Day One of the ALEA Conference: Debating Corporate Governance Reform

This weekend the Law School plays host to the annual meeting of the American Law and Economics Association, which offers two days of presentations on the latest work in law and economics scholarship.  This afternoon’s panel on corporate governance reform, hosted by Paul Mahoney, featured papers from top scholars on the dismantling of staggered boards, the effect of Sarbanes-Oxley on the cross-listing premia available to foreign issuers, and the effects of the 2003 mutual fund voting disclosure regulation.  All three pieces are great reads for those interested in corporate governance reform.

The first paper, Mira Ganor‘s Why Do Managers Dismantle Staggered Boards?, uncovers statistically significant evidence that the likelihood that managers will destagger their board of directors increases in relation to shareholder pressure and the number of unvested stock options held by the CEO.  Staggered boards are increasingly viewed as a means of entrenching managers, as first proposed in this paper by Lucian Bebchuk, John Coates, and Guhan Subramanian.  This paper suggests that managers might nevertheless be willing to destagger their boards where doing so might reduce public pressure or result in a change of control that would immediately vest the CEO’s options on the firm’s stock.

Next, Kate Litvak presented Sarbanes-Oxley and the Cross-Listing Premium, which builds on a previous paper that found, by way of an event study, that Sarbanes-Oxley was followed by a decrease in the stock prices of foreign firms subject to its requirements compared to foreign firms not subject to the Act.  The new paper adds to that analysis by showing that the cross-listing premium that foreign firms get by listing on an American exchange decreased following the passage of SOX, and that the biggest losers were smaller firms, a result consistent with the intuition (also explored by Ehud Kamar in this piece) that SOX’s reporting requirements are most onerous for small firms. 

Finally, Roberta Romano presented Institutional Investors and Proxy Voting: The Impact of the 2003 Mutual Fund Voting Disclosure Regulation (the piece is co-authored with Martijn Cremers).  The article offers evidence suggesting that mutual funds are not less likely to support management-sponsored proposals on executive equity compensation plans, as advocates of disclosure reform argued.  Indeed, mutual fund support for manager-sponsored proposals has increased.  The paper suggests–but does not conclude–that this counterintuitive result may be explained by the fact that managers of firms with more mutual fund ownership are more likely to sponsor executive equity compensation plans. 

Tomorrow morning the ALEA turns to new papers on hedge fund activism and executive pay.  We’ll be sure to post an update (with links to these exciting new papers) when the Conference wraps up tomorrow night.