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E-MailThis year’s meeting of the American Law and Economics Association, hosted here at Harvard Law, wrapped up today with three different panels featuring the latest scholarship on corporate governance. Today’s panelists offered papers on hedge funds, stock market efficiency, and executive pay, all cutting-edge subjects for those interested in corporate governance. For those of you who couldn’t join us here in Cambridge, I provide below a brief summary of the authors’ presentations as well as links to the excellent papers we discussed today.
The first panel, chaired by Eric Talley, emphasized new work on hedge funds. Randall Thomas first presented Hedge Fund Activism, Corporate Governance, and Firm Performance (co-authored by Alon Brav, Wei Jian, and Frank Partnoy). The authors analyze the first wave of hedge fund “activism (over 350 acquisitions of at least a 5% stake in public firms undertaken by more than 100 hedge funds) and find that such activism results in higher returns for shareholders, especially when the fund persuades management to change its strategy. The authors contend that their findings undermine the notion that hedge fund “activism” is little more than short-term arbitrage in disguise, a view perhaps most prominently set forth in this memorandum by Martin Lipton. Emanuel Zur next presented Hedge Fund Activism (co-authored with April Klein), which examines a large sample of block acquisitions by hedge funds and concludes that funds are able to persuade management to acquiesce to their demands more than 60% of the time–perhaps, the authors suggest, because the fund can credibly threaten to engage managers in a lengthy and costly proxy fight. Finally, Douglas Cumming presented his new paper with Li Que, A Law and Finance Analysis of Hedge Funds, which analyzes a cross-country sample of hedge fund regulation and performance and concludes that regulation of hedge funds decreases returns, increases fixed fees, and lowers performance fees that align fund managers’ incentives with those of investors. The authors are therefore skeptical of the desirability of increasing regulation of hedge funds here in the United States.
The second panel, chaired by Henry Hansmann (co-author, with Reinier Kraakman and Richard C. Squire, of Law and the Rise of the Firm, recently recognized as one of the best 10 corporate law articles of 2006), focused on the relationship between stock market efficiency and firm governance. Art Durnev presented Erroneous Accounting and Industry Investment Efficiency (co-authored by Claudine Mangen), which argues that the stock market punished the shares of competitors of firms plagued by accounting scandals not because of “contagion” of the industry by the scandalized firm but because the accounting fraud caused the firm’s competitors to overinvest. Jesse Fried next discussed Deviations from Contractual Priority in the Sale of VC-Backed Firms (co-authored by Brian Broughman), which shows that venture capitalists often surrender their contractual right to cash-flow priority in order to facilitate the sale of the firm–especially when governance arrangements give common shareholders the power to impede a sale. Finally, Luigi Zingales presented Who Blows the Whistle on Corporate Fraud? (co-authored with Alexander Dyck and Adair Morse), which analyzes a sample of 243 major corporate frauds and concludes that employees and the media bring the lion’s share of securities fraud to light. (The authors seem as puzzled as I am as to why employees would have an incentive to do so, although the qui tam provisions of the False Claims Act provide some explanation.)
The final panel, chaired by Jeffrey Gordon, featured the latest empirical analysis on executive compensation. Urs Peyer presented both of his papers with Yaniv Grinstein and Lucian Bebchuk, Lucky Directors and Lucky CEOs. (Lucian elaborated on these pieces for our readers in this post.) Lucky CEOs argues that the dates of CEO stock option grants fall on the day of the month on which the stock price is lowest (and thus the grant is worth the most) far more frequently than they would have by chance alone, and shows that such “luck” is correlated with lower-quality corporate governance. (Lucky Directors shows that a similar pattern persists with option grants to directors, suggesting that directors also face an agency cost when evaluating the desirability of opportunistic option-grant timing.) Next, K.J. Martijn Cremers presented his piece on Pay Distribution in the Top Executive Team (also co-authored by Urs and Lucian), which argues that CEO’s share of aggregate pay for the top-five paid officers has been increasing over the past decade, and that an increase in the CEO’s share is associated with, among other things, lower firm value. David Walker concluded the proceedings with Unpacking Backdating: Economic Analysis and Observations, which argues that, although the media has generally overestimated the amount of pay conferred by way of option backdating (because most firms accused of backdating have stocks with high equity volatility, reducing the effect of a decrease in exercise price on the option’s Black-Scholes value), backdating has nevertheless skewed executive pay datasets by reducing the apparent value of options reported to shareholders.
For fans of corporate governance scholarship, this year’s ALEA Conference certainly did not disappoint, offering the latest work on the most salient policy questions in corporate law. Those considering legislation on these issues would do well to start with the empirical analysis presented by the ALEA’s panelists this weekend.
