Tag: Social capital


Why University Endowments are Large and Risky

Thomas Gilbert is an Assistant Professor of Finance & Business Economics at the University of Washington. This post is based on an article authored by Professor Gilbert and Christopher Hrdlicka, Assistant Professor of Finance & Business Economics at the University of Washington.

Universities as perpetual ivory towers, though often meant as a pejorative, describes well universities’ special place in society as centers of learning with a mission distinct from that of businesses. Universities create new knowledge via research while preserving and spreading that knowledge through teaching. The social good aspect of universities makes donations critical to funding their mission. But rather than investing these donations internally to build the metaphorical towers higher and shine the light of learning more widely, universities have built large endowments invested heavily in risky financial assets.

In our paper, Why Are University Endowments Large and Risky?, forthcoming at The Review of Financial Studies, we model how universities’ objectives, investment opportunities (internal and external) and public policy, specifically the Uniform Prudent Management of Institutional Funds Act (UPMIFA), interact to create this behavior. Our findings suggest a reevaluation of UPMIFA’s ability to achieve its goal of maintaining donor intent in light of the costs it imposes on universities.

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The Iliad and the IPO

Andrew A. Schwartz is an Associate Professor of Law at the University of Colorado Law School. This post is based on Professor Schwartz’s recent article published in The Harvard Business Law Review, available here.

Many public companies have shed takeover defenses in recent years, on the theory that such defenses reduce share price. Yet new data presented in my latest article, Corporate Legacy, shows that practically all new public companies—those launching their initial public offering (IPO)—go public with powerful takeover defenses in place, which presumably depresses the price of the shares. This behavior seems strange, as pre-IPO shareholders both have a strong incentive to maximize the value of the shares being sold in the IPO and are in position to control whether to adopt takeover defenses. Why do founders and early investors engage in this seemingly counterproductive behavior? In Corporate Legacy, I look to a surprising place, the ancient Greek epic poem, the Iliad, for a solution to this important puzzle, and claim that pre-IPO shareholders adopt strong takeover defenses, at least in part, so that the company can remain independent indefinitely and thus create a corporate legacy that may last for generations.

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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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Information Networks: Evidence from Illegal Insider Trading Tips

The following post comes to us from Kenneth Ahern of the Finance & Business Economics Unit at the University of Southern California.

Illegal insider trading has become front-page news in recent years. High profile court cases have brought to light the extensive networks of insiders surrounding well-known hedge funds, such as the Galleon Group and SAC Capital. Yet, we have little systematic knowledge about these networks. Who are inside traders? How do they know each other? What type of information do they share, and how much money do they make? Answering these questions is important. Augustin, Brenner, and Subrahmanyam (2014) suggest that 25% of M&A announcements are preceded by illegal insider trading. Similarly, the U.S. Attorney for the Southern District of New York believes that insider trading is “rampant.”

In my paper, Information Network: Evidence from Illegal Insider Trading Tips, which was recently made publicly available on SSRN, I analyze 183 insider trading networks to provide answers to these basic questions. I identify networks using hand-collected data from all of the insider trading cases filed by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) between 2009 and 2013. The case documents include biographical information on the insiders, descriptions of their social relationships, data on the information that is shared, and the amount and timing of insider trades. The data cover 1,139 insider tips shared by 622 insiders who made an aggregated $928 million in illegal profits. In sum, the data assembled for this paper provide an unprecedented view of how investors share material, nonpublic information through word-of-mouth communication.

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Lawyers as Professionals and Citizens: Key Roles and Responsibilities in the 21st Century

Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an essay by Mr. Heineman, William F. Lee, and David B. Wilkins; the complete publication is available here.

We have written a detailed essay presenting practical vision of the responsibilities of lawyers as both professionals and as citizens at the beginning of the 21st century. Specifically, we seek to define and give content to four ethical responsibilities that we believe are of signal importance to lawyers in their fundamental roles as expert technicians, wise counselors, and effective leaders: responsibilities to their clients and stakeholders; responsibilities to the legal system; responsibilities to their institutions; and responsibilities to society at large. Our fundamental point is that the ethical dimensions of lawyering for this era must be given equal attention to—and must be highlighted and integrated with—the significant economic, political, and cultural changes affecting major legal institutions and the people and institutions lawyers serve.

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Revisiting Executive Pay in Family-Controlled Firms

The following post comes to us from Juyoung Cheong of the Korea Advanced Institute of Science and Technology and Woochan Kim of the Department of Finance at Korea University Business School.

In our paper, Revisiting Executive Pay in Family-Controlled Firms, which was recently made publicly available on SSRN, we reexamine executive pay in family-controlled firms and challenge the findings in the existing literature.

According to the prior literature, family executives of family-controlled firms receive lower compensation than non-family executives. Using 82 family-controlled firms in the U.S. in 1988, McConaughy (2000) report that family CEOs are paid lower compensation than non-family CEOs. Likewise, Gomez-Mejia, Larraza-Kintana, and Makri (2003) show similar findings using a sample of 253 family-controlled firms in the U.S. during 1995-98.

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Human Capital, Management Quality, and Firm Performance

The following post comes to us from Thomas Chemmanur and Lei Kong, both of the Department of Finance at Boston College, and Karthik Krishnan of the Finance Group at Northeastern University.

The quality of the top management team of a firm is an important determinant of its performance. This is an obvious statement to many. Yet, there is little evidence that relates top management team quality to firm performance in a causal manner. Part of the challenge in doing so stems from assigning a measure to the quality of the top management team. There are, after all, various aspects of top managers that contribute to their performance, including their education, their connections and prior experience. Another reason that relating management quality to firm performance is hard is that one can argue that the best managers can simply select into the best firms to work in. This makes making causal statements extremely hard in this context. As a result, while one can point toward anecdotal evidence relating good managers to good performance (e.g., Steve Jobs of Apple), systematic evidence is lacking in the academic literature on this issue. The relation between management quality and firm performance is important in more than just an academic context. For instance, analysts frequently cite top management quality as a reason to invest in a stock. Thus, one needs to ask what they mean by “quality,” and does it really impact the future performance of the firm.

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Incentives and Ideology

The following post comes to us from James Kwak at University of Connecticut School of Law.

The financial crisis that began in 2007 prompted a tidal wave of thinking about financial regulation. One major theme that has been pursued by the Financial Crisis Inquiry Commission, journalists, and scholars—most recently in Other People’s Houses, by Jennifer Taub—is the question of what went wrong in the years or decades leading up the crisis. A second strand of research answers the question of what substantive regulations we should have; one important book in this genre is The Banker’s New Clothes, by Anat Admati and Martin Hellwig. But beyond the issue of what regulations are appropriate for today’s complex financial system, a third important area of inquiry is the political and administrative landscape in which financial regulations (whether statutes, rules, administrative guidances, or court opinions) are hammered out. After all, if it were somehow possible to design a perfect regulatory framework, it could only become effective by navigating through the complicated web of interests and incentives that encompasses the legislative and executive (and perhaps judicial) branches.

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The Ownership of Japanese Corporations in the 20th Century

The following post comes to us from Julian Franks, Professor of Finance at London Business School; Colin Mayer, Professor of Management Studies at Saïd Business School, University of Oxford; and Hideaki Miyajima, Professor of Commerce at Waseda University.

The Japanese insider ownership system began to fall apart approximately twenty years after it came into operation at the beginning of the 1970s. In our paper, The Ownership of Japanese Corporations in the 20th Century, which was recently made publicly available on SSRN, we suggest that the insider system emerged in the first place because the alternative institutions for promoting outside ownership failed. The problem was not with the legal framework, which was relatively strong in Japan. Instead, the failure was due to the absence of institutional reputational capital in equity markets equivalent to that embedded in the business coordinators and zaibatsu earlier in the century. The first point that this brings out is that the destruction of institutions, such as zaibatsu, can be serious in terms of economic performance. The second point is that the creation of new institutions of trust to replace previous institutions is complex and not readily achieved by design.

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Span of Control and Span of Attention

The following post comes to us from Oriana Bandiera, Professor of Economics at the London School of Economics and Political Science (LSE); Andrea Prat, Professor of Economics at Columbia Business School; and Raffaella Sadun and Julie Wulf, both of the Strategy Unit at Harvard Business School.

In our paper, Span of Control and Span of Attention, which was recently made publicly available on SSRN, we use novel data to better understand the role of the CEO and the relationship to the executive team as represented by the CEO’s span of control. We collect detailed time use information for a large sample of CEOs and use it to characterize how CEOs allocate their time. We compare how this new and more comprehensive measure—span of attention—is related to the more traditional notion of span of control.

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