This dissertation consists of three essays which examine topics at the intersection of law and finance. The first essay investigates the role of regulatory sanctions and reputational damage in financial markets. We study the impact of the announcement of enforcement of financial and securities regulation by the UK’s financial regulators on the market price of penalized firms. We find that reputational sanctions are very real: their stock price impact is on average almost 9 times larger than the financial penalties imposed. Furthermore, reputational losses are confined to misconduct that directly affects parties who trade with the firm (such as customers and investors). In the second essay we analyze the costs and benefits associated with secured creditor control in bankruptcy. We do it by studying the highly contested practice of UK pre-packs, where a deal to sell the business is agreed before publicly entering into bankruptcy. Contrary to widespread criticism that this procedure leads to collusion, we find no evidence of exploitation of conflict of interests and we find that it preserves the value of the business and maximizes recovery in circumstances in which a public announcement of bankruptcy would destroy value. In small businesses where secured creditors are concentrated the benefits of their control seem to outweigh the costs. Finally, in the last essay we examine whether mandatory shareholder voting prevents wealth destruction in corporate acquisitions. We study the UK setting where all large transactions must have shareholder approval. We observe that such Class 1 transactions always get consent. Nevertheless, there is a striking difference between the performance of acquirers between Class 1 and other transactions. The finding is most pronounced for transactions in a narrow neighbourhood of the size threshold, and is robust to a large set of controls for confounding effects.

This thesis seeks to explain the meaning and function of conscience in commercial law doctrine. It argues that the idea of conscience in law bears its ordinary meaning. When the courts use the language of conscience, they are simply expressing a moral judgement about whether, e.g. the defendant’s behaviour or a particular state of affairs conforms to the commonly held standards of right and wrong to which we all have access and of which we are all expected to be aware. The thesis argues further that the language of conscience has a discernible but very limited function in commercial law doctrine. It helps us to understand that in recognising and enforcing obligations, equity is giving effect to moral obligations, and that it will not do so unless the individual on whom the obligation is to be imposed has knowledge of the relevant facts. However, beyond this, the language of conscience has little, if any, explanatory force. For example, it tells us nothing about the moral principles underpinning particular doctrines, nor does it tell us what or how much an individual must know before it will be reasonable to treat her as subject to an obligation. In fact, the courts’ tendency to invoke the language of conscience and unconscionability without regard to the limits of its explanatory power means that a number of important doctrinal questions remain perpetually unanswered and sometimes obscured. Therefore, the thesis concludes that the courts should not continue to use the language of conscience without paying much greater attention to what it can and cannot explain.

In the 1990s and early 2000s lender liability for the remediation of contaminated land was considered the greatest environmental risk for lenders. The threat of liability from Part IIA of the Environmental Protection Act 1990 initially drove the introduction and use of environmental due diligence in banks. But instances of such lender liability are now considered highly unlikely. It is because of the low risk of lender liability and the empirical knowledge gaps that existed in the literature basis that this research was necessary. The overarching research question of this thesis examines the lenders’ current perceptions of the threat of the environmental risks, as well as the main drivers for the use and development of environmental due diligence in banks. Unique interview data were collected from fifteen semi-structured interviews with elite banking professionals to test the research premise. There are three, primary environment-related risks. According to the banking respondents’ data the current environmental risk ranking is: (1) lender liability – low risk; (2) the indirect risks – medium risk(s); and (3) reputational risk – high risk. Thus reputational risk has now replaced lender liability as the greatest risk. The interview data further verify that banks use a range of due diligence techniques before and after the grant of loan finance to manage environmental risks. And further to this, the main driver for the continued use and development of environmental due diligence in banks has shifted from lender liability to reputational risk. Originality is assured in this thesis by the use of the interview data. The research fills the empirical knowledge gaps that existed in the literature basis, and has implications for the theory, practice and future research opportunities in a number of areas, including law and banking.

The 2007-09 Global Financial Crisis has been described as the greatest crisis in the history of financial capitalism. The failure of the global financial system was triggered by the ‘Great American Real Estate Bubble,’ however it quickly developed into a global liquidity squeeze that left financial markets at the brink of collapse. The thesis argues that the general culture of banking prevalent at the time both caused and exacerbated the crisis. The Business Strategies were excessively risky, focusing on short-term gains, at the expense of financial security. It is therefore purported that to mitigate the risks of any future global financial crisis a fundamental change in the culture of banking is needed. Behavioural expectations and norms must be redefined and more prudent strategies inculcated. The thesis will show that the only way to hope to achieve such a cultural shift is to employ a holistic approach, encompassing supervision, regulation and crucially corporate governance mechanisms. Previous debates within the UK have tended to focus on macro and micro regulatory reform. However, it is purported that it was in many cases, risk monitoring and management practices within financial institutions that dramatically failed. Whilst prudential regulation is important, the thesis will show that it alone is insufficient to change the culture within the financial system; a multi-faceted approach is needed. The central argument to the thesis will show that corporate governance mechanisms must play a central part in the legal and regulatory response to the Global Financial Crisis, as part of a cohesive package of measures necessary to effect cultural change; it will do this by conducting a case study into the collapse and subsequent nationalisation of Northern Rock Plc.

This thesis examines the determinants inequality and its effects on macroeconomic outcomes, and in particular the economic effects of bankruptcy law. The first two chapters are joint work with Jochen Mankart. In the first chapter, we examine the effects of Chapter 7 of the US bankruptcy law on entrepreneurs. Entrepreneurs are subject to production risk. They can borrow and if they fail they can default on their debt. We examine the optimal wealth exemption level and the optimal credit market exclusion duration in this environment. In the second chapter, we introduce secured credit, in addition to unsecured credit in a model that is similar to the one in the first chapter. Secured credit lowers the cost of a generous bankruptcy regime because agents who are rationed out of the unsecured credit market can still obtain secured credit. Therefore, the optimal exemption level is very high. In the third chapter, I estimate stochastic process for earnings of Italian individuals. I find that individual’s earnings present statistically significant heterogeneity both in levels and in growth rates that is determined before the beginning of economic activity. In the fourth chapter, I analyze the quantitative effects of introducing immediate debt discharge (fresh start) in the procedures of personal bankruptcy law on the saving and default decisions of Italian household. I find that introducing fresh start in the Italian bankruptcy law would worsen credit conditions, without almost any benefit in terms of better insurance. The fifth chapter is joint work with Emanuele Tarantino and Nicolas Serrano-Velarde. In this chapter we exploit the recent reform of bankruptcy law in Italy to analyze the effects of bankruptcy regulation on the cost of credit. We find that strengthening firms’ rights to renegotiate outstanding deals with creditors increased the costs of funding, while simplifying the procedure of liquidation decreased the costs of funding. In the sixth chapter, I show that credit market imperfections are not necessary to generate an individual poverty trap.

This thesis is study of the principle of good faith in contract law. In the last fifteen years enormous attempts have been made by contract lawyers, especially those in common law systems, to consider the question of good faith in contracts. But the approach that has been taken by those lawyers in dealing with this important question is unsatisfactory and incapable of producing a coherent understanding of the role of good faith in contracts. Instead of considering the essential question of good faith in contracts, especially commercial contracts, the debate has turned out into a battle between common law and civil law. This approach creates a polarized debate. This study will concentrate on the applications of good faith in arm 's length contractual relationships. This will no doubt concentrate the analysis on its operation in contracts generally, without involving other theories that may explain the courts' concern over the problems of bad faith conducts. Examining good faith as a general requirement in contracts is vitally important in order to reach a coherent understanding of its implications for contracting parties. This study will examine in depth the most important issues regarding the operation of the good faith principle in contract law. I will examine the rationality of this principle in pre-contractual negotiations. This area of contract raises difficult questions in many common law legal systems. The Introduction of the principle of good faith at the stage of negotiation under the PECL and the UNIDROIT Principles has strengthened the role of that principle at the formation of contracts. The interaction between the principle of good faith and express terms in contracts will also be examined in an attempt to identify the limits of the parties' freedom in the enforcement of contract terms. In addition to dealing with the operation of the principle of good faith throughout the life of the contract, it is also vitally important to analyse the general provisions of good faith in the PECL, CISG, UCC and the UNIDROIT Principles. Examining these general provisions of good faith will help us to understand its role in commercial contracts.

This thesis aims to chart and explain the evolution of credit practices and the law’s reaction to them vis-à-vis the protection of borrowers between 1700 and 1974. The cat-and-mouse game played out between the credit industry and the legislature, and the longstanding tension between the credit needs of the commercial community and those of the small private borrower are of central importance. This thesis is primarily historical rather than theoretical; it seeks to describe and explain legal developments over time. But, in order to illuminate this development, the law will be viewed through the lens of a simple analytical framework based on the dichotomy between public law regulation, on the one hand, and the private law of contract, on the other. Viewed through this lens, it should be possible to position the law at any given stage of its development at a particular point on a scale of ‘regulatoriness’. The framework within which these rules were originally developed was, of course, neither intentionally nor self-consciously theoretical, but that is not to say that a theoretical framework lacks utility in legal historical inquiry.

The U.S. Bankruptcy Code is a frequently used channel to resolve corporate financial distress. In the code, liquidation (Chapter 7) and reorganization (Chapter 11) are two most crucial processes. My PhD thesis discusses several important issues around the U.S. Bankruptcy Code, including recovery rate determination in bankruptcy, debt valuation in bankruptcy under a two-class debt structure and determination of an optimal bankruptcy threshold. With the aim of linking corporate finance and asset pricing, new models of credit risk are developed in this thesis and fruitful empirical implications are generated. Specifically, the first main chapter is “Default and Recovery Rate under Chapter 11 with Multiple Debts”. This studies both theoretically and empirically the influence of debt structure on the outcome of debt renegotiation under Chapter 11. I investigate the trilateral negotiation in court-supervised formal bankruptcy. The model demonstrates how loans and bonds differ in terms of concentration level of debt owner and how this disparity impacts the action of the debtor company both before and after bankruptcy. The model developed in this chapter predicts that creditors’ ultimate recovery is higher for firms with more bank debt and less bargaining frictions and, despite the bank’s involvement improving total recovery, bondholders are still disadvantaged by the presence of senior bank creditors. Using a sample of 439 U.S. firms that filed for Chapter 11 during 1987-2014, I present evidence on the link between bank debt share and recovery rates that is supportive of the model’s prediction. The second main chapter is “Debt Structure and Valuation in U.S. Bankruptcy Code”. In this chapter I discuss the impact of bankruptcy procedure on security valuation by developing a credit risk model. As in the first chapter, the debt structure is in the form of two-class debt. A structural model of credit risk is built where default and liquidation are represented by two boundaries and a grace period is granted prior to liquidation. Within the setup, corporate debt is viewed as quasi Parisian corridor option and valuations are obtained via a partial differential equation formulation solved using a finite difference approach. The model can generate a credit spread for corporate debt which is more quantitatively consistent with the market credit spread. In this chapter I also show how the debt valuation is affected by several bankruptcy-related factors such as length of grace period. The last chapter, “Boundary Determination and Optimal Control Right Allocation in Financially Distressed Firms”, analyzes the determination of optimal default and liquidation boundaries in bankrupt entities. Compared with the previous chapter, this chapter reexamines the issue of debt valuation but allows the liquidation and renegotiation boundaries to be determined endogenously by valuing the maximization decision of involved parties. The model results show that different claim holders choose different default and liquidation boundaries to maximize the value of securities they hold, which leads to conflicts of interest between borrowers and lenders and also between different borrowers. The first-best outcome can be achieved if bondholders determine the liquidation boundary. Finally, the model shows that the optimal length of grace period, in the sense of firm value maximization, is roughly 6 months.

Nowadays, arbitration is increasingly defined by its procedural flexibility and suitability to adapt to the needs and circumstances of different parties in different situations. In so being, arbitration employs the agreement to arbitrate as the device through which parties can utilise this procedural flexibility to create an exceptionally party-oriented process. Consequently, the drafting of these agreements and the choices concluded by the parties in them can very much determine whether a particular process is going to produce an efficient and effective outcome or rather frustrate the intentions of the parties and, generally, the objectives of international commercial arbitration. This thesis looks into the most influential decisions/choices made by the parties during the drafting stage of their arbitration agreements and attempts to underline the best practical and legal techniques to approach these decisions within today’s modern regulations of international commercial arbitration. The thesis begins its analysis by examining the separate procedural nature of arbitration agreements in comparison to the substantive nature of ordinary contracts. Such examination revealed that the separability of arbitration agreements produces certain consequences that can potentially uphold arbitration agreements in situations where the main contract was found illegal, non-existent, or invalid, for instance. A clear recognition of the distinct nature of arbitration agreements and the effects of that on the status of arbitration clauses, specifically, can provide the parties, from the very beginning, with rather precise expectations as to the future status of their arbitration agreement. In focus on the role of parties’ autonomy in producing timely awards, it was essential to analyse the different limitations that could restrict this autonomy and, possibly, frustrate the expectations and intentions of the parties. Such analysis revealed that these limitations were limited to incapacity, non-arbitrability, waiver of right to arbitrate, as well as public policy and mandatory rules of law. Finally, in scrutinising the most influential choices which parties can make in their arbitration agreement to positively and effectively create an intelligent international arbitration settlement, it was found that these choices mainly consisted of the choice of the seat of arbitration, the arbitrators, the language of the arbitration, and the law(s) applicable to the arbitration. Throughout this thesis, it is argued that through the consensual nature of international arbitration along with the autonomy bestowed upon its parties, the latter can have a better chance of achieving a practically and legally efficient settlement.

Avec la crise financière qui éclata en 2007, les scandales financiers à répétition, les difficultés rencontrées actuellement par les banques sont d'autant d'éléments qui encouragent les autorités de concurrence nationales et européennes, à porter une attention plus particulière au secteur. Ces préoccupations traduisent la lecture des aspects économiques, juridique et de régulation de la Concurrence dans le secteur bancaire. Au moment, où les institutions européennes à l'image des divers États membres tentent de trouver un moyen de stopper les effets de la crise. La Concurrence est au cœur des débats. La recherche d'un équilibre entre Concurrence et stabilité économique se révèle indispensable. Dans la perspective d'accélération du processus d'intégration financière européenne, les thèmes sont récurrents : compétitivité des banques, régulations des activités bancaires, réformes structurelles du secteur bancaire.L'analyse suivie par cette thèse, se fixe pour objectif de démontrer l'importance pour les banques de bien appréhender les divers aspects de la Concurrence. Notamment dans ces périodes de turbulences financières, la Concurrence apparaît comme l'outil le plus efficace pour donner au secteur bancaire les moyens et le cadre adéquat à son développement. La Concurrence permet ainsi de déceler les enjeux tant économiques que sociaux à relever par le secteur bancaire. / With the financial crisis that erupted in 2007, repeated financial scandals, the difficulties currently faced by banks are all elements that encourage both european and national competition authorities to pay closer attention to the sector. These concerns reflect the reading of the economic, legal and regulation of Competition in the banking sector. When, where European institutions like the various Member States are trying to find a way to stop the effects of the crisis. Competition is at the heart of the debate. The search for a balance between Competition and economic stability is indispensable. From the perspective of accelerating the process of European financial integration, are recurring themes. Competitiveness of banks, banking regulations, structural reforms of the banking sector.The followed objective by the thesis analysis is to demonstrate the importance for banks to fully understand the various aspects of Competition. Including such periods of financial turmoil, the Competition appears as the most effective tool to give the banking sector means and adequate framework for its development. Competition allows detecting both economic and social challenges facing the banking sector.