Corporate Laws limits Mark j. roe Introduction The critical precondition to developing modern securities markets, and the economic and technological benefits that go with good stock marke most recent analyses posit, is a foundation of solid corporate and securities laws that protect stockholders from the rampages of the dominant majority stockholders or controlling managers. Without such corporate law protections securities markets, it is said, will not arise. And if corporate law is good enough in technologically advanced nations, ownership will infuse away from concentrated ownership into dispersed stock markets This perspective contributes to understanding the fragility of capital markets in transition and third-world economies. But there is too much that is critical to separation that corporate law does not reach in the worlds richest, most advanced nations. And if those conditions-which depend on institutions other than corporate law-aren't met, ownership will not diffuse. And in nations that do not meet those conditions, public policy makers would have little reason to invest much in developing good corporate law institutions, because they just would not be used The conceptual problem is basic: Current academic thinking lumps together costly opportunism due to a controller's self-dealing and costly managerial decision-making that inflicts losses on the owners. The first, self-dealing, corporate law seeks to control directly; the second, bad decision-making that damages shareholders, it does not Other institutions must control the latter and their strength varies from nation-to-nation. Owners tend to stay as blockholders if they expect managerial agency costs would be very high after full separation Corporate law does not even try to directly control the costs of 率 Berg Professor of L Law School. Thanks for comments go to Lucian Bebchuk, Victor Brune oates, Einer Elhauge, Howell Jackson, Ehud Kamar, Reinier Kraakman, Mi and participants in workshops at Harvard Business school. the national f Economic research. the italian Securities Commission(CONSOB), the Sorbonne, and the Columbia, Harvard, Stanford University of Southern California and Vanderbilt Law SchoolsCorporate Law’s Limits Mark J. Roe* Introduction The critical precondition to developing modern securities markets, and the economic and technological benefits that go with good stock markets, most recent analyses posit, is a foundation of solid corporate and securities laws that protect stockholders from the rampages of the dominant majority stockholders or controlling managers. Without such corporate law protections securities markets, it is said, will not arise. And if corporate law is good enough in technologically advanced nations, ownership will diffuse away from concentrated ownership into dispersed stock markets. This perspective contributes to understanding the fragility of capital markets in transition and third-world economies. But there is too much that is critical to separation that corporate law does not reach in the world’s richest, most advanced nations. And if those conditions—which depend on institutions other than corporate law—aren’t met, ownership will not diffuse. And in nations that do not meet those conditions, public policy makers would have little reason to invest much in developing good corporate law institutions, because they just would not be used. The conceptual problem is basic: Current academic thinking lumps together costly opportunism due to a controller’s self-dealing and costly managerial decision-making that inflicts losses on the owners. The first, self-dealing, corporate law seeks to control directly; the second, bad decision-making that damages shareholders, it does not. Other institutions must control the latter and their strength varies from nation-to-nation. Owners tend to stay as blockholders if they expect managerial agency costs would be very high after full separation. Corporate law does not even try to directly control the costs of * Berg Professor of Law, Harvard Law School. Thanks for comments go to Lucian Bebchuk, Victor Brudney, John Coates, Einer Elhauge, Howell Jackson, Ehud Kamar, Reinier Kraakman, Mitch Polinsky, and participants in workshops at Harvard Business School, the National Bureau of Economic Research, the Italian Securities Commission (CONSOB), the Sorbonne, and the Columbia, Harvard, Stanford, University of Southern California and Vanderbilt Law Schools