Category Archives: Empirical Research

The Volcker Rule as Structural Law

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School.

In response to the 2008 financial crisis the US Congress introduced the “Volker Rule”—a novel law generally barring banking organizations from proprietary trading and investing in hedge and private equity funds. Before implementing the Volcker Rule, US governmental agencies are required by administrative law to follow specified notice-and-comment procedures, and courts have a role in enforcing an obligation that agencies not be “arbitrary” in finalizing regulations. Many continue to advocate that the financial agencies also use quantified cost-benefit analysis in doing so. In principle, ad law requirements should help the public evaluate the impact of the Rule and hold agencies accountable in exercising their discretion and delegated authority in choosing among ways to implement a legislative requirement. However, in The Volcker Rule as Structural Law: Implications for Cost-Benefit Analysis and Administrative Law, a forthcoming article in a symposium issue of the Capital Markets Law Journal that focuses on the Volcker Rule, I build on prior work published in the Yale Law Journal and Law and Contemporary Problems to argue that the effects of a structural law such as the Volcker rule and its implementation by agencies cannot be reliably or precisely quantified, and courts err when they attempt to force agencies to do so under the guise of review for procedural regularity or substantive rationality.


Banker Loyalty in Mergers and Acquisitions

Andrew F. Tuch is Associate Professor of Law at Washington University School of Law. This post is based on an article authored by Dr. Tuch, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

As recent decisions of the Delaware Court of Chancery illustrate, investment banks can face conflicts of interest in their role as advisors on merger and acquisition (“M&A”) transactions. In a trilogy of recent decisions—Del Monte[1] El Paso [2] and Rural Metro [3]—the court signaled its concern, making clear that potentially disloyal investment banking conduct may lead to Revlon breaches by corporate directors and even expose bank advisors (“M&A advisors”) themselves to aiding and abetting liability. But the law is developing incrementally, and uncertainty remains as to the proper obligations of M&A advisors and the directors who retain them. For example, are M&A advisors in this context properly regarded as fiduciaries and thus obliged to act loyally toward their clients; gatekeepers, and thus expected to perform a guardian-like function for investors; or simply arm’s length counterparties with no other-regarding duties? [4] The Chancery Court in Rural Metro potentially muddied the waters by labelling M&A advisors as gatekeepers and—in an underappreciated part of its opinion—by also suggesting they act consistently with “established fiduciary norms.” [5]


Can Institutional Investors Improve Corporate Governance?

Craig Doidge is Professor of Finance at the University of Toronto. This post is based on an article authored by Professor Doidge; Alexander Dyck, Professor of Finance at the University of Toronto; Hamed Mahmudi, Assistant Professor of Finance at the University of Oklahoma; and Aazam Virani, Assistant Professor of Finance at the University of Arizona.

In our paper, Can Institutional Investors Improve Corporate Governance Through Collective Action?, which was recently made publicly available on SSRN, we examine whether a collective action organization of institutional investors can significantly influence firms’ governance choices. Growth in institutional investor ownership over the last few decades puts these investors in the position to have significant influence, particularly if they can work collectively and coordinate their efforts. But we have very limited evidence whether institutional investors are able to overcome the obstacles to collective action. We focus on the Canadian Coalition for Good Governance (CCGG), an organization of institutional investors whose mandate is to promote good governance. We use proprietary data on its private communications and find that its private engagements between owners and independent directors influenced firms’ adoption of majority voting and say-on-pay advisory votes, improved compensation structure and disclosure, and influenced CEO incentive intensity.


A New Paradigm for Corporate Governance

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum. The study putting forward the empirical evidence on hedge fund activism that the post seeks to question is The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here). Additional posts discussing the Bebchuk-Brav-Jiang study, including additional critiques by Wachtell Lipton and responses to them by Professors Bebchuk, Brav, and Jiang, are available on the Forum here.

Recently, there have been three important studies by prominent economists and law professors, each of which points out serious flaws in the so-called empirical evidence being put forth to justify short-termism, attacks by activist hedge funds and shareholder-centric corporate governance. These new studies show that the so-called empirical evidence omit important control variables, use improper specifications, contain errors and methodological flaws, suffer from selection bias and lack real evidence of causality. In addition, these new studies show that the so-called empirical evidence ignore real-world practical experience and other significant empirical studies that reach contrary conclusions. These new studies are:


Opportunism as a Managerial Trait

David Hirshleifer is Professor of Finance at the University of California, Irvine. This post is based on an article authored by Professor Hirshleifer and Usman Ali, Portfolio Manager at MIG Capital. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here.)

In trading their firms’ stocks, insiders must balance the profits of informed trading before news, the scrutiny by regulators that such trading can engender, formal policy restrictions by firms of insider trading activities, and diversification and liquidity motivations for selling shares after vesting of equity-based compensation. This mixture of motivations and constraints makes it is hard to decipher the information content of insider trades, especially because different trades may be intended to exploit news arriving at short or long horizons. This noise makes it feasible, up to a point, to conceal deliberate opportunism from regulators such as the SEC.

Empirically, there are some indications that insiders do exploit private information. Past research finds that insider purchases positively predict subsequent abnormal returns. On the other hand, effects are much harder to identify for insider sales, presumably because such sales are often performed for non-informational reasons, such as to reduce risk or to consume.


Peer Effects of Corporate Social Responsibility

Hao Liang is Assistant Professor of Finance at Singapore Management University. This post is based on an article authored by Professor Liang, and Jie Cao and Xintong Zhan, both of the Department of Finance at the Chinese University of Hong Kong.

Corporate social responsibility (CSR) has increasingly become a mainstream business activity—ranging from voluntarily engaging in environmental protection to increasing workforce diversity and employee welfare—although standard economic theories predict that it should be rather uncommon (Benabou and Tirole, 2010; Kitzmueller and Shimshack, 2012). The neoclassical economic paradigm usually considers CSR as unnecessary and inconsistent with profit maximization (e.g., Friedman, 1970). This discrepancy between theory and real-world observations has attracted much scholarly attention in recent years. One popular view on why CSR prevails is that it creates a competitive advantage for the firm and thus contributes to firm value. Following this line, numerous studies have investigated the causes and consequences of CSR by focusing on its strategic value implications.


The Disappearance of Public Firms

Gustavo Grullon is Professor of Finance at Rice University. This post is based on an article authored by Professor Grullon; Yelena Larkin, Assistant Professor of Finance at Penn State University; and Roni Michaely, Professor of Finance at Cornell University.

In our paper, The Disappearance of Public Firms and the Changing Nature of U.S. Industries, which was recently made publicly available on SSRN, we show that contrary to popular beliefs, U.S. industries have become more concentrated since the beginning of the 21st century due to a systematic decline in the number of publicly-traded firms. This decline has been so dramatic that the number of firms these days is lower than it was in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today.

We show that the decline in the number of public firms has not been compensated by other mechanisms that could reduce market concentration. First, private firms did not replace public firms, as the aggregate number of both public and private firms declined in over half of the industries, and the concentration ratio based on revenues of public and private firms has increased. Second, we examine whether the intensified foreign competition could provide an alternative source of rivalry to domestic firms, and find that the share of imports out of the total revenues by U.S. public firms has remained flat since 2000. Third, we show that the decrease in the number of public firms has been a general pattern that has affected over 90% of U.S. industries, and is not driven by distressed industries, or business niches that have disappeared due to technological innovations or changes in consumer preferences. Instead, it has been driven by a combination of a lower number of IPOs as well as high M&A activity.


CEO and Executive Compensation Practices: 2015 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO and Executive Compensation Practices: 2015 Edition, an annual benchmarking report authored by Dr. Tonello with James Reda of Arthur J. Gallagher & Co. For details regarding how to obtain a copy of the report, contact

The Conference Board, in collaboration with Arthur J. Gallagher & Co., recently released the Key Findings from CEO and Executive Compensation Practices: 2015 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the U.S. Securities and Exchange Commission (SEC) and, as of May 2015, included in the Russell 3000 Index.

The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.


Firms and Earnings Guidance

Kristian Allee is Assistant Professor of Accounting at the University of Wisconsin. This post is based on an article authored by Professor Allee; Ted Christensen, Professor of Accounting at Brigham Young University; Bryan Graden, Assistant Professor of Accounting at Illinois State University; and Ken Merkley, Assistant Professor of Accounting at Cornell University.

Understanding the formation of firms’ disclosure practices is of significant interest to regulators, managers, and investors. Anecdotal evidence and prior disclosure research generally conclude that firms’ current disclosure practices are often tightly connected to prior disclosure practices. However, prior disclosure practices must have a beginning in their own right, begging the questions of when and why disclosure practices begin. In our paper, When Do Firms Initiate Earnings Guidance? The Timing, Consequences, and Characteristics of Firms’ First Earnings Guidance, we examine when firms initiate earnings guidance (i.e., establish an earnings guidance policy) after an Initial Public Offering (IPO) and what factors are associated with the initiation decision.


Corporate Use of Social Media

James Naughton is Assistant Professor of Accounting at Northwestern University. This post is based on an article authored by Professor Naughton; Michael Jung, Assistant Professor of Accounting at New York University; Ahmed Tahoun, Assistant Professor of Accounting at London Business School; and Clare Wang, Assistant Professor of Accounting at Northwestern University.

Social media has transformed communications in many sectors of the U.S. economy. It is now used for disaster preparation and emergency response, security at major events, and public agencies are researching new uses in geolocation, law enforcement, court decisions, and military intelligence. Internationally, social media is credited for organizing political protests across the Middle East and a revolution in Egypt. In the business world, social media is considered a revolutionary sales and marketing platform and a powerful recruiting and networking channel. Little research exists, however, on how firms use social media to communicate financial information to investors and how investors respond to investor disseminated through social media, despite firms devoting considerable effort to creating and managing social media presences directed at investors. Motivated by this lack of research, in our paper, Corporate Use of Social Media, which was recently made publicly available on SSRN, we provide early large-sample evidence on the corporate use of social media for investor communications. More specifically, we investigate why firms choose to disseminate investor communications through social media, whether investors and traditional media outlets respond to social media disclosures, and whether potential adverse consequences to the firm exist from the use of social media to disseminate investor communications.


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