Monthly Archives: December 2008

Key Issues for Directors

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Saturday, December 20, 2008
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This post is by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

At the end of each year, we list what we think will be the key issues for directors in the new year. Some issues continue to be relevant from year to year; others are new or come to the forefront due to current events. This year the economic crisis affects all the issues. The following is an updated list:

1. The risk oversight function of the board of directors has never been more critical and challenging than it is today. In the context of the current global economic crisis, companies now face risks that are more complex, interconnected and potentially devastating than ever before. The public and political perception that undue risk-taking has been central to the breakdown of the financial and credit markets is leading to an increased legislative and regulatory focus on risk management and risk prevention. In this environment, directors must be mindful of the possibility that courts will apply new standards, or interpret existing standards, to increase board responsibility for risk management.

2. Monitoring balance sheet issues, including leverage, liquidity, debt maturities, share buybacks and dividend policy, in light of the economic crisis, and dealing with the problem of underwater pension and other employee benefit plans.

3. Assuring shareholders and other constituents (including regulators) that the CEO and senior management are being properly evaluated and that there is a frequently reviewed management succession plan.

4. Dealing with executive compensation, not only in light of normal sensitivities, but also to address the current perception that poorly structured executive compensation programs encouraged excessive risk-taking and contributed to the economic crisis. Directors will need to develop specially tailored executive compensation programs to comply with new regulations and to minimize criticism, but at the same time enable the company to attract and retain the best available executives and reward outstanding performance.

5. Regularly reviewing that the CEO and senior management are setting “tone at the top” that stresses professionalism, integrity, transparency, risk management, legal compliance and high ethical standards.

6. Striking the right balance in responding to shareholder corporate governance initiatives, accepting those that do not interfere with management of the business and rejecting those that impede the achievement of long-term success and shareholder value.

7. Anticipating attacks by activist hedge funds seeking management, structural or strategy changes to boost short-term stock prices at the expense of long-term value, and developing business, financial and legal strategies to avoid or counter them.

8. Maintaining collegiality and the culture of a common enterprise with the CEO and senior management, while continuing to enhance monitoring of performance, risk management and compliance in response to sharply increased pressure from Congress, shareholders, regulators and employees brought about by the economic crisis.

9. As the current economic crisis grows more severe, navigating the dangerous shoals when a company has solvency issues that create a conflict between the interests of shareholders and creditors.

Unlocking Credit Markets

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, December 19, 2008
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The post below is an op-ed piece published by Lucian Bebchuk and Itay Goldstein in the Financial Times this morning. The op-ed piece builds on Bebchuk and Goldstein’s discussion paper, Self-Fulfilling Credit Market Freezes, and on Bebchuk’s discussion paper, Unfreezing Credit Markets, both just issued by the Harvard Law School Program on Corporate Governance.

An important aspect of the economic crisis has been the drying up of credit that US banks normally extend to Main Street companies. Borrowing by businesses remains costly and difficult, with spreads between yields on corporate bonds and treasuries at extremely high levels.

Why does credit fail to flow despite the infusion of so much additional capital into the financial sector? The Treasury has been arguing that banks still lack confidence and we just need to give them time to adjust. The chair of the congressional oversight panel has suggested that banks’ reluctance to lend reflects their rational assessment of borrowers’ bleak prospects. But there is a third explanation: banks may not be lending because of their self-fulfilling expectations that other banks will not lend.

In a modern economy, the prospects of businesses are likely to be interdependent, with each company’s success (and ability to repay) depending on whether other companies obtain financing. Companies commonly use components and services from other businesses and often sell their output to other companies or their employees.

Consider a bank choosing whether to lend to companies or park its capital in treasuries. Suppose that lending to any given company will generate an expected return of 10 per cent if other businesses obtain financing but an expected loss of 5 per cent if they do not. In such circumstances, the economy might get stuck in an inefficient credit freeze in which banks expect other banks to avoid lending and, given these expectations, rationally choose to hoard their capital to avoid the expected loss from lending when other banks do not.

Unfortunately, we cannot count on interest rate cuts and capital infusions into banks to get the economy out of such a credit freeze. Even if banks have ample capital and the yield on treasuries is barely positive, not lending and avoiding the 5 per cent expected loss will remain each bank’s rational choice as long as other banks are not lending.

Is there anything more the government could do? Yes, it can go beyond intervening at the level of the financial sector and intervene in lending to companies. It can take upon itself some of the credit risks involved in extending substantial new lending to businesses.

Suppose that the government wishes to get at least $200bn of additional lending to companies. Under one possible mechanism, the government would facilitate banks’ putting together a diversified portfolio of newly originated loans by agreeing to bear part of any losses to the portfolio, in return for a share of the upside. In the example considered above, to induce banks to put together a portfolio of new loans, it would be sufficient for the government to agree to bear any losses to the portfolio of up to 10 per cent of the value of the extended loans.

The share of the upside received by the government could be determined through a competitive process. Banks would submit bids indicating the share they would be willing to offer and the government would accept the highest offers that would collectively produce additional lending of $200bn.

Under an alternative mechanism, the government would place $200bn in a number of funds. Each would be run by a private manager charged with putting together a portfolio of loans and compensated with a share of the profits generated by the fund.

Under each of these mechanisms, the party putting together the portfolio of new loans (the bank or the fund’s manager) would have incentives to lend only to companies with good projects. And the government’s taking upon itself credit risks would directly lead to $200bn flowing to companies.

But the programme’s contribution to producing a credit thaw would go much beyond this direct effect. With many companies expected to receive financing, banks’ willingness to lend their own capital, which they might otherwise elect to hoard, would increase. Furthermore, to the extent that the programme would produce a credit thaw, the programme’s costs to the government would be limited, because the credit risks the government took upon itself would not materialise.

When capital infusions and interest rate cuts fail to produce a credit thaw, the mechanisms we propose might provide effective tools for unfreezing credit markets.

Leadership in Challenging Times

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, December 18, 2008
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In New York City on December 2, executives, board directors, institutional investors, regulators and others gathered for the Directorship Boardroom and Economic Leadership Forum “The Way Forward: Leadership in Challenging Times.” The annual event recognizes the Directorship 100, a list of the most influential people on corporate governance and in the boardroom, and included day-long panel discussions, workgroups and peer group exchanges that focused on the financial crisis, the new Administration and Congress, and the forthcoming proxy season. (For a post on this Blog about the Directorship 100, see here). Speakers included Congressman Barney Frank, former Congressman Michael Oxley, Vanguard founder John Bogle, former SEC Chairmen William Donaldson and Harvey Pitt and — from Harvard Law School — professor Lucian Bebchuk and Delaware vice-chancellor Leo Strine, Jr., who serves as a visiting professor and a senior fellow of the Corporate Governance Program.

Two panel discussions and the keynote address attracted intense interest. The first panel discussion, involving William Donaldson, Martin Lipton, Harvey Pitt, and Leo Strine and moderated by The New York Times’ Andrew Ross Sorkin, considered the outlook for regulation, legislation, and litigation. None of the panelists disputed the need for financial regulatory reform. Pitt was the most specific about the reforms required. Regulatory reform was required quickly as the current system was badly broken and threatened freedoms we cherish, Pitt said during the panel discussion and an earlier session. He recommended reforms to clarify the scope of each regulator’s authority so that when problems arose regulators would know with certainty whether they could respond and others could identify the regulator that could act – and act dispositively. To provide transparent, fully informed markets, he encouraged regulators to compel the disclosure of information about all financial markets. This could be done in the short term. In the longer term, he recommended the consolidation of federal regulators into the Federal Reserve and a single other regulator, saying that the Treasury’s Blueprint for a Modernized Financial Regulatory Structure should be considered only the beginning of the analysis that was required.

In discussing the role the board of directors could play in regulatory reforms, Lipton cautioned against looking to the board to do what it was incapable of doing and noted that many independent directors lacked in-depth knowledge of their company’s business. He compared this situation unfavorably with boards in earlier decades that had often included the company’s investment banker and commercial banker – people who understood the business and could engage in a robust exchange with other board members.

Donaldson took the position that directors have taken their job more seriously since the passage of the Sarbanes-Oxley act and asserted that investor protection should not be overlooked in any financial regulatory reforms. Strine agreed that boards have become much more responsive to stockholder demands in recent years, including demands by activist investors that companies take more risks to generate very high profits. He noted that strong safety and regulation was more, not less important, when stockholder voice was potent, especially given that institutional investors who represent long-term stockholders have generally failed to make monitoring for excessive risk and leverage a centerpiece of their activism.

Lipton also discussed the need for regulators to understand the products and transactions they regulate. Today, professionals with PhDs often design complex financial instruments and if regulators are to regulate them, they will need to understand the instruments properly. Regulatory design needed to reflect this reality.

The second panel discussion, involving Professor Lucian Bebchuk and former Congressman Michael Oxley and moderated by The Wall Street Journal’s Alan Murray, considered how the credit crisis can be expected to affect corporate governance. Mr. Oxley contrasted the current regulatory environment with the conditions prevailing when the Sarbanes Oxley legislation was adopted, commenting that the current crisis could not be characterized as a scandal involving criminal misconduct. He doubted that criminal behavior would be found to have contributed to the crisis and said we would likely find that bad decisions had been made by good people. Lucian Bebchuk suggested that flawed compensation practices have been an important driver of the short-term outlook of corporate managers that contributed to the current crisis, and described how compensation packages can be redesigned to provide managers with incentives to maximize long-term shareholder value.

In his keynote address, Congressman Frank gave his own assessment of the financial crisis and discussed Congress’ likely response. He characterized the financial crisis as a failure of techniques to constrain risks in the securitization of assets. Explaining how regulation had failed to keep pace with financial innovation, Frank said the challenge now for Congress was to legislate to retain the benefits of securitization while mitigating its risks. Congressman Frank canvassed numerous possible regulatory reforms regarding securitization for Congress to consider, including mandating increased disclosure standards, altering compensation arrangements of participants in the chain of securitization, and requiring participants to retain some risk rather than distributing all of it.

In other comments, Frank expressed a concern that, given that banks now have ample capital, the continued difficulty of getting credit might reflect banks’ rational assessment that operating firms will not be able to repay funds lent to them. He also questioned the rationale for current remuneration practices of executives receiving large bonuses for doing their jobs well. Other professionals, such as dentists, he said, don’t receive financial incentives to align their interests with those of their patients, and he asked why directors needed the promise of great financial rewards for good performance. On the reform front, Congressman Frank expressed support for proposals to allow shareholders to set broad policy of corporations and said that Congress will likely consider say-on-pay reforms and giving shareholders access to the corporate ballot.

Survey of Literature on Boards of Directors

Posted by Michael S. Weisbach, Fisher College of Business at The Ohio State University, on
Wednesday, December 17, 2008
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This post is by Michael S. Weisbach of Ohio State University.

Renée B. Adams, Benjamin Hermalin and I have recently completed a survey of the literature on boards of directors, with an emphasis on research done in the last five years. This survey updates and expands significantly the survey I completed with Benjamin Hermalin in 2003. In the 2008 survey, we focus on how the literature, theoretical and empirical, deals with the complications that arise from the joint endogeneity of board makeup and board action.

Given that all corporations have boards, the question of whether boards play a role cannot be answered econometrically as there is no variation in the explanatory variable. Instead, studies look at differences across boards and ask whether these differences explain variations in the way firms function and how they perform. The board differences that one would most like to capture are differences in behavior. Unfortunately, outside of detailed field work, it is difficult to observe differences in behavior and harder still to quantify them in a way useful for statistical study.

Some help with the heterogeneity issue could be forthcoming from more theoretical analyses. The common perception of the literature on corporate governance, particularly related to boards of directors, is that it is largely empirical. However, such a view overlooks a large body of general theory that is readily applied to the specific topic of boards. Unfortunately, this literature also has some shortcomings. Often, a simplified, and thus tractable model can produce theoretical results that are unattainable in practice. To an extent, this problem can be finessed by restricting attention to incomplete contracts. However, the assumption of incomplete contracts can fail to be robust to minor perturbations of the information structure or the introduction of a broader class of mechanisms. A further issue is that corporations are complex, yet, to have any traction, a model must abstract away from many features of real-life corporations.

We organize our survey into four main sections that address four key questions about directors: What do directors do? What are the issues related to board structure? How do boards fulfill their roles? What motivates directors? Throughout the paper, we suggest that many studies of boards can best be interpreted as joint statements about both the director selection process and the effect of board composition on board actions and firm performance.

The full paper is available for download here.

Daniel Kaufmann Farewell Lecture

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, December 16, 2008

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Daniel Kaufmann recently gave his farewell address as the outgoing Director of Global Programs at the World Bank Institute. Kaufmann is widely recognized as a leading expert, researcher, and policy adviser on governance and development. Among other activities, Kaufmann was a key figure in the Worldwide Governance Indicators research project, which designed improved measures of public sector governance quality such as corruption, the rule of law, and regulatory quality (the latest version is available here).

At the standing room only event, Kaufmann described his professional journey, the influence of his numerous experiences around the world on his personal development, and his views on the current state of the anti-corruption and governance movement which has defined his career. In Kaufmann’s view, the governance and anti-corruption drive is currently in a silent crisis since concrete reforms have lost steam in recent years. He argued that this silent crisis is directly connected to the more visible financial crisis, which arose in part due to governance and corruption failures. Therefore, he suggested that the current environment provides an opportunity for the international donor community and its key institutions to re-evaluate their business model to enhance governance and improve transparency, and create an open environment in which we can better address the pending challenges of governance, state capture, corruption, human rights, and freedom of expression.

A video of the entire lecture is available here. (video no longer available) The PowerPoint slides used in the lecture are available here. In addition, Kaufmann maintains his own blog at www.thekaufmannpost.net, which contains links to his papers and other governance related sites and material, as well as some posts that are related to many of the points he made during his farewell lecture.

Taxes and the Backdating of Stock Option Exercise Dates

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, December 15, 2008
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This post comes from Shane Heitzman at the University of Rochester Simon Graduate School of Business, Dan Dhaliwal at the University of Arizona and Merle Erickson at the University of Chicago Graduate School of Business.

In our paper “Taxes and the Backdating of Stock Option Exercise Dates”, which was recently accepted for publication at the Journal of Accounting and Economics, we investigate the opportunistic timing of stock option exercises by insiders. We focus on a group of exercises where there likely exists both the incentive and the ability to backdate an option exercise: exercises paid in cash where the insider holds the acquired shares. Once the decision to exercise is made, insiders who plan to hold the acquired shares have an unambiguous personal tax-based incentive to exercise on the day with the lowest possible stock price. Unlike exercises in which the acquired shares are sold immediately through a broker, these exercise-and-hold transactions are often accomplished in-house. Thus, we expect that opportunistic backdating, to the extent it exists, is more likely to occur in exercise-and-hold transactions. We find that exercise-and-hold transactions tend to occur at monthly stock price lows. Before SOX, we find that 13.55% of exercise-and-hold transactions by CEOs occurred on the day the stock was at its lowest price during the month (i.e. suspect exercises). After SOX, only 7.20% of CEO exercise-and-hold transactions occurred on that day.

Consistent with the prediction that backdating an exercise-and-hold transaction is driven by personal tax considerations, we find that the likelihood of a suspect exercise is increasing in the potential taxes saved by the option holder from exercising on the day of the month with the lowest closing price before SOX, but not after SOX. Finally, suspect exercises are more likely in small firms. While this finding is consistent with the conclusion that backdated exercises are more likely when the firm has a relatively weaker internal control environment we also find that the probability of a suspect exercise is not consistently related to common proxies for corporate governance based on the subsample of observations with available governance data.

We estimate that our sample of CEOs saved an average of $96 thousand in taxes per exercise by exercising on the day of the month with the lowest closing stock price. These tax savings make up only about 3.2% of the total value of the options exercised, and are even smaller at the median. Given that filing a false tax return can be a felony, can result in individual level penalties in excess of $100 thousand (among other costs), and can have significant adverse consequences for the firm and shareholders, the tax savings realized by CEOs through suspect option exercises seem remarkably modest. One likely explanation is that insiders believed the probability of getting caught was low enough to justify the risk. We also find that the firm’s foregone tax benefits from suspect exercises are of similar magnitude to the taxes saved by the CEO.

Finally, we find that suspect exercise-and-hold transactions are more likely in firms with a higher likelihood of stock option grant backdating. For the sample of exercise-and-hold transactions by insiders of firms under scrutiny for option grant backdating as listed in the Wall Street Journal’s “Options Scorecard”, we find that 21.53% of exercises by CEOs and 18.41% of exercises by non-CEOs occurred on the day the stock was at its lowest price during the month. That is, insiders from firms with alleged grant backdating practices were more likely to have a suspect exercise than other insiders. We also find that the firm-specific odds of option grant backdating are positively associated with the frequency of suspect exercises among firms not mentioned in the Wall Street Journal’s list. Together with the remainder of this study, our analysis provides additional evidence on the magnitude and determinants of opportunistic behavior associated with executive stock options.

The full paper is available for download here.

The Board’s Role in Corporate Strategy

Posted by Andrew Tuch, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, December 14, 2008
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This post comes to us from Bill Baxley and Jeff Stein at King & Spalding.

Corporate strategy is a difficult undertaking for directors, even in the best of times. While management draws on significant resources to develop and refine corporate strategy, directors have fewer opportunities to contribute to the endeavor. It is not surprising then that while CEOs suggest that participating in corporate strategy is the second most important activity that their boards undertake, they give their boards only the 11th highest grade for their performance in this realm. “What’s the board’s role in strategy development?: Engaging the board in corporate strategy”, David A. Nadler, Strategy & Leadership, Vol. 32 No. 5, 2004. The difficulty of developing corporate strategy, as well as the stakes involved, increase significantly in times of economic crisis such as we are facing today.

Against this background and facing the current economic crisis, the Lead Director Network, a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies created by King & Spalding and Tapestry Networks, met on November 3, 2008 to discuss the role of the board in corporate strategy. Following this meeting, King & Spalding and Tapestry Networks have published the ViewPoints report, to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of this important subject. The following provides highlights from the meeting, as described in this ViewPoints report.

Greater Involvement of Boards in Corporate Strategy. Members of the Lead Director Network observed that boards have become significantly more involved in corporate strategy in recent years. This increased involvement might be attributable to boards being more proactive, generally, since the corporate scandals in the early part of this decade, the rise of activist investors, and directors’ own efforts to become more engaged in corporate strategy, particularly when their companies are undergoing rapid changes or facing turbulent events.

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The Financial Crisis and the Business Judgment Rule

Posted by Robert J. Giuffra, Jr., Sullivan & Cromwell LLP, on
Saturday, December 13, 2008
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This post is by Robert J. Giuffra, Jr. of Sullivan & Cromwell LLP. Sullivan & Cromwell LLP advised the boards of both Bear Stearns and Wachovia in the transactions discussed in this post. This Blog recently published a post, available here, about the JPMorgan/ Bear Stearns decision. Today’s post analyzes this decision as well as the similar decision by the North Carolina Superior Court arising from the Wachovia/ Wells Fargo merger.

My firm has issued a memorandum that discussed the recent judicial decisions arising from the mergers of JPMorgan and Bear Stearns in March and of Wells Fargo and Wachovia in October. The two decisions — In re Bear Stearns Litigation, No. 600780/08 and Ehrenhaus v. Baker et al., No. 08 CVS 22632 — offer the first indication of how courts will evaluate board decisions made in response to the extraordinary conditions created by the ongoing financial crisis. Both opinions stand as strong endorsements of the protections offered by the business judgment rule for directors who act diligently and in good faith in making major corporate control decisions during this crisis. Their holdings have several important implications:

• First, these cases suggest that courts are cognizant of the extreme conditions created by the financial crisis, and will take into account the overwhelming financial, governmental, and time pressures boards of directors are facing when evaluating whether board decisions are entitled to the protections of the business judgment rule.

• Second, these cases suggest that courts are aware of the uncertainties created by regulatory and legislative responses to the financial crisis, and that courts will not fault boards for failing accurately to predict these governmental responses.

• Third, despite the broad deference these courts have given board decisions made in response to the financial crisis, the Wachovia decision suggests that courts still may be willing to invalidate or enjoin provisions – such as the 18-month bar on redeeming Wells Fargo’s preferred shares – that the court believes will prevent boards from fulfilling their fiduciary duties.

The memorandum is available here.

Market-Based Corrective Actions

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, December 12, 2008
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This post comes to us from Itay Goldstein of the Wharton School at the University of Pennsylvania.

In my paper Market-Based Corrective Actions (co-written with Philip Bond and Edward Simpson Prescott), which I recently presented at the Law, Economics and Organizations seminar, my co-authors and I derive a model that examines the idea that financial-market prices provide useful and important information about firms’ fundamentals.

Many economic agents take corrective actions based on information inferred from the market prices of firms’ securities. In corporate governance, it is widely believed that low market valuations trigger the replacement of CEOs by the board of directors or attract various actions by shareholder activists. In bank supervision, regulators are frequently encouraged to learn from market prices of bank securities before making an intervention decision. Even corporate managers are believed to be influenced by market prices of their firms’ securities when making a decision to invest or acquire another firm.

We provide an equilibrium analysis of such situations in light of a key problem: if the agent uses market prices when deciding on a corrective action, prices adjust to reflect this use and potentially become less revealing. For example, if the board knows that the CEO is of low quality they will replace him. This corrective action will benefit the shareholders of the firm and thus increase the price of its shares. So inferring information from the price about the quality of the CEO is a challenge: a moderate price may indicate either that the CEO is bad and that the board is expected to intervene and replace him, or that the CEO is not bad enough to justify intervention. We show that there is a strong complementarity between market information and the agent’s information, so that a market-based corrective action leads to the agent’s preferred outcome only when the information gap is not too large. We demonstrate that the type of security being traded matters, and discuss other measures that can increase the efficiency of learning from the market.

The full paper is available for download here.

US Securities Regulation and Global Competition

Posted by Howell Jackson, Harvard Law School, on
Thursday, December 11, 2008
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This post is by Howell Jackson of Harvard Law School.

A forthcoming issue of the Virginia Law & Business Review entitled “US Securities Regulation and Global Competition” will feature articles by Eric Pan and myself, Stavros Gadinis, and Andreas M. Fleckner on international aspects of United States securities regulation. The articles in this symposium issue have important implications for the ongoing debate over competition among markets internationally for issuers of securities as well as for the role played by US securities regulations in the apparently declining competitiveness of US capital markets. In an introduction to the issue, Donald Langevoort characterizes all three articles as exploring different aspects of the bind that U.S. securities regulation now faces in balancing demands for more intense supervisory oversight with pressures to improve U.S. capital market competitiveness in the face of mounting international competition.

In “Regulatory Competition in International Securities Markets: Evidence from Europe – Part II ,” Eric Pan and I return to the study of capital raising practices of foreign firms. We began this project nearly a decade ago at a time when U.S. corporate law scholars were debating the theoretical merits of a regime of “issuer choice” in which firms would be permitted to choose the legal regime governing the sale of and trading in issuer securities. Our goal was to move beyond theoretical debates by interviewing market professionals to ascertain exactly how firms were deciding in which markets to raise capital and to probe the extent to which mandatory legal regimes were constraining.

Our new article is the second half of this research project and draws on evidence gained from some four dozen in-depth interviews conducted in 1999 with lawyers and market professionals in London and other major European markets. The first article in the project, which is available here, presented evidence concerning capital raising practices within the European Union. The second article, which is now forthcoming in the Virginia Law & Business Review, focuses on practices of European issuers seeking to raise capital in the US. Our results are of particular relevance to recent debates over the effect of the Sarbanes-Oxley Act on foreign issuers as our survey took place shortly before that Act was passed. Significantly, our article provides evidence that during this earlier period US investors were tending to prefer to execute transactions on European trading markets as opposed to parallel markets established in the US, such as ADR listings. In other words, many aspects of the decline in U.S. capital markets competitiveness that some have associated with the enactment of the Sarbanes-Oxley Act were in evidence well before the passage of that Act.

In the article, Eric and I present a range of evidence on the capital raising choices available to European issuers seeking to raise capital in the US and how they weighed the pros and cons of these choices. We test our findings against statistical evidence and other academic writings on the subject and discuss the implications of this aspect of our analysis on the debate over regulatory competition. The article also presents survey data about the efficacy of SEC supervision of foreign issuers seeking access to public markets as well as information pertaining to legal fees and other direct expenses that European issuers incurred when they raised capital in the US in the late 1990s. While the additional costs and regulatory impediments of the public U.S. offering process imposed a burden on foreign issuers seeking access to U.S. public markets at the time, market developments, including the rise of European capital markets and the availability of alternative mechanisms to reach most U.S. investors, seem to have played a more important role in the declining relative attractiveness of U.S. public listings.

The paper by Stavros Gadinis, “Market Structure for Institutional Investors: Comparing the US and the EU Regimes,” considers the rules governing stock exchange market structure: Regulation NMS (“National Market System”) in the United States and the EU Directive on Markets in Financial Instruments (“MiFID”) in the EU. Focusing on issues of regulatory design, the article compares the US and EU regimes to explore which policy can better achieve its stated goals. In particular, the paper examines the impact of these policies on the major contributors to equity trading volume in the last decade: institutional investors. It argues that US rules result in higher liquidity costs for institutional investors and may harm the informational efficiency of US markets. The paper is available here.

In “FASB and IASB: Dependence Despite Independence,” Andreas M. Fleckner focuses on the organizational structure of the Financial Accounting Standards Board and the International Accounting Standards Board and their susceptibility to outside influence. The paper considers the integration of each Board into its respective parliamentary system as well as the exposure of each Board to financial, political and national influences. The paper shows that, in principle, both Boards are organized independently from private and governmental influence, but that neither Board is immune to outside influence. It refers to recent examples of both Boards being subjected to outside influence and, when put under pressure, making concessions that jeopardized their independence. The paper is available here.

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