Politics and Finance, POL 348

Spring Semester 2000-2001

Prof. Howard Rosenthal, Corwin 031, x84768 rosentha@Princeton.edu

 

Lecture: Tuesday, Thursday 10:00-10:50, Frist 309

Precepts: TBA

 

Overview:

This course examines how legislation and regulation influences the structure of financial markets and how players in these markets intervene in the political process to create or modify legislative and regulatory outcomes.  Particular emphasis will be placed on the environment in the United States.  International comparisons will also be present.  Most of the class will consider how markets and firms relate to their external political environment, but there will also be discussion of the internal political structure of corporations.  The class will assume that students have had exposure to microeconomics and finance but not to political theory.  A brief introduction to political theory will be provided.  The approach will be similar to that used in microeconomics, except that transactions will be made through voting institutions rather than through economic exchange.

 

The course will use an interdisciplinary approach with readings from political science, economics, law, and history.  Most of the reading will be non-technical but there will be bursts of formal models and econometrics.

 

One book is to be purchased.  Items marked * can be downloaded from www.jstor.org.  All other required readings will be assembled in a two-volume course packet to be purchased from PEQUOD.  Some items will be on reserve.

Course Prerequisite:

 

ECO 317 Financial Investments.

 

Course Requirements:

There will be weekly assignments, typically taking the form of 2-3 page reports.  There will also be a midterm exam and a 10-page paper as a final assignment.  No final exam.  For several of the class assignments, students will be asked to study congressional roll call votes using VOTEVIEW, a database that includes all roll calls between 1789 and 1985.  VOTEVIEW was programmed by Boris Shor ’96.  One precept will be used to demonstrate VOTEVIEW.

 

 

 

Lectures 1-2: Politics Really Matters: The Case of Conrail

 

Required Readings.

 

Baldwin, Corwin and Sugato Battachyara.  1991.  “Choosing the Method of Sale: A Clinical Study of Conrail.”  Journal of Financial Economics, 30: 69-98.

David W. Brady and Craig Volden, Revolving Gridlock: Politics and Policy from Carter to Clinton.  Boulder, CO.: Westview Press, 1998, 206 pp.  PURCHASE

Recommended:

Students interested in a more formal introduction to political theory can start with Morrow, James.  1994. Game Theory and Politics, Princeton: Princeton University Press.

Class exercise:  The lectures will be devoted to explicating the theory of pivotal politics and using the theory to understand why Conrail was privatized through a public offering rather than being sold to Norfolk and Southern as proposed by Elizabeth Dole, Secretary of Transportation in the Reagan administration.  More recently, Conrail was absorbed b y Norfolk and Southern and the Chessie System.  Use the web or the library to learn what you can about the sale of Conrail.  Write a brief 2-3 page note emphasizing any insights provided by the theory of pivotal politics (see Brady and Volden) as to why Congress did not insist in the 90s, as against the 80s, that Conrail be preserved.

Lecture 3: Nuts and Bolts and Alphabet Soup: SEC, CFTC, the Fed and Other Regulators of Financial Markets.  The Hot (and Maybe Sour) Soupe du Jour: Selective Disclosure.

 

Reading Assignment:  You can get an official view of what these agencies do and how they handle a current “hot” issue by using the following URLs:

The Investor’s Advocate: How the SEC Protects Investors and Maintains Market Integrity  http://www.sec.gov/asec/wwwsec.htm

The CFTC At a Glance. 

http://www.cftc.gov/cftcglan.htm

The Structure of the Federal Reserve System

http://www.federalreserve.gov/pubs/frseries/frseri.htm

Final Rule: Selective Disclosure and Insider Trading

http://www.sec.gov/rules/final/33-7881.htm

Regulation FD: The SEC's New Selective Disclosure Rule Takes Effect

http://www.haledorr.com/publications/corp/2000_09_CorpAdvisor.html

SEC Selective Disclosure Conference Call

[You will need RealPlayer or similar to listen to this.  It is a one hour recording, so you may want to sample.  The conference call provides some insight into the interplay between the regulator and the regulated.]

http://www.videonewswire.com/BRTABLE/022500/

 

Lectures 4-5: The Rule of Law and Financial Markets Around the World

 

Readings:

*Shleifer, Andrei and Robert W. Vishny.  A Survey of Corporate Governance.  The Journal of Finance 52 (2) June 1997. 737-

*La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny.  Legal Determinants of External Finance.  The Journal of Finance, 52 (3) July 1997.  1131-

Wei, Shang-Jin.  How Taxing Is Corruption on International Investors?  The Review of Economics and Statistics, 82(1) Feb. 2000, 1-11.

Davis, Lance and Larry Neal.  1998.  “Micro Rules and Macro Outcomes: The Impact of Micro Structure on the Efficiency of Securities Exchanges, London, New York, and Paris 1800-1914.  American Economic Review 88(2), 1998 40-45.

Lecture 6: Activists and Finance: California Redwoods

 

Reading:

DeAngelo, Harry and Linda DeAngelo, 1998.  “Ancient Redwoods and the Politics of Finance: The Hostile Takeover of the Pacific Lumber Company”, Journal of Financial Economics.  47, 1998:3-53.  download from http://www.elsevier.com/homepage/sae/econbase/finec/

Lectures 7-8: Regulatory Change and Regulatory Gridlock

 

Reading

 

Barry R. Weingast.  1984.  “The Congressional-Bureaucratic System: A Principal-Agent Perspective (with Applications to the SEC).”  Public Choice, 44: 147-177.

Kroszner, Randall S. and Thomas Stratmann, 1998.  “Interest group Competition and the Organization of Congress: Theory and Evidence from Financial Services Political Action Committees”, American Economic Review, 88 Dec., 1163-87

Lectures 9-11: Regulatory Failure

Readings:

Romer, Thomas and Barry R. Weingast, 1991.  “Political Foundations of the Thrift Debacle”.  In Alberto Alesina and Geoffrey Carliner, eds.  Politics and Economics in the 1980s.  Chicago: University of Chicago Press, 175-209.

White, Lawrence J. 1991. The S&L Debacle:Public Policy Lessons for Bank and Thrift Regulation.  New York: Oxford University Press, pp. 53-122.

Pyle, David H. 1995.  “The U.S. Savings and Loan Crisis” in Robert A. Jarrow et al., Eds., Handbooks in OR &MS, Vol. 9. Elsevier Science

Friedman, Milton and Anna Jacobson Schwartz, 1963 A Monetary History of the United States, 1857-1960.. Princeton: Princeton University Press, p. 420-483.

 

Assignment:  Use the web and library to learn what you can about the recent financial crisis in Japan.  In what ways is the Japanese crisis just the S&L crisis up a few orders of magnitude?

 

Lectures 12-13: Populism and Regulatory Structure: Why the US, Unlike Others, Has One Regulator for Securities, Another for Futures.

 

Readings:

Romano, Roberta  1998.  “The Political Dynamics of Derivative Securities Regulation”.  Yale Journal of Regulation, 14: 279-406.

Mahoney, Paul G. 1999.  “The Stock Pools and the Securities Exchange Act”.  Journal of Financial Economics 51: 343-369.

Roe, Mark J., 1990.   “Political and legal restraints on ownership and control of public companies.”  Journal of Finanical Economics, 27: 7-41.

Recommended: 

Roe, Mark J. 1994.   Strong managers, weak owners : the political roots of American corporate finance.  Princeton, N.J. : Princeton University Press

 

 

Lecture 14 : Federalism and Corporate Finance

 

Reading:

 

Romano,  Roberta.  “The state competition debate in corporate law.”  In Lucian Ayre Bebchuk, ed., Corporate Law and Economic Analysis.  Cambridge UK, Cambridge University Press, 1990. 216-254.

 

Lectures 15-16 :  The Political Evolution of Bankruptcy Law

 

Guest lecture, April 5.  David A. Skeel, Professor of Law, University of Pennsylvania Law School.  Author of Debt’s Dominion.  Princeton: Princeton University Press, in publication.

 

Readings:

Skeel, David A.  1999.  “The Genius of the 1898 Bankruptcy Act”, Bankruptcy Developments Journal, 15(2) .321-341.

Skeel, David A.  1998.  “An Evolutionary Theory of Corporate Law and Corporate Bankruptcy” Vanderbilt Law Review, 51(5): 1325-1398.

Skeel, David A.  2000.  “Vern Countryman and the Path of Progressive (And Populist) Bankruptcy Scholarship.” Harvard Law Review 113 (5): 1075-1129.

Hansen, Bradley (1998) “Commercial Associations and the Creation of a National Economy: The Demand for Federal Bankruptcy Law”  Business History Review, 72 (Spring): 86-113.

Posner, Eric. (1997).  “The Political Economy of the Bankruptcy Reform Act of 1978”, Michigan Law Review 96: 47-124.

Recommended:

Berglöf, Erik and Howard Rosenthal (1999) “The Political Economy of American Bankruptcy: The Evidence from Roll Call Voting, 1800-1978”, working paper, Princeton University.  Will be on course website.

 

Lecture 17: Don’t Trust the Courts

 

Readings:

Balleisen, Edward J. (1996).  “Vulture Capitalism in Antebellum America: The 1841 Federal Bankruptcy Act and the Exploitation of Financial Distress”, Business History Review, 70: 473-516.

Weiss, Lawrence A. and Karen H. Wruck.  “Information problems, conflicts of interest, and asset stripping: Chapter 11’s failure in the case of Eastern Airlines”, Journal of Financial Economics 48 (1998) 55-97.  Download from http://www.elsevier.com/homepage/sae/econbase/finec/

Lectures 18-19: Credit Markets for the Poor and Disadvantaged

 

Readings:

*Holmes, George K., “Usury in Law, in Practice and in Psychology”, Political Science Quarterly, 7 3 (Sep., 1892), 431-67

*Caskey, John P. “Pawnbroking in America: The Economics of a Forgotten Credit Market”, Journal of Money, Credit and Banking, Volume 23, 1 (Feb. 1991), 85-99

State of Alaska, Office of the Governor, “Knowles Signs Lease-Purchase Disclosure Bill” http://www.gov.state.ak.us/press/99090.html

Alaska State 21st Legislature, “A Bill for an Act Entitled ‘An Act relating to lease-purchases of personal property”   http://www.legis.state.ak.us/PDF/21/HB0128B.PDF

Federal Trade Commission, Proposed consent agreement: Sears Roebuck and Co; Analysis to Aid Public Comment (Washington, D.C.: GPO, 10 June 1997); available from CQ Federal Register Service.  This document and several other items picked off the web have been copied and will be distributed.

Glaeser, Edward C. and Jose Scheinkman, “Neither A Borrower Nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws”, Journal of Law and Economics, 41(1) Apr. 1998 1-36.

 

Recommended:

Sullivan, Teresa A., Elizabeth Warren and Jay Lawrence Westbrook..  2000.  The fragile middle class : Americans in debt.  New Haven : Yale University Press.

Lectures 20-21: Political Intervention in Credit Markets

Readings:

*Alston, Lee  J., 1983. “Farm Foreclosures in the United States During the Interwar Period.”  Journal of Economic History, 43, 885-903.

*Alston, Lee J., 1983.  “Farm Foreclosure Moratorium Legislation: A Lesson from the Past.  American Economic Review, 74 (March): 445-57.

Kroszner, Randall S. 1999.  “Is It Better to Forgive than to Receive?  Repudiation of the Gold Indexation Clause in Long-Term Debt During the Great Depression”, working paper, University of Chicago.  Download: http://gsbwww.uchicago.edu/fac/randall.kroszner/research/repudiation.pdf

*Rucker, Randal R. and Lee J. Alston, 1987.  “Farm Failures and Government Intervention: A Case Study of the 1930’s.  American Economic Review, 77. 724-730.

Recommended:

Bolton, Patrick and Howard Rosenthal, “Political Intervention in Credit Markets”.  A theory paper with a good deal of algebra.  The paper also contains an historical section and references to the literature on intervention in credit markets in the United States in the 18th and 19th centuries.  Will be on the course web site.

Assignment:  Use Voteview to examine congressional voting on debt repudiation.  Was there a division in Congress?  Why do the votes seem inconsistent with Kroszner’s conclusions about financial markets?  Can you reconcile the observations about voting with the observations about securities prices?

Lectures 22-23 : The Internal Political Structure and Voting Rules of Corporations

 

Readings:

Gordon, Jeffrey N.  “Ties that bond: dual class common stock and the problem of shareholder choice.”  In Bebchuk, 74-117.l

Pound, John.  “Raiders, Targets, and Politics: The History and Future of American Corporate Control.”  Journal of Applied Corporate Finance 4 1992 6-18

Pound, John.  “Beyond Takeovers: Politics Comes to Corporate Control.”  Harvard Business Review 70 1992 72-83.

Lecture 24: Leftovers and Conclusions