Harvard University
Department of Economics
Spring 2006
Economics 970
AMERICAN CORPORATE SCANDALS
TF: David Roddenberry, Jamie Bartholomew
e-mail: droddenb@law.harvard.edu, jbarthol@law.harvard.edu
Section Times:
7:00 - 8:30pm Monday and Wednesday OR
8:30 – 10:00pm Monday and Wednesday
Location: Cabot House (room TBD)
Course Description:
This course aims to provide students with a thorough understanding of the framework in
which managerial activities take place. Students will examine the separation of ownership
and control and how the resulting agency problems can be resolved. In particular, they
will consider this tension in the context of ownership, board of directors, managerial
compensation, and the market for corporate control.
Students will then apply economic theory and analytical tools to current corporate
governance issues. Recent corporate scandals involving Enron, WorldCom, and Martha
Stewart have led many to claim that American corporate governance has systemic
problems and must be overhauled. Others claim that these corporate scandals are the
result of a few “bad apples” and that there is no need to reform American corporate
governance.
Students will examine corporate scandals from the last 25 years. What went wrong? What
reforms were proposed to address the cause of the scandal? How successful do we expect
the reform to be at addressing the identified problem? What else should be done to fix
this problem? Why was more not done to address this problem? To what extent is this an
isolated problem?
By the end of the class students should have an opinion on a number of pending
proposals for corporate governance reform, including changes to insider trading, CEO
compensation, poison pills, staggered boards and other merger defenses. To what extent
will these changes be efficient? To what extent will they be equitable? To what extent do
we need to overhaul US corporate governance?
Quantitative Level: 1
COURSE REQUIREMENTS
1. Class Participation. 30%
Class discussions are an essential component of the sophomore tutorial. You will be
expected to contribute meaningfully and consistently to class discussion. You will also be
expected to complete the reading assigned for each week and to come to class prepared
with comments and questions. In the first week of class, each student will sign up for a
topic on the syllabus to ‘specialize in’. Specializing in a topic will mean that you will do
additional research on the topic before the class discussion, introduce the topic on the day
it is covered in class, prepare a list of discussion questions, and present a practical
extension of the material covered. Don’t worry— we will meet with each of you ahead of
time to prepare for the discussion.
2. Two Short Essays 30%
These policy memos will ask you to provide a recommendation on a current proposal for
reform of US corporate governance. Memos should address both the benefits and
problems associated with implementing the reform and should reach a conclusion as to
whether the reform should be adopted. Clarity of thought and expression will be valued.
The expected length of both memos will be 7-pages.
3. Empirical Exercise. 10%
Is CEO pay related to stock price performance? The empirical exercise will ask you to
build a model to determine whether CEO pay (including and excluding stock options)
was related to market performance for publicly traded companies from 2001 to 2004.
You should also explain how your results fit with current theories of CEO
pay/performance. Expected length will be 6-8 pages.
4. Prospectus for final paper. 5% of grade
Before you leave for spring break you will be expected to submit a 1-2 page proposal for
your paper. This proposal should outline the question you hope to address and explain the
tentative framework through which you will do so. The proposal should demonstrate that
you have begun to research where your question fits in with the existing literature.
5. Research Paper. 25%
For your research paper, you will be free to choose any topic that interests you. The topic
must be related to the subject of corporate governance and must go substantially beyond
the readings covered in this course. The expected length of the final paper will be 15-20
pages.
COURSE POLICIES
Texts: The following are required texts. Please purchase them.
 Den of Thieves, James B. Stewart
 When Genius Failed: The rise and fall of Long-term Capital Management,
Roger Lowenstein
 Barbarians at the Gate, Bryan Burrough & John Helyar
 Disney Wars, James B. Stewart
Movies: There are 3 required movies for the term: Wall Street, The Corporation and The
Smartest Guys in the Room. If you have seen the movie before, please re-watch it in
preparation for the session. There will be a group showing at Cabot House one evening
the week before the movie is to be seen.
Readings. ALL readings are mandatory. Please read all assigned material before class.
Attendance. Attendance is mandatory. Exceptions for personal or family emergencies
will be granted on a case-by-case basis.
Tardiness. No assignments will be accepted beyond the announced deadline. As with
attendance, exceptions for personal or family emergencies will be granted on a case-bycase basis.
ASSIGNMENT DUE DATES
Empirical Exercise: Due Friday March 3, 2006
Paper 1: Due Friday March 17, 2006
Prospectus for Research Paper: Due Friday March 24, 2006
Research Paper: Due Friday April 21, 2005
Paper 2: Due Friday May 12, 2005
Session 1:Introduction
 Wall Street
 Shleifer, Andrei (2000), Inefficient Markets: An Introduction to Behavioral
Finance, Chapter 1, pp. 1-27.
Session 2: Does corporate governance affect share value?
 Bebchuk, Ferrel, Cohen “What matters in corporate governance?”
Session 3: The Principal Agent Problem
 Theory of the firm: Managerial Behavior, Agency Costs and Ownership Structure
Jensen and Meckling Journal of Financial Economics 3 (1976) 305-360
Session 4: Public outrage to executive compensation
 Greed is bad; Spitzer v Grasso The Economist May 29, 2004
 Making companies work The Economist October 25, 2003
 Tough at the top The Economist October 25, 2003
 Who is in charge? The Economist October 25, 2003
 Fat cats feeding - Executive pay The Economist October 11, 2003
 Bebchuk, L. & Fried, J. “Pay without performance: Overview of the Issues”
http://www.law.harvard.edu/programs/olin_center/papers/pdf/Bebchuk_et%20a
l_528.pdf
Session 5: Empirical Exercise & Library research training
 Background reading on econometrics
Session: 6: The Insider Trading Scandal of the 1980s
 Den of Thieves, James B. Stewart
Session 7: What constitutes an “insider trade?”
 US Supreme Court Opinions
o Chiarella
o Dirks
Session 8: Should the US regulate insider trading?
 The Law and Economics of Insider Trading: A Comprehensive Primer
Steven Bainbridge UCLA Law Review
 The Wall Street Journal, January 16, 2004 Op-Ed
Session 9: Mandatory disclosure and earnings management:
 Graham, John, Campbell Harvey and Shiva Rajgopal (2004), “The Economic
Implications of Corporate Financial Reporting”, Duke working paper.
Session 10: Enron and the Congressional Response
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The Smartest Guys in the Room
Clark, Robert Corporate Governance Changes in the Wake of the Sarbanes-Oxley
Act: A Morality Tale for policymakers Too
http://www.law.harvard.edu/programs/olin_center/papers/pdf/Clark_525.pdf
The way we govern now - Corporate boards The Economist January 11, 2003
Where's all the fun gone? - Non-executive directors; The Economist March 20,
2004
Top Regulator Says Sarbanes-Oxley Act Audits Are Too Costly and
Inefficient The New York Times December 1, 2005
Session 11: Disney: An application of Sarbanes-Oxley
 Stewart, James: Disney Wars
Session 12: Increasing shareholder access
 Martin Lipton & Steven Rosenblum, Election Contests in the Company Proxy: An
Idea Whose Time Has Not Come, 59 THE BUSINESS LAWYER 67 (November
2003)
 Lucian Bebchuk, The Case For Shareholder Access to the Ballot, 59 THE BUSINESS
LAWYER 43
 No democracy please, we're shareholders; American corporate governance The
Economist May 1, 2004
 Stephen Labaton, SEC to Revise Election Rules for Directors, N.Y. TIMES,
Wednesday, October 1, 2003
 Stephen Labaton, SEC at Odds on Plan to Let Big Investors Pick Directors,
N.Y. TIMES, Thursday, July 1, 2004
 Stephen Labaton, SEC Member Says Agency Has Bowed to Executives,
N.Y. TIMES, Saturday, October 9, 2004
 Lucian Bebchuk, The Business Rountable’s Untenable Case Against Shareholder
Access
http://www.law.harvard.edu/programs/olin_center/papers/pdf/Bebchuk_516.pdf
Section 13: Merger defenses: What are they protecting against and should they be
permitted
 Roll, Richard (1986), “The Hubris Hypothesis of Corporate Takeovers”, Journal
of Business 59: 197-216.
 Morck, Randall, Andrei Shleifer, and Robert Vishny (1990), “Do Managerial
Objectives Drive Bad Acquisitions?”, Journal of Finance.
 Selected recent articles on course website
Session 14: Leveraged buy-outs in the 1980s
 Barbarians at the Gate, Brian Burrough & John Helyar
Section 15: LBOs and private equity

Aandrade Gregor, and Steven N. Kaplan (1998), “How Costly is Financial (not
Economic) Distress? Evidence from Highly Leveraged Transactions that Become
Distressed”, Journal of Finance.
Session 16: Do mergers increase value?
 Andrade, Gregor, Mark Mitchell, and Erik Stafford (2001), “New Evidence and
Perspectives on Mergers,” Journal of Economic Perspectives, 15:103-120.
Moeller, Sara, Frederik Schlingemann, and René Stulz, (2004), “Wealth destruction on a
massive scale? A study of acquiring-firm returns in the recent merger wave”, Mimeo,
Ohio State University
Session 17: LTCM--The collapse of a hedge fund
 When Genius Failed: The rise and Fall of Long-term Capital Management
Richard Lowenstein
Session 18: The Role of the Corporation in Society
 The Corporation (DVD)
 Economist Section (Jan. 2005)
Session 19: Corporate Philanthropy
 Smith v. Barlow
 Schlenksy v. Wrigley
 The competitive advantage of Corporate philanthropy: Michael Porter & Mark
Kramer, Harvard Business Review Dec. 2002 5-16
Session 20-23: Student Presentations of research papers