Category Archives: Academic Research

Attorney-Whistleblowing and Conflicting Regulatory Regimes

Jennifer M. Pacella is Assistant Professor of Law at City University of New York (CUNY), Zicklin School of Business, Baruch College.

In my latest article, Conflicted Counselors: Retaliation Protections for Attorney-Whistleblowers in an Inconsistent Regulatory Regime, I examine the ever-evolving issue of attorney-whistleblowing, the reporting requirements under the Sarbanes-Oxley Act (“SOX”) of attorneys representing issuer-clients, the potential for conflict of these requirements with the rules of professional conduct in various states, and the lack of retaliation protections for attorneys subject to these rules. Although attorney-whistleblowing undoubtedly invokes concerns about ethics and client relationships, SOX requires attorneys who “appear and practice” before the Securities and Exchange Commission to internally blow the whistle on their clients by reporting evidence of material violations of the law “up-the-ladder” when they represent issuers. If an attorney fails to adhere to these requirements, he/she will be subject to SEC-imposed civil penalties and disciplinary action. The SOX rules also allow an attorney to make a permissive disclosure to the SEC, revealing confidential information without the issuer-client’s consent, in certain instances, including when the attorney reasonably believes necessary to prevent substantial financial injury to the issuer.

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Government Preferences and SEC Enforcement

Jonas Heese is Assistant Professor of Business Administration in the Accounting & Management Unit at Harvard Business School.

The Securities and Exchange Commission’s (SEC) enforcement actions have been subject to increased scrutiny following the SEC’s failure to detect several accounting frauds. A growing literature investigates the reasons for such failure in SEC enforcement by examining the SEC’s choice of enforcement targets. While several studies recognize that the SEC and its enforcement actions are subject to political influence (e.g., Correia, 2014; Yu and Yu, 2011), they do not consider that such influence by the government may also reflect voters’ interests. Yet, economists such as Stigler (1971) and Peltzman (1976) have long emphasized that the government may also influence regulations and regulatory agencies to reflect voters’ interests—independent of firms’ political connections. In my paper, Government Preferences and SEC Enforcement, which was recently made publicly available on SSRN, I examine whether political influence by the president and Congress (“government”) on the SEC may reflect voters’ interests.

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Managerial Ownership and Earnings Management

Phil Quinn is Assistant Professor of Accounting at the University of Washington. This post is based on an article by Mr. Quinn.

In my paper, Managerial Ownership and Earnings Management: Evidence from Stock Ownership Plans, which was recently made publicly available on SSRN, I exploit the initiation of ownership requirements to examine the relation between managerial ownership and earnings management. Prior work provides mixed evidence on the relation between managerial ownership and earnings management. Many studies provide evidence of a positive relation between managerial ownership and earnings management, which is consistent with an increase in stock price increasing the portfolio value of high-ownership managers more than the value of low-ownership managers (i.e., the “reward effect”) (Cheng and Warfield 2005; Bergstresser and Philippon 2006; Baber, Kang, Liang, and Zhu 2009; Johnson, Ryan, and Tian 2009). Other work notes that earnings management is a risky activity and posits that risk-adverse managers will be less likely to engage in risky activities as their ownership increases. Consistent with the “risk effect” increasing with managerial ownership, several studies find no relation or a negative relation between earnings management and managerial ownership (Erickson, Hanlon, and Maydew 2006; Hribar and Nichols 2007; Armstrong, Jagolinzer, and Larcker 2010). Armstrong, Larcker, Ormazabal, and Taylor (2013) note that the theoretical reward effect and risk effect are countervailing forces, and the countervailing forces may explain why prior empirical work finds mixed evidence on the relation between ownership and earnings management. By examining stock ownership plans, a governance reform that limits the reward effect, I seek to inform the discussion on the relation between ownership and earnings management.

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Regulatory Arbitrage and Cross-Border Bank Acquisitions

Alvaro Taboada is an Assistant Professor of Finance at the University of Tennessee, Knoxville. This post is based on an article by Professor Taboada and Andrew Karolyi, Professor of Finance at Cornell University.

In our forthcoming Journal of Finance paper, Regulatory Arbitrage and Cross-Border Bank Acquisitions, we examine how differences in bank regulation influence cross-border bank acquisition flows and share price reactions to cross-border deal announcements. The recent global financial crisis, caused in part by systemic failures in bank regulation, has sparked, among other things, a strong push for both stricter capital requirements and greater international coordination in regulation. For example, seven of the 10 recommendations of the 2011 Report of the Cross-Border Bank Resolution Group of the Basel Committee for Banking Supervision (BCBS) propose greater coordination of national measures to deal with the increasingly important cross-border activities of banks. Some argue this push for tougher regulations and increased restrictions on bank activities may create incentives for “regulatory arbitrage,” whereby banks from countries with strict regulations engage in cross-border activities in countries with weaker regulations. The purpose of the study is to shed light on the motives behind regulatory arbitrage by examining one of the most important types of investment decisions that banks can make—namely, cross-border acquisitions.

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Congress Should Let the SEC Do its Job

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

Last week, the House Appropriations Committee included in its 2016 appropriations bill for financial services agencies a provision that would prevent the SEC from developing rules that would require public companies to disclose their political spending. Although this provision is unlikely to become law, its adoption is regrettable. In our view, Congress should let the SEC do its job and use its expert judgment—free of political pressures in any direction—to determine what information should be disclosed to public-company investors.

In July 2011, we co-chaired a committee of ten corporate and securities law academics that petitioned the SEC to develop rules requiring public companies to disclose their political spending. The SEC has now received over 1.2 million comments on the proposal—more than any rulemaking petition in the SEC’s history. As we have explained in previous posts on the Forum, the case for rules requiring disclosure of corporate spending is compelling. Unfortunately, Chairman Mary Jo White has faced significant political pressure not to develop such rules, and the Commission has so far chosen to delay consideration of rules in this area.

As we explained in earlier posts on the Forum (see, for example, posts here and here), we view this delay as regrettable in light of the compelling arguments in favor of disclosure and the breadth of support that the petition has received. Furthermore, as we explain in detail in our article Shining Light on Corporate Political Spending, an analysis of the full range of objections that opponents of transparency have raised makes clear that these opponents have failed to provide a convincing basis for keeping corporate political spending below investors’ radar screen.

We agree with the bipartisan group of three former SEC Commissioners who just last month referred to the SEC’s inaction on the petition as “inexplicable.” At a minimum, the broad support and compelling arguments in favor of disclosure of corporate spending on politics make clear that the Commission should move promptly to consider the petition on the merits. Unfortunately, last week’s move by the Appropriations Committee reflects another attempt to avoid consideration of the rulemaking petition on its merits. Members of Congress should not try to prevent the SEC from even considering the substantive merits of the petition.

While corporate political spending is an issue that politicians are naturally interested in, our petition focuses on whether investors should receive information regarding political spending at the companies they own. That is an issue that falls squarely within the SEC’s mandate and expertise. Regardless of their views on corporate political spending, Congressmen of all stripes should avoid interfering with the Commission’s rulemaking processes. We urge them to allow the SEC to do its job.

Brain Drain or Brain Gain? Evidence from Corporate Boards

Mariassunta Giannetti is Professor of Economics at the Stockholm School of Economics. This post is based on an article by Professor Giannetti; Guanmin Liao, Associate Professor of Accounting at the School of Accountancy, Central University of Finance and Economics; and Xiaoyun Yu, Associate Professor of Finance at Indiana University, Bloomington.

Development economists have long warned about the costs for developing countries of the emigration of the best and brightest that decamp to universities and businesses in the developed world (Bhagwati, 1976). While this brain drain has attracted a considerable amount of economic research, more recently, arguments have been raised that the emigration of the brightest may actually benefit developing countries, because emigrants may eventually return with more knowledge and organizational skills. (See The Economist, May 26, 2011.) Thus, the brain drain may actually become a brain gain.

In our paper, Brain Drain or Brain Gain? Evidence from Corporate Boards, forthcoming in the Journal of Finance, we demonstrate a specific channel through which the brain gain arising from return migration to emerging markets may benefit the overall economy: the brain gain in the corporate boards of publicly listed companies. Specifically, we highlight the effects of individuals with foreign experience joining the boards of directors on firms’ performance and corporate policies in China.

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CFO Narcissism and Financial Reporting Quality

Sean Wang is Assistant Professor of Accounting at the University of North Carolina at Chapel Hill. This post is based on an article by Professor Wang, Mark Lang, Professor of Accounting at the University of North Carolina at Chapel Hill, and Chad Ham and Nicholas Seybert, both of the Department of Accounting & Information Assurance at the University of Maryland.

In Kurt Eichenwald’s Conspiracy of Fools, the author details the collapse of the Enron empire and places the majority of the blame on their CFO, Andrew Fastow. Fastow is credited with being responsible for engineering the special purpose entities, which hid the majority of Enron’s debt from their balance sheets. The excess leverage created risks that were opaque to Enron’s shareholders, and were largely responsible for Enron’s bankruptcy. Eichenwald’s interviews with Fastow’s colleagues portrayed him as a narcissist who would do anything for his own self-interest at the expense of the welfare of those around him.

In our paper, CFO Narcissism and Financial Reporting Quality, which was recently made publicly available on SSRN, we examine whether CFO narcissism can impact financial reporting outcomes. We focus on CFOs because of their primary role in financial reporting decisions. We conjecture that the traits of narcissism, which include exploitativeness, the domination of group decisions, a sense of self-entitlement, inflated self-perceptions, and a constant need for recognition, will result in narcissistic CFOs being more willing to exploit power and information asymmetry to engage in misreporting.

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Foreign Institutional Ownership and the Global Convergence of Financial Reporting

Vivian Fang is an Assistant Professor of Accounting at the University of Minnesota. This post based on an article by Professor Fang, Mark Maffett, Assistant Professor of Accounting at the University of Chicago, and Bohui Zhang, Associate Professor at the School of Banking and Finance, University of New South Wales.

In our recent paper, Foreign Institutional Ownership and the Global Convergence of Financial Reporting Practices, forthcoming in the Journal of Accounting Research, we examine the role of foreign institutional investors in the global convergence of financial reporting practices. Regulators frequently espouse comparability as a desirable characteristic of financial reporting to facilitate investment decision-making and allocation of capital. Over the past 15 years, significant regulatory effort has gone into promoting comparability, the most prominent example of which is the International Accounting Standards Board’s (IASB) push for global adoption of International Financial Reporting Standards (IFRS). However, recent research (e.g., Daske, Hail, Leuz, and Verdi [2008], Christensen, Hail, and Leuz [2013]) shows that mandating the use of a common set of accounting standards alone is unlikely to achieve financial reporting convergence.

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Harmony or Dissonance? The Good Governance Ideas of Academics and Worldly Players

Robert C. Clark is University Distinguished Service Professor at Harvard Law School. His article, Harmony or Dissonance? The Good Governance Ideas of Academics and Worldly Players, was recently published in the Spring 2015 issue of The Business Lawyer and is available here.

There are numerous players who have ideas about what are good or best corporate governance practices, but different players have different themes. My article, Harmony or Dissonance? The Good Governance Ideas of Academics and Worldly Players, originally delivered as a special lecture and recently published in The Business Lawyer, asks questions concerning ideas about what constitutes good corporate governance that are espoused by different players.

The article dwells briefly on seven categories of players: (1) academics, such as financial economists and law professors who resort heavily to empirical studies; and more worldly players such as (2) legislators, (3) governance rating firms, (4) large institutional investors, (5) corporate directors, (6) law firms that represent corporate clients on the defensive, and (7) courts. Are there discernible trends and patterns in the views espoused by these different categories of actors, despite all the differences among individual actors within each category? I believe there are such patterns, and offer some initial thoughts about the characteristic themes and different patterns of ideas about good corporate governance that we observe among the different categories of players. I then hypothesize about the reasons for these differences. My approach focuses on the motives and incentives driving the different players and how they take shape in the occupational situations inhabited by the players.

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Structural Corporate Degradation Due to Too-Big-To-Fail Finance

Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. Professor Roe received the European Corporate Governance Institute’s 2015 Allen & Overy Prize for best corporate governance paper. The article, Structural Corporate Degradation Due to Too-Big-To-Fail Finance, appeared in the University of Pennsylvania Law Review, and was discussed on the Forum here as a working paper. In the following summary, Mr. Roe updates the earlier post.

In Structural Corporate Degradation Due to Too-Big-to-Fail Finance, I examined how and why financial conglomerates that have grown too large to be efficient find themselves free from the standard and internal and external corporate structural pressures push to resize the firm. The too-big-to-fail funding boost—from lower financing costs because lenders know that the government is unlikely to let the biggest financial firms fail—shields the financial firm’s management from restructuring pressures. The boost’s shielding properties operate similar to “poison pills” for industrial firms, in shielding managers and boards from restructurings. But unlike the conventional pill, the impact of the too-big-to-fail funding boost reduces the incentives of insiders to restructure the firm, not just outsiders. These weakened restructuring incentives weaken both the largest financial firms and the financial system overall, making it more susceptible to crises. The article predicts that if and when too-big-to-fail subsidies diminish, the largest financial firms will face strong pressures to restructure.

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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
    Richard Breeden
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    Daniel Fischel
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Barry Rosenstein
    Paul Rowe
    Rodman Ward