FALL 2000 ISSUE

Journal Home

Penn Law Home

Securities law is often considered a part of corporate law, but actually both areas are more accurately described as components of business law. Assistant Professor Peter Huang's recent scholarship pays equal attention to these intertwining vines. "There's obviously an overlap between corporations and securities." Huang states. "Many people who teach one of these two courses also teach the other." Students of Huang's classes in Securities Regulation, Capital Markets, and Financial Innovation or Economics Analysis of Law are treated to his energetic teaching style that serves to infuse his classrooms with an enthusiasm for finance rarely seen beyond the trading floors on Wall Street.

In a paper co-authored with new Penn Law faculty member Michael S. Knoll entitled "Corporate Law, Corporate Finance and Finance Theory," forthcoming in the Southern California Law Review in 2000, the authors argue how a single concept is useful in both understanding much of the business law curriculum and in conducting scholarly research. This unifying concept is the Modigliani-Miller Theorem of Capital Structure Irrelevancy (M&M). Huang explains, "The Modigliani Theorem states that the value of a firm won't change under certain assumptions no matter how you finance it - by debt or equity." He uses the welcome analogy of a pizza pie: "no matter how many slices you cut it into, it will still equal one pizza."

Huang's paper, "Derivatives, Fear and Hope," analyzes how fear and hope affect investor behavior in derivative markets. As he puts it, "Many financial practitioners react with fear and hope to bad and good financial news as well as believe that others also do. An improved understanding of derivative market psychology, in turn, forms the basis for public policy prescriptions about derivatives and their regulation."

Huang's new passion concerns using the options perspective in teaching corporate law. He references the 1990 Nobel Prize in Economics awardee Merton H. Miller who, until his death in June, was a professor of finance at the University of Chicago Business School. Miller suggested that options are the way of the future in corporate financing. Huang enters the dialogue with an article forthcoming in the University of Georgia Law Review "Teaching Corporate Law From an Options Perspective."

He proposes introducing the options perspective in the basic corporate law course and states several benefits to doing this: first, defining stock options highlights the differences between the capital gain or loss from owning stock and other aspects of stock ownership, such as receiving dividends and having voting rights. Second, graphing stock option payoffs leads naturally into a discussion of the zero-sum nature of trading in options and financial engineering via the vertical addition of such graphs. Third, viewing debt and equity as options on corporate assets illustrates the conflict of incentives between bondholders and shareholders. Fourth, the options perspective demonstrates how paying managers in stock and/or stock options can reduce the conflict of interests between managers and shareholders. And, finally, introducing the notion of real options as opposed to financial options contrasts traditional expected values of corporate projects or mergers with their real option values.