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Contrary to the views of many commentators, the Efficient Capital Market Hypothesis ("ECMH"), as originally framed in financial economics, was not "disproven" by the Subprime Crisis of 2007-2008, nor has it been shown to be irrelevant to the project of regulatory reform of financial markets. To the contrary, the ECMH points to commonsense reforms in the wake of the Crisis, some of which have already been adopted. The Crisis created a lot of losers – from individual investors to pension funds and German Landesbanken – who purchased mortgage-backed securities that they did not, and perhaps could not, understand, and it cost them extraordinary amounts of money as a result. Perhaps more significantly, the knock-on effects of the Subprime Crisis rippled through the finance markets, pushed Lehman Brothers over the edge, decimated other financial institutions across the world, and resulted in massive provisions of government assistance and sometimes the full nationalization or failure of financial institutions and even giant industrial enterprises such as General Motors and Chrysler. Moreover, the damaging consequences of the Subprime Crisis continue. America's recovery is fragile. The Great Recession of 2008-2010 is also the backdrop for Europe's sovereign debt and banking crisis that still lingers today. Some smaller European nations – including Greece, Iceland, Ireland, and Portugal – required large international aid packages, and even larger countries such as Italy and Spain were at risk of default prior to decisive intervention by the European Central Bank. The resulting pressure to slash government spending threatens political stability across Europe. The recent political Sturm und Drang in the United States over budget deficits and debt limits reflects similar sharply divided views about the causes and policy implication of the Crisis. Against this backdrop, one might think it of small consequence that the Subprime Crisis is also said to have dealt major setbacks to academic theories, most particularly the ECMH. After all, the only loss that follows a crisis in theory – as opposed to a debilitating crisis in the economy – is damage to the egos of the academics who defend or reject a contested theory. Indeed, academic theories (unlike economies) thrive on contradiction to make advances, a point famously stressed by Thomas Kuhn almost fifty years ago. Nevertheless, the particular iteration of theory and response attending the ECMH after the Subprime Crisis differs importantly from other encounters between theory and seemingly inconvenient facts. The reason is that the ECMH had moved beyond the academic community beginning in the 1970s, and has played a prominent role in the larger world political debate and regulatory reform ever since. One or another interpretation of the ECMH has influenced regulatory policy for well over thirty years. As a result, the public understanding of the limits of the ECMH is not just a matter of academic debate; it carries real political consequences. Important regulatory implications follow if the ECMH itself is held partially responsible for the Subprime Crisis.

Compared to the worldwide financial carnage that followed the Subprime Crisis of 2007-2008, it may seem of small consequence that it is also said to have demonstrated the bankruptcy of an academic financial institution: the Efficient Capital Market Hypothesis ("ECMH"). Two things make this encounter between theory and seemingly inconvenient facts of consequence. First, the ECMH had moved beyond academia, fueling decades of a deregulatory agenda. Second, when economic theory moves from academics to policy, it also enters the realm of politics, and is inevitably refashioned to serve the goals of political argument. This happened starkly with the ECMH. It was subject to its own bubble – as a result of politics, it expanded from a narrow but important academic theory about the informational underpinnings of market prices to a broad ideological preference for market outcomes over even measured regulation. In this Article we examine the Subprime Crisis as a vehicle to return the ECMH to its information cost roots that support a more modest but sensible regulatory policy. In particular, we argue that the ECMH addresses informational efficiency, which is a relative, not an absolute measure. This focus on informational efficiency leads to a more focused understanding of what went wrong in 2007-2008. Yet informational efficiency is related to fundamental efficiency – if all information relevant to determining a security's fundamental value is publicly available and the mechanisms by which that information comes to be reflected in the securities market price operate without friction, fundamental and informational efficiency coincide. But where all value relevant information is not publicly available and/or the mechanisms of market efficiency operate with frictions, the coincidence is an empirical question both as to the information efficiency of prices and their relation to fundamental value. Properly framing market efficiency focuses our attention on the frictions that drive a wedge between relative efficiency and efficiency under perfect market conditions. So framed, relative efficiency is a diagnostic tool that identifies the information costs and structural barriers that reduce price efficiency which, in turn, provides part of a realistic regulatory strategy. While it will not prevent future crises, improving the mechanisms of market efficiency will make prices more efficient, frictions more transparent, and the influence of politics on public agencies more observable, which may allow us to catch the next problem earlier. Recall that on September 8, 2008, the Congressional Budget Office publicly stated its uncertainty about whether there would be a recession and predicted 1.5 percent growth in 2009. Eight days later, Lehman Brothers had failed, and AIG was being nationalized.

Almost 45 years ago, in an elegantly depressive account of the then current state of corporate law scholarship, Bayless Manning announced the death of corporation law "as a field of intellectual effort." Manning left us with an affecting image of a once grand field long past its prime, rigid with formalism and empty of content: When American law ceased to take the "corporation" seriously, the entire body of law that had been built upon that intellectual construct slowly perforated and rotted away. We have nothing left but our great empty corporate statutes towering skyscrapers of rusted girders, internally welded together and containing nothing but wind. And so matters stood for awhile, certainly for the period that we were in law school. Aside from the development of the law of insider trading, hardly at the core of corporate law, the field, in truth, was worse than Manning described it. Rather than the remnants of a once great effort, it was simply boring.

This article was written for a symposium on the occasion of the 25th anniversary of Martin Lipton's 1979 article, Takeover Bids in the Target's Boardroom. In our view, Takeover Bids is a Burkean take on a messy Schumpeterian world that, during 1980s, reached its apex in Drexel Burnham's democratization of finance through the junk bond market. But the irony is that today, long after the Delaware Supreme Court has adopted many of Lipton's views, there is a new market for corporate control that no longer poses the threats – or supports the opportunities – that the market of the 1980s created. Today's strategic bidders and their targets share the same boardroom views. And for precisely this reason, "just say no" is no longer the battle cry that it once was. It stirred the crowds in the past precisely because hostile takeovers could be credibly depicted as a sweeping threat to the status quo – a claim that no one would make about today's strategic bidders. The market for corporate control now is a process of peer review, rather than an instrument of systemic change. What is lost as a result is just what, in the conservative view, has been gained: the capacity of the market for corporate control to ignite the dynamism that in our view has served the U.S. economy so well. Although Lipton may still lose today's battle to allow targets to just say no to intra-establishment takeovers, he will still have won the larger war. For now, at least, boardrooms are insulated from much of the force of a truly Schumpeterian market in corporate control of the sort we briefly glimpsed during the 1980s.

Comparative corporate governance is both necessary and hard. Recent scholarship has identified the political and historical contingency of the American pattern of corporate governance. The Berle-Means corporation, with its separation of management and risk bearing and the attendant agency conflict between managers and shareholders, is now widely recognized as being as much a creature of the American pattern of law and politics as the handiwork of neutral market forces. This recognition underscores the need to place the American experience in a comparative perspective. Other patterns of corporate governance can provide both insights into the operation of our own and a source of potential reforms; organizational techniques that have worked elsewhere may be transportable. Nevertheless, the very insight that recommends a comparative perspective also indicates the difficulty of the undertaking. It is not only the American pattern of corporate governance that is contingent. A mature comparative scholarship must ultimately explore the political and historical complexity of every major corporate governance structure. Even before this enterprise is complete, however, comparative analysis can still carry important policy implications for those of us who have the more limited agenda of making incremental improvements in our own governance structures. Foreign techniques can be evaluated in terms of their potential contributions to one's own system, even without a complete understanding of their origins and function in their domestic contexts. In this article, we undertake such a limited exercise in comparative corporate governance as part of a continuing project to devise incremental improvements in the American pattern of corporate governance. Our focus here is a little noted European, and particularly Swedish, form of financial intermediary, which we call a Managerial Strategic Investment Company (an "MSIC"), that may be peculiarly suitable for American transplant. The MSIC's special characteristic is that, consistent with non-U.S. corporate governance systems, it is an intermediary that serves as an active monitor of the performance of its portfolio companies. Consistent with the American corporate governance system, however, its only tie to its portfolio companies is its equity investment. Unlike the German and Japanese systems, the link between the financial intermediary and its portfolio companies is one-dimensional.

This edition has been comprehensively revised and updated to reflect the profound changes in corporate law and governance practices that have taken place since the previous edition. These include numerous regulatory changes following the financial crisis of 2007-09 and the changing landscape of governance, especially in the US, with the ever more central role of institutional investors as (active) owners of corporations. The geographic scope of the coverage has been broadened to include an important emerging economy, Brazil. In addition, the book now incorporates analysis of the burgeoning use of corporate law to protect the interests of 'external constituencies' without any contractual relationship to a company, in an attempt to tackle broader social and economic problems

What is corporate law? / John Armour, Henry Hansmann, Reinier Kraakman, and Mariana Pargendler -- Agency problems and legal strategies / John Armour, Henry Hansmann, and Reinier Kraakman -- The basic governance structure : the interests of shareholders as a class / John Armour, Luca Enriques, Henry Hansmann, Reinier Kraakman -- The basic governance structure : minority shareholders and non-shareholder constituencies / Luca Enriques, Henry Hansmann, Reinier Kraakman, and Mariana Pargendler -- Transactions with creditors / John Armour, Gerard Hertig, and Hideki Kanda -- Related-party transactions / Luca Enriques, Gerard Hertig, Hideki Kanda, and Mariana Pargendler -- Fundamental changes / Edward Rock, Paul Davies, Hideki Kanda, Reinier Kraakman, and Wolf-Georg Ringe -- Control transactions / Paul Davies, Klaus Hopt, and Wolf-Georg Ringe -- Corporate law and securities markets / Luca Enriques, Gerard Hertig, Reinier Kraakman, and Edward Rock -- Beyond the anatomy / John Armour, Luca Enriques, Mariana Pargendler, and Wolf-Georg Ringe