate is over ideology. It is harder to disguise a purely ideological candidate as the best from a "merit" standpoint when the candidate performs poorly relative to many other judges based on objective factors. Once merit-based arguments have been isolated (or at least reduced in scope) to factors related to the tournament, it should be possible to have a transparent and meaningful debate over ideology.The Article runs such a tournament using data on opinions authored by active federal circuit court judges from one common time period: the beginning of 1998 to the end of 2000. The focus on a common time period helps put judges in the tournament on a level playing field. We then generate a series of measures of merit focusing on (a) productivity, (b) opinion quality, and (c) judicial independence. While not perfect, our measures interject a greater focus on merit in the current nomination process (thereby flushing out previously non-transparent motives based on ideology). With our data, we are able to test the claims of merit that the next President will inevitably make when he announces one or the other of his favorite circuit court judges as the nominee for the Supreme Court.

A Tournament of Judges

Abstract: We suggest a Tournament of Judges where the reward to the winner is elevation to the Supreme Court. Politics (and ideology) surely has a role to play in the selection of justices. However, the present level of partisan bickering has resulted in delays in judicial appointments as well as undermined the public's confidence in the objectivity ofjustices selected through such a process. More significantly, much of the politicking is not transparent, often obscured with statements on a particular candidate 's "merit"casting a taint on all those who make their way through the judicial nomination process. We argue that the benefits from introducing more (and objective) competition among judges are potentially significant and the likely damage to judicial independence negligible. Among the criteria that could be used are opinion publication rates, citations of opinions by other courts, citations by the Supreme Court, citations by academics, dissent rates, and speed of disposition of cases. Where political motivations drive the selection of an alternative candidate, our proposed system of objective criteria will make it more likely that such motivations are made transparent to the public. Just as important, a judicial tournament for selection to the Supreme Court will serve not only to select effective justices, but also to provide incentives to existing judges to exert effort.

Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds

Abstract: Author(s): Choi, Stephen; Gulati, Mitu | Abstract: Network externalities may lead contracting parties to stay with a "standardized" term despite preferences for another term. Using a dataset of sovereign bond offerings from 1995 to early 2004, we test the importance of standardization for the modification provisions relating to payment terms. We provide evidence that (a) standardization may lead parties to adopt provisions not necessarily out of preference and (b) standards, nonetheless, may change. The process of change, however, is not necessarily quick or straightforward. In the sovereign bond context, change came by way of an "interpretive shock". Contracts with modification provisions requiring the unanimous consent of bondholders (UACs) suddenly became vulnerable to change with less than unanimous approval through the unexpected use of exit consents. After the shock, sovereigns and investors did not initially react with a significant shift in contract terms. However, we provide evidence that after this initial lull (once investors and sovereign gained experience on the value of allowing modification of payment terms with less than unanimous consent), large shifts in contract terms followed, moving sovereign bond contracts even further away from UACs toward collective action clauses (CACs). We also report evidence that issuer's attorneys dealing with a high volume of sovereign offerings were the driving factor behind this delayed large shift in contract terms.

Should Issuers be on the Hook for Laddering? An Empirical Analysis of the IPO Market Manipulation Litigation

Abstract: Under Section 11 of the Securities Act of 1933, firms making public offerings of securities are strictly liable to investors for any material misstatements in the registration statements that accompany those offers. This strict liability regime is premised on the notion that issuers are best placed to avoid misstatements in the registration statement. Section 11 gives other potential defendants a "due diligence" defense to reflect their lesser ability to ensure the accuracy of the registration statement. The recent spate of "laddering" lawsuits alleging manipulation of the aftermarket for certain stocks issued in "hot" initial public offerings (IPOs) presents a role-reversal in that underwriters, rather than issuers, are alleged to be the principal wrongdoers. This paper compares a randomly selected sample of the defendant-issuers in the IPO laddering lawsuits with a matched sample of IPO firms not included in the laddering litigation. We find few differences between the sued firms and the match firms that would suggest that the issuers are culpable for laddering schemes. These findings call into question - at least under some circumstances - the deterrent value of the strict liability regime of Section 11 for corporate issuers. We propose a due diligence defense for issuers for statements in the registration statement relating to situations in which the primary wrongdoer is not the issuer.

A Framework for the Regulation of Securities Market Intermediaries

Abstract: Author(s): Choi, Stephen | Abstract: This Essay examines the role of private institutions in promoting strong securities markets. Recent scandals in the United States highlight both the importance and the fallibility of the securities market intermediary institutions to which investors typically turn for protection, such as auditors, analysts, and proxy advisory firms. From the perspective of investor welfare, this Essay discusses the various forms of institution failure and the efficacy of recently promulgated reforms. First, the paper provides a taxonomy of the various forms of securities market intermediary institution failure. Second, the essay compares the failings of the market against the fallibility of regulators. Not all regulations are the same - a series of possible interventions into the securities market exists ranging from merit regulation at one extreme to the provision of optional investor education materials at the other. Some forms of market failures require less intervention (with a corresponding reduced cost of regulatory error and capture). Lawmakers often regulate first and ask questions later, ignoring both the potential downsides of regulation as well as the possibility of market-based alternative solutions to market failures. The presence of market-based solutions allows regulators to intervene less stringently into markets, leaving the market with some degree of choice in how to address particular intermediary defects.

A Framework for the Regulation of Securities Market Intermediaries

Abstract: This Essay examines the role of private institutions in promoting strong securities markets. Recent scandals in the United States highlight both the importance and the fallibility of the securities market intermediary institutions to which investors typically turn for protection, such as auditors, analysts, and proxy advisory firms. From the perspective of investor welfare, this Essay discusses the various forms of institution failure and the efficacy of recently promulgated reforms. First, the paper provides a taxonomy of the various forms of securities market intermediary institution failure. Second, the essay compares the failings of the market against the fallibility of regulators. Not all regulations are the same - a series of possible interventions into the securities market exists ranging from merit regulation at one extreme to the provision of optional investor education materials at the other. Some forms of market failures require less intervention (with a corresponding reduced cost of regulatory error and capture). Lawmakers often regulate first and ask questions later, ignoring both the potential downsides of regulation as well as the possibility of market-based alternative solutions to market failures. The presence of market-based solutions allows regulators to intervene less stringently into markets, leaving the market with some degree of choice in how to address particular intermediary defects.