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"We extend here our prior work, which focused on equity decoupling (Hu and Black, 2006, 2007, 2008), by providing a systematic treatment of debt decoupling and an initial exploration of hybrid decoupling. Equity decoupling involves unbundling of economic, voting, and sometimes other rights customarily associated with shares, often in ways that may permit avoidance of disclosure and other obligations. We discuss a new U.S. court decision which will likely curtail the use of equity decoupling strategies to avoid large shareholder disclosure rules. Debt decoupling involving the unbundling of the economic rights, contractual control rights, and legal and other rights normally associated with debt, through credit derivatives and securitisation. Corporations can have empty and hidden creditors, just as they can have empty and hidden shareholders. 'Hybrid decoupling' across standard equity and debt categories is also possible. All forms of decoupling appear to be increasingly common. Debt decoupling can pose risks at the firm level for what can be termed 'debt governance' - the overall relationship between creditor and debtor, including creditors' exercise of contractual and legal rights with respect to firms and other borrowers. Widespread debt decoupling can also involve externalities and therefore create systemic financial risks; we explore those risks." Copyright (c) 2008 Henry T. C. Hu Journal compilation (c) 2008 Blackwell Publishing Ltd.

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The article begins by setting out three alternative conceptions of the corporate objective function. Relying on this framework, it shows that legal analyses tend to neglect conflicts between the interests of the corporate entity and the interests of shareholders over the amount of corporate risk-taking. Financial analyses tend to ignore both constraints on managerial discretion imposed by law and a fundamental ambiguity the author identifies in the "shareholder wealth maximization" assumption that underlies such analyses. 1996 Morgan Stanley.