Sunday, May 29, 2005

Article By John C. Coffee

Professor John C. Coffee of Columbia Law School has an article titled, "A Theory of Corporate Scandals: Why the U.S. and Europe Differ"  posted on SSRN here as part of the Columbia Law and Economics Working Papers.  In part the abstract on SSRN states:

"This paper submits that different kinds of scandals characterize different systems of corporate governance. In particular, dispersed ownership systems of governance are prone to the forms of earnings management that erupted in the United States, but concentrated ownership systems are much less vulnerable. Instead, the characteristic scandal in concentrated ownership economics is the appropriation of private benefits of control. Here, Parmalat is the representative scandal, just as Enron and WorldCom are the iconic examples of fraud in dispersed ownership regimes.

"Is this difference meaningful? This article suggests that this difference in the likely source of, and motive for, financial misconduct has implications both for the utility of gatekeepers as reputational intermediaries and for design of legal controls to protect public shareholders. What works in one system will likely not work (at least as well) in the other. The difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies should directly select their own gatekeepers.

(esp) (With thanks to Joseph A. Hodnicki for alerting us to this Article).

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