Category Archives: Academic Research

Insider Trading and Innovation

Ross Levine is Professor of Finance at the University of California, Berkeley. This post is based on an article authored by Professor Levine; Chen Lin, Professor of Finance at the University of Hong Kong; and Lai Wei of the School of Economics and Finance at the University of Hong Kong.

In our paper, Insider Trading and Innovation, which was recently made publicly available on SSRN, we investigate the impact of restricting insider trading on the rate of technological innovation. Our research is motivated by two literatures: the finance and growth literature stresses that financial markets shape economic growth and the rate of technological innovation, and the law and finance literature emphasizes that legal systems that protect minority shareholders enhance financial markets. What these literatures have not yet addressed is whether legal systems that protect outside investors from corporate insiders influence a crucial source of economic growth—technological innovation. In our research, we bridge this gap. We examine whether restrictions on insider trading—trading by corporate officials, major shareholders, or others based on material non-public information—influences technological innovation.


Does Majority Voting Improve Board Accountability?

Edward B. Rock is the Saul A. Fox Distinguished Professor of Business Law at University of Pennsylvania Law School. This post is based on a paper, Does Majority Voting Improve Board Accountability?, authored by Professor Rock, Stephen J. Choi, Murray and Kathleen Bring Professor of Law at the New York University School of Law, Jill E. Fisch, Perry Golkin Professor of Law at the University of Pennsylvania Law School, and Marcel Kahan, George T. Lowy Professor of Law at the New York University School of Law.

Directors have traditionally been elected by a plurality of the votes cast (the Plurality Voting Rule or PVR). This means that the candidates who receive the most votes are elected, even if a candidate does not receive a majority of the votes cast. Indeed, in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a Majority Voting Rule (MVR), under which a candidate must receive a majority of the votes cast to be elected. This, proponents say, will make directors more accountable to shareholders.


Rural/Metro and Disclosure Settlements

Joel E. Friedlander is President of Friedlander & Gorris, P.A. This post relates to Mr. Friedlander’s recent article, How Rural/Metro Exposes the Systemic Problem of Disclosure Settlements. This post is part of the Delaware law series; links to other posts in the series are available here.

There is no aspect of merger and acquisitions litigation more pervasive or significant than the disclosure settlement. It is the mechanism by which stockholder claims are conclusively resolved for approximately half of all public company acquisitions greater than $100 million. [1] For that half of major acquisitions, the contracting parties and their directors, officers, affiliates, and advisors receive a court-approved global release of known and unknown claims relating to the merger in exchange for supplemental disclosures to stockholders prior to the stockholder vote. [2] The supplemental disclosures have no impact on stockholder approval of the merger. Nevertheless, in almost every such case, class counsel for the stockholder plaintiff receives a court-approved six-figure fee award for having conferred a benefit on the stockholder class.


Corporate Law and The Limits of Private Ordering

James D. Cox is the Brainerd Currie Professor of Law of Duke Law School. The following post is based on an article forthcoming in the Washington University Law Review. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Solomon-like, the Delaware legislature in 2015 split the baby by amending the Delaware General Corporation Law to authorize forum-selection bylaws and to prohibit charter or bylaw provisions that would shift to the plaintiff defense costs incurred in connection with shareholder suits that were not successfully concluded. The legislature acted after the Boilermakers Local 154 Retirement Fund. v. Chevron Corp ATP Tour, Inc. v. Deutscher Tennis Bund, broadly empowered the board vis-à-vis the shareholders through the board’s power to amend the bylaws. Repeatedly the analysis used by each court referenced the contractual relationship the shareholders had through the articles of incorporation and the bylaws with their corporation. The action of the Delaware legislation hardly puts the important question raised by each opinion to bed: are there limits on the board of directors to act through the bylaws to alter the rights shareholders customarily enjoy? Stated differently, can the board of directors’ authority to amend the bylaws extend to changing both the procedural and substantive relationship shareholders have with their corporation. In examining this question, the article, Corporate Law and The Limits of Private Ordering, develops two broad points: the shareholder’s relationship is more than just a contract and, even if the relationship was contractual, bedrock contract law does not support the results reached in Boilermakers and ATP Tour, Inc. In conclusion, the article also uncovers an issued overlooked in the debate over the relative prerogatives of shareholders and the board of directors, namely that bylaws proposed by the board of directors carry a strong presumption of propriety whereas those proposed by shareholders do not.


Program Hiring Post-Doctoral Fellows and Senior Associates

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The Program on Corporate Governance is seeking applications from highly qualified candidates who are interested in working with the Program as post-doctoral fellows or senior associates in the fields of corporate governance and/or law and finance.

Post-Doctoral Fellows: Applicants for a position of a post-doctoral fellow should be interested in spending between one and three years in preparation for a career in academia or in policy research. Applicants should have a J.D. or an LL.M. degree from a U.S. law school, or a doctoral degree in finance, accounting or business economics. Applicants may also be candidates who would be completing work on a doctoral dissertation in law or another discipline during their period as fellows.

Senior Associates: Applicants for the position of senior associate should be interested in working with the Program on some of its activities in the areas of corporate governance and law and finance. Applicants should have a J.D. or an LL.M. degree from a U.S. law school. Law firm experience in a relevant area of legal practice would be a plus.

During the period of their appointment, post-doctoral fellows and senior associates will be expected to work on research and corporate governance activities of the Program, with the allocation to projects depending on their interests and program requirements.

Applications will be considered on a rolling basis. Applicants should send the following to the coordinator of the Program, at (1) a curriculum vitae; and (2) a 2-3 page statement describing the applicant’s interests, experience, reasons for seeking the position, career plans, and the kind of Program projects and activities in which they would be interested in being involved.

Management Philosophies and Styles in Family and Non-Family Firms

William Mullins is Assistant Professor of Finance at the University of Maryland and Antoinette Schoar is Professor of Finance at MIT. This post is based on an article authored by Professor Mullins and Professor Schoar.

A growing body of evidence supports the view that there are substantial differences in the management styles and skill sets of individual CEOs, and these differences seem to translate into effects on firm performance and how firms operate. However, we know little about what drives these differences in CEO behavior. In particular, we do not know if the management philosophies and styles of CEOs vary with the governance structure or ownership of the firm (for example, whether it is a family firm or widely held firm), or even across countries. One view is that the extent to which they take a stakeholder approach to management—in opposition to a shareholder focused approach—is an important determinant of CEO behavior. Family members as CEO might be more likely to adopt a stakeholder view, since they have a longer horizon and care about the reputation of the family beyond profit maximization. An alternative view holds that greater emphasis on stakeholder management is a feature of entire countries, evolving in response to aspects of the economy as a whole, rather than to firm-specific characteristics.

In our paper, How Do CEOs See Their Roles? Management Philosophies and Styles in Family and Non-Family Firms, forthcoming in the Journal of Financial Economics, we explore how the interplay of firm level and country level factors shape CEO management styles and beliefs regarding their roles.


19 Law Professors Submit Amicus Brief in Union Political Spending Case

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post relates to a brief submitted by 19 law professors, led by Professor Coates, in the case of Friedrichs v. California Teachers Association. The amicus brief is available here.

In 2010, the Supreme Court ruled in Citizens United v. Federal Election Commission that under the First Amendment, the government could not restrict a corporation’s independent political spending, even in the interest of aligning corporate expression with shareholders’ views. In contrast, an earlier Court case, Abood v. Detroit of Board of Education, conditioned the ability of unions to use fees from non-members for political spending on a mechanism for non-members to opt out of fees not directly used in collective bargaining. In Friedrichs v. California Teachers Associationcurrently awaiting oral argument in the Court’s October Term 2015—again deals with speech by labor unions, which the Supreme Court has compared to speech by corporations.

Presently, California requires that public schoolteachers either join the California Teachers Union or pay “agency fees” to compensate the union for its efforts on their behalf. Plaintiffs, a group of teachers, argue that these fees constitute forced subsidization of the union’s speech. Pinning their claim to the First Amendment, plaintiffs are seeking to invalidate agency fees altogether, or else require non-union members to affirmatively consent to subsidizing the union’s speech. In effect, plaintiffs are seeking to overturn Abood, converting an opt-out to an opt-in. The CTU, on the other hand, argues that the opt-out already required by Abood means that non-union teachers are not forced to pay for union speech at all.


Investor-Advisor Relationships and Mutual Fund Flows

Leonard Kostovetsky is Assistant Professor of Finance at Boston College. This post is based on Professor Kostovetsky’s recent article, available here.

In my paper, Whom Do You Trust? Investor-Advisor Relationships and Mutual Fund Flows, forthcoming in the Review of Financial Studies, I investigate the role of trust in the asset management industry. While there is plenty of anecdotal and survey evidence which underlines the general importance of trust in finance, academic research has been scarce due to the difficulty of quantifying and measuring trust. In this paper, I use an exogenous shock to the relationships between investors and mutual fund advisory companies (e.g. Fidelity, Wells Fargo, Vanguard, etc.) to try to tease out the effect of trust.


The Product Market Effects of Hedge Fund Activism

Praveen Kumar is Professor of Finance at the University of Houston. This post is based on an article authored by Professor Kumar and Hadiye Aslan, Assistant Professor of Finance at Georgia State University, available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Whether intervention by activist investors, such as hedge funds, is beneficial or detrimental to the shareholders of target firms remains controversial. Proponents marshal considerable empirical evidence that hedge fund activism (HFA) is associated with significant medium-to-long-run improvements in targets’ cost and investment efficiency, profitability, productivity, and shareholder returns. Opponents, however, insist that HFA forces management to take myopic decisions that weaken firms in the longer run. The debate rages in academia, media, and has already featured in the 2016 presidential campaign.

Despite this intense interest, however, the research on the effects HFA has typically focused only on its impact on the performance of target firms. But targets of HFA do not exist in vacuum; they have industry competitors, suppliers, and customers. It is by now well known that HFA has a broad scope that often—simultaneously or sequentially—touches on virtually every major aspect of company management, including changes in product market strategy, negotiation tactics with suppliers and customers, and knowledge-based technical advice of production organization. In particular, HFA that improves target’s cost efficiency and product differentiation, and generally redesigns its competitive strategy, should have a significant impact on the target’s competitors (or rival firms). This prediction follows from basic principles of strategic interaction among firms in oligopolistic interaction. Indeed, the received theory of industrial organization provides the effects of cost improvements and product differentiation on rivals’ equilibrium profits and market shares.


Shadow Resolutions as a “No-No” in a Sound Banking Union

Luca Enriques is Allen & Overy Professor of Corporate Law at Oxford University. The following post is based on a paper co-authored by Professor Enriques and Gerard Hertig.

Credit crisis related bank bailouts and resolutions have been actively debated over the past few years. By contrast, little attention has been paid to resolution procedures being generally circumvented when banks are getting insolvent in normal times.

In fact, supervisory leniency and political considerations often result in public officials incentivizing viable banks to acquire failing banks. In our book chapter Shadow resolutions as a no-no in a sound Banking Union, published in Financial Regulation: A Transatlantic Perspective 150-166 (Ester Faia et al. eds.), Cambridge University Press, 2015, we consider this a very unfortunate approach. It weakens supervision, distorts competition and, most importantly, gives resolution a bad name.


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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    David Fox
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Rodman Ward