Berkeley Program in Law and Economics

Academics studying public firms' choice of governance arrangements have largely assumed that stock prices accurately reflect the effect of these arrange¬ments on firm value. As a result, firms going public generally have an incentive to seek arrangements that maximize shareholder value, and states seeking incor¬porations have an incentive to offer such arrangements. Oddly, this literature has ignored the considerable evidence that stock prices are frequently "noisy" ¬deviating significantly from fundamental value. This Article systematically ana¬lyzes the effect of noisy stock prices on firms' choice of governance arrangements. It demonstrates that stock price noisiness leads firms to seek - and states to of¬fer - arrangements with a current-owner bias - that is, arrangements favoring both insiders and current public shareholders at the expense of future public shareholders and long-term corporate value. Current-owner bias can explain many features of (and gaps in) state corporate law as well as the governance ar¬rangements chosen by public firms. The problem of current-owner bias also has important normative implications for the desirability of the market for corporate charters, the proper relationship between mandatory federal securities regula¬tion and state corporate law, and the wisdom of recent proposals to "empower" firms to choose their own securities regime.