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How To Fix Wall Street: A Voucher Financing Proposal for Securities Intermediaries |
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Stephen J. Choi and Jill E. Fisch [View as PDF]
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113 Yale L.J. 269 (2003)
Securities market intermediaries reduce the collective action
problem facing investors in the capital markets. Analysts provide
securities research. Proxy advisory firms assist investors in
determining how to vote their shares. Even shareholders bringing
proxy contests can be viewed as providing a collective benefit to the
extent the contests are motivated by a desire to increase share value.
Despite the services they provide to investors, many intermediaries
face financing problems due to pervasive free riding on the part of
dispersed shareholders. This can result in underfunding of valuable
intermediary services or, alternatively, excessive or duplicative
funding of wasteful services. One regulatory response is mandatory
financing of intermediaries. Regulators are poorly suited, however, to
determine optimal funding levels and to make appropriate allocation
decisions. Alternatively issuers, through their managers, can subsidize
intermediary services. Issuers may subsidize analysts, for example,
through the investment banking fees they pay to brokerage firms.
Manager control over allocation of issuer-based funding can,
however, corrupt the intermediaries in favor of the managers.
Understanding the problem of intermediary corruption as an
outgrowth of the financing problem cautions against simply imposing
regulatory prohibitions on voluntary issuer subsidies. Instead, this
Article proposes a voucher financing mechanism to separate the
source of subsidization from the allocation. Under the proposal,
regulators determine a subsidy amount funded through levies on
publicly traded firms, roughly equal to the present amount of subsidies
that flow from issuers to intermediaries. Shareholders are then given
the ability to direct the subsidy dollars to their preferred
intermediaries, using vouchers in proportion to their shares.
Voucher financing offers a market-based mechanism to finance
intermediaries, resulting in greater flexibility and responsiveness in
the provision of intermediary financing. Shareholders may aggregate
vouchers from several companies in their portfolios and direct them
across different intermediaries to their highest-value use. By providing
a common funding mechanism for a range of intermediaries, voucher
financing enables shareholders to address problems of both excessive
and inadequate intermediary funding. Similarly, shareholder
allocation reduces the potential for intermediary corruption. Although
voucher financing is subject to problems, including information
problems, coordination problems, and shareholder apathy, the Article
identifies potential solutions to these problems and argues that
voucher financing reflects a substantial improvement over the existing
regulation and funding of intermediaries.
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