We study markets’ reactions towards securities issued by firms that announce an external auditor’s retention instead of an external auditor’s rotation. We focus on differences in reactions to announcements when markets are stable versus when markets are convulsed. We carry out an event study of publicly traded Chilean companies (100

Judicial ideology in court has attracted the attention of political scientists and legal economists. The question we address here is the extent to which ideological stability impacts the law. We consider a model where a court has two judicial ideological inclinations, majority and minority. However, they may change their relative influence over time. We show that, while both sides have a preferred legal policy and want their standard to become law, the two groups may compromise on not changing the standard, thus maintaining the status quo, because of majority uncertainty in the future. One important implication from our article is that less certainty concerning the future (in terms of majority and minority ideology) could actually make the law more stable in the present (since the standard is unchanged). In addition, we prove that moderate standards are more likely to endure the passage of time when compared to extreme standards.

An important question in political economy is how an elected constitutional convention fails to understand the inclinations of the voters and approves a new constitution that is later rejected in referendum. In this article, we explore possible information asymmetry between legislators and voters to explain why a gap between the preferences of the median legislator and the median voter can lead to the prevalence of status quo in constitutional making. We show that rejection probability increases with uncertainty about voters’ preferences, regardless of whether these preferences are actually aligned or opposed to the legislator. Second, the expected distance between legislator and voters’ preferences does not monotonically link with approving constitutional proposals. Sometimes, as intuition commands, the correlation will be positive but, some other times, and contrary to intuition, it will be negative.

Given that corporate governance codes seek to prevent value-destroying events, why do compliance levels differ so significantly across firms and corporate practices? We answer this question by introducing the first micro-founded model that describes firms’ compliance decisions as a diffusion process. The model explains why the most managerially beneficial practices and those that avoid the largest losses are not necessarily the most compliant with governance codes. It also explains why compliance with practices closer to their steady-state levels may be lower. We use Chilean data to test the model and point out implications for regulators.

We introduce the first micro-founded model describing the evolution of compliance with corporate governance practices regulated by comply or explain ('CorE') standards. We show that a practice's compliance level evolves as a diffusion process determined by a mimicking effect and a pressure to comply effect. The diffusion process converges to the practice's efficacy at preventing losses associated with value-destroying events. Estimations using Chilean data reveal that efficacy and expected losses differ by practices' categories. We emphasize the explanatory, predictive and normative reach of our theory. For instance, the model explains why the most managerially beneficial practices are not necessarily the most complied with (for Chile, average risk management compliance levels are below 54%). The model predicts the compliance level's required time to converge to its steady state (for Chile, more than 30 years). It also estimates the benefits of a 'CorE' compliance system when compared to a mandatory compliance system (for Chile, utility would increase up to 30%). We conclude discussing how stakeholders and regulators can shape compliance levels.

We document the effects that three different types of events: i) corporate scandals ii) hard legal reforms, and iii) soft legal reforms, have had on the Chilean market for corporate directors between 2008 and 2019. Like the effects generated by the sequence Enron-Worldcom-SOX, we find that the supply of corporate directors contracted due to increasing risks and workload faced by the profession. However, unlike the case of Enron-Worldcom-SOX the demand for corporate directors only changed marginally and the use of external directors remained almost constant. This is consistent with an overall result in which directors’ compensations significantly increased and the average size of the board marginally decreased. In addition, we found that hard legal reforms had several unexpected and probably unwanted effects, including a reduction in the use of committees and in the presence of independent directors. Finally, and perhaps surprisingly for a civil-law country, we show that a corporate scandal followed by a soft legal reform has the capacity to significantly increase directors’ efforts and accelerate changes in average board compositions.

This article models the interaction of key factors missed in most accounts of Supreme Court decision making - that is, the interaction of the rules of authorship (chief and senior justice authorship rights), authorship utility (in terms of justice reputation, and the chief justice's legacy), and the constraint of legal doctrines. We model how (1) the chief justices and senior median justices compete for case authorship and have incentives to vote for policy outcomes they do not prefer in order to gain authorship control of the Court's opinion (and the added reputation and legacy utility that comes with authorship), and (2) legal doctrines may enhance or restrict such behavior. We illustrate the model through a stylized account of the Supreme Court's 2012 "Obamacare" decision where the deciding vote of Chief Justice Roberts to uphold Obamacare (along with his authorship of the opinion), and the dissenting vote of Justice Kennedy to repeal Obamacare, follow the implications of our model rather than the counter expectations of Supreme Court experts and commentators at the time. The model has implications for interpreting justice voting and authorship behavior and how the design of legal doctrines influence the justices' votes and opinion authorship. (c) 2021 Elsevier Inc. All rights reserved.

I propose an integrated understanding of litigation and legal standards that allows us to answer key questions in the functioning of common law legal systems: When do substantive trials occur?; do these trials take place too frequently or infrequently?; and can legal standards be used to correct a potentially inefficient frequency of litigation? I characterize the dynamics of trials in continuous time and predict their occurrence on an infinite horizon. After solving an optimal stopping problem, I show that the private and the optimal litigation frequencies are not equal because of two externalities (the cost of litigation externality and the law externality). I show that each of these externalities can be positive or negative. In addition, I identify corrections for these externalities, derive time-variant and time-invariant optimal standards, and discuss policy implications.

It is commonly argued that the case overload faced by higher courts (especially in civil law) can be reduced by restricting access to them. In this paper we prove that such restriction can also significantly reduce judicial uniformity among lower courts and alter litigation decisions as well as outcomes. To test our predictions we build a database of wrongful termination lawsuits that took place before and after the implementation of a reform to the Chilean labor justice system. This reform exogenously and drastically reduced access to higher courts. As we predict, this reduction increased the probability of a first-instance pro-plaintiff decision (by 36%); increased the percentage recovered by a plaintiff in court (by 27%) and reduced the probability of a settlement (by 16%). The Priest & Klein 50% hypothesis suggests that prior to the reform plaintiffs recovered too little. Policy implications follow.

While civil law courts of last resort-e.g., cassation courts in France, Italy, and Chile-review up to 90% of appealed cases, common law courts of last resorte-g., supreme courts of the United States, United Kingdom, and Canada-hear as few as 1% of the same petitions. In this study, we postulate that these different policies can be explained by a comparatively larger commitment from common law courts of last resort to judicial law-making rather than judicial uniformity. While courts require few hearings to update the law (in theory one decision is sufficient), they need a large number of hearings to maximize consistency in the lower courts' interpretation of the law. We show that the optimal number of hearings increases with an increment in the courts' concern for uniformity. We also show that if hearing costs are linear then the hearing policies of all courts can be classified in only two types. In addition, we predict important changes in hearing policies when the number of petitions increases. Finally, we find that hearing rates and reversal disutility operate as two ways in which a legal system can achieve a given level of judicial uniformity.

The Chief Justice of the United States Supreme Court authors many of the most important opinions coming out of the Court. The prestige of authoring an important policy decision, and the value that such an opinion adds to the legacy of the Chief Justice’s Court, plays an important and strategic role in the Court’s opinion authorship dynamics and the policy outcomes of the Court. We present a Supreme Court decision-making model that, within the confines of legal doctrine, incorporates the authorship utility of the Chief Justice (and senior associate justices who hold secondary, yet important, property rights over authorship). New predictions emerge about who authors the Court’s opinion, what case outcome is chosen by the justices, which legal doctrines are chosen, and which decisions are unanimous among the justices. We illustrate aspects of the model with recent Supreme Court decisions involving health care and campaign financing.

While civil law supreme courts (e.g., Italy, France, Chile) hear up to 90% of the petitions for revisions, common law supreme courts (e.g., U.S., U.K, Canada) hear as low as 1% of the same type of cases. In this study we postulate that these different commitments towards revisions are each consistent with different approaches by which the legal system provides judicial uniformity. We formulate a theoretical model that shows that a given level of uniformity in lower (or appeal) court decisions can be achieved either by fixing a given probability of judicial revision or a given monetary/non-monetary disutility associated with a reversal. Hence, despite the fact that common law legal systems are characterized by a lower probability of case revision, we cannot state a priori that judicial uniformity is greater in civil law systems, as this will depend upon the magnitude of the disutility associated with a reversed decision. Indeed, with the exception of the impact upon career concerns (which net effect is not clear) in terms of ideology, reputation and legal standards, reversal disutility seems to be much higher in common law systems than in civil law systems. In addition, we demonstrate that in an efficient legal system the optimal number of revisions increases with the size of the reversal disutility, but decreases with the probability that the supreme court makes erroneous decisions; the total number of cases soliciting revision and the intrinsic utility obtained by a lower court which enforces its desired rule. We also show that in an efficient legal system it is the judicial law-making role of a common law supreme court that explains why that Court revises fewer cases than a civil law supreme court.

How does the Supreme Court choose among cases to grant cert? In a model with a strategic Supreme Court, a continuum of rule-following lower courts, a set of potential cases for revision, and a distribution of future lower court cases, we show that the Court takes the case that will most significantly shape future lower court case outcomes in the direction that the Court prefers. That is, the Court grants cert to the case with maximum salience. If the Court is rather liberal (or conservative), then the most salient case is that which moves the discretionary range of the legal standard as far left (or right) as possible. But if the Court is moderate, then the most salient case will be a function of the skewedness of the distribution of ideologies of the lower courts and the likelihood that future cases will fall within the adjusted discretionary range. The extent of the political alignment of lower courts affects not only substantive lawmaking by the Supreme Court but also the earlier decision of whether to grant a given case cert to begin with.

Justices can strategically shape perceptions of their likely retirements, and so influence the President and Senate in choosing an ideologically compatible replacement. Relatively new justices can vote insincerely to affect how their ideologies are perceived, but their strategies are shaped by older justices' expected retirement probabilities. We show that "strong messages" of retirement are likely when new justices vote insincerely and the new and retiring justices' ideologies are aligned. "Weak messages" are more likely when new justices vote sincerely or, if they do vote insincerely, the old and new justices' ideologies are unaligned. (C) 2015 Elsevier Inc. All rights reserved.

In order to determine the market reaction to an announcement of a change in the audit firm, we carry on an event study between 2004 and 2013 that includes 130 publicly traded Chilean Companies. We find that the market reacted positively when a company announced that it will keep its audit firm that year. We rule out possible biases in the informational content of the event. This suggests that overall, the costs associated to a change of an audit firm (start-up cost and know how loss) would dominate the benefits of the same change (reduction in the probability of a value destroying event such as a fraud or an error). We discuss the implications of this result for the potential implementation of a rule of mandatory rotation in a developing country such as Chile. We also discuss the possibility of identifying the specific costs and benefits behind the audit firm change.

This paper introduces a formal model of Supreme Court retirement, in which the justices, the President and the Senate are rational agents who aim to shift the median ideology of the Court as close as possible to their own ideologies. The model shows that the probability of retirement depends on a set of personal, contextual, and political variables. It provides a rigorous theory for the effect of extant variables, and identifies variables that have not previously been fully appreciated. In particular, it shows the impact of the ideologies of the non-retiring justices and whether the ideology of the retiring justice is moderate or extreme. This more complete explanation of strategic judicial retirements raises empirically testable predictions to differentiate among the disparate findings of the existing literature.

We examine the revelation of preferences of justices whose true ideologies are not known when entering the Court but gradually become apparent through their judicial decisions. In a 2-period president-Senate-Court game, we show that some new justices vote disingenuously and so move the perceived ideology of the overall Court closer to their ideally preferred outcome, which influences the selection of future justices. Justices will sometimes have an incentive to exaggerate the extremeness of their preferences and at other times will seek to appear more moderate. Systematic changes in judicial behavior can be predicted on the basis of the characteristics of the cases; the initial ideologies of the justices, the president, and the Senate; and the probabilities of retirement of the justices. These results have important implications for interpreting judicial voting behavior: particularly, it is not safe to infer changes in actual judicial preferences from changes in expression of judicial preferences.

For over 50 years, narrative and empirical accounts of judicial retirement have selected variables on a range of unstated assumptions, with discordant results. This paper introduces a formal model in which the justices, the President and the Senate are rational agents who aim to shift the median ideology of the Court as close as possible to their own ideologies. The model shows that the probability of retirement depends on a set of personal, contextual and political variables. It provides a more rigorous theory for the effect of extant variables, reveals erroneous conclusions in the literature, and identifies variables that have not been previously appreciated, such as the ideologies of the non-retiring justices and whether the ideology of the retiring justice is moderate or extreme. This more complete explanation of strategic judicial retirements raises empirically testable predictions to differentiate among the disparate findings of the existing literature.

Companies that offer services with capacity constraints in which there are negative consumption externalities (such as restaurants that serve smokers and non-smokers, airlines that fyy passengers travelling with infants and without infants or organizers of sport events that serve aggressive and friendly supporters) tend to separate generators of the externality from receptors of the externality. Do consumers and/or Society end better off with this type of separation? We show that if firms have complete information then: unless the number of consumers is small enough, as a net effect, consumers end worse off with separation than without it. Instead, when investment in separation is negligible, firms always prefer separation. This is true regardless whether firms price discriminate consumers. On the other side, if firms have incomplete information then: consumers prefer no separation if their number is small enough and firms always prefer no-separation -also when investment in separation is negligible. First we derive the results in the context of a monopoly that serves a linear demand, later we address robustness and discuss policy implications.

This paper focuses on the economic and legal implications of the enactment of caps on non-economic damages on conflicting parties who know that state supreme courts may strike down the caps as unconstitutional within a few years of enactment. We develop a simple screening model where parties have symmetric expectations regarding the probability of a strike down and asymmetric information regarding plaintiff's non-economic harm. Our model makes the following predictions: First, caps may increase the length required to resolve disputes if the caps are low enough or the probability of a strike down is large enough. Second, although caps always increase the percentage of disputes that are settled out of courts, they do not necessarily save litigation expenses. Third, when caps increase the length of dispute resolution, they also increase litigation expenses if and only if the settlement negotiation costs are neither too small nor too large. Fourth, while caps always reduce the recoveries of plaintiffs with large claims, caps may increase recoveries of plaintiffs with low claims compared to their recoveries in states with no caps. We end by discussing the robustness of the results.