Yearly Archives: 2009

FDIC Releases Policy Statement Restricting Private Equity Investments in Failed Banks

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on
Friday, August 28, 2009
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This post is based on a Wachtell, Lipton, Rosen & Katz client memorandum prepared by Edward D. Herlihy, Richard K. Kim, Lawrence S. Makow, Nicholas G. Demmo and Matthew M. Guest.

The FDIC issued yesterday its final policy statement on private equity investments in failed banks. In early July, the FDIC issued a proposed policy statement containing stringent restrictions on these types of transactions. While the final policy statement relaxes some of these limitations, it continues to impose significantly higher requirements for private equity investors seeking to acquire failed banks than for strategic acquirors.

• Scope. Although the FDIC’s policy is generally viewed as focused on private equity investments, the policy is worded more broadly and applies to “private investors” – a term which is not defined in the policy. The earlier proposal applied to “private capital investors” and contained language, which has since been omitted, that made it clearer that the focus was private equity investors. In contrast, the policy statement does not apply to, and in fact encourages investment structures where private equity investors acquire a failed bank in conjunction with a bank or thrift holding company with a successful track record where the bank/thrift holding company has a strong majority interest in the resulting bank or thrift.

• Capital Support. Investors will be required to commit that an acquired depository institution be capitalized at a minimum 10% Tier 1 common equity ratio for at least three years following acquisition. The FDIC had previously proposed a minimum 15% Tier 1 leverage ratio – a higher number but a different measurement. The Tier 1 common equity ratio was a key measurement for the recent stress tests conducted by the Federal Reserve on the largest U.S. banks, but before then was not typically used as an explicit measure of regulatory capital. (In order to pass the stress test, banks were required to have sufficient common equity to achieve a Tier 1 common equity ratio of at least 4% at year-end 2010 under a hypothetical economic scenario.) Under the FDIC’s final rules, failure to meet the 10% Tier 1 common equity ratio would result in the institution being treated as “undercapitalized” for purposes of Prompt Corrective Action. This designation triggers strong regulatory measures, such as a requirement that the institution file a capital plan, restrict the payment of dividends and restrict asset growth.

• Source of Strength. Previously, the FDIC had proposed that investment vehicles would be expected to serve as a source of strength for their subsidiary depository institutions and would be expected to sell equity or engage in capital qualifying borrowings as necessary. The final policy does not contain this requirement.

• Cross Support of Affiliated Institutions. Investors and investor groups whose investments constitute 80% or more of the investments in more than one depository institution must pledge to the FDIC their proportionate interests in each such institution to pay for any losses to the Deposit Insurance Fund resulting from the failure of, or FDIC assistance provided to, the other affiliated institutions.

• Minimum Holding Period. Investors are prohibited from selling or otherwise transferring securities of the investors’ holding company or depository institution for a three-year period following the acquisition, unless the FDIC has approved the sale or transfer.

• Bar on Affiliate Transactions. All extensions of credit to investors, their investment funds, and any of their affiliates, by a depository institution acquired from receivership are prohibited.

• Bank Secrecy Law Jurisdictions. Investment structures involving entities domiciled in bank secrecy jurisdictions would not generally be eligible to own an interest in a depository institution acquired from receivership, unless they are subsidiaries of companies located in countries that exercise comprehensive consolidated supervision as recognized by the Federal Reserve and commit to provide extensive information to the FDIC.

• Ability of Existing Investors to Bid on a Failed Depository Institution. Investors that hold 10% or more of the equity of a depository institution that fails would not be eligible to bid on the institution once it is in receivership.

• Extensive Disclosure. Investors would be expected to submit to the FDIC detailed information about themselves, all entities in the proposed ownership chain, the size of the capital fund or funds, their diversification, the return profile, the marketing documents, the management team and the business model.

Private equity investors already face significant regulatory obstacles in bidding on failed banks. Since becoming a bank or thrift holding company and submitting to consolidated regulatory supervision is not practical for most private equity investors, investors need to satisfy the Federal Reserve (in the case of bank acquisitions) and the Office of Thrift Supervision (in the case of thrift acquisitions) that they will restrict themselves to largely passive roles. At the same time, they strive to ensure the placement and maintenance of competent management with the wherewithal to engineer a turnaround. There remain powerful arguments for the banking system to tap the investment resources available to private equity. Whether the FDIC’s final policy has changed enough to permit private equity to participate in acquiring failed banks remains to be seen.

Guaranteed Bonuses Can Induce Risk-Taking

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 27, 2009
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(Editor’s Note: This post is based on an op-ed piece by Lucian Bebchuk published today on Wall Street Journal Online and available here.)

Financial firms seeking to attract and retain talent are reported to be making a substantial use of guaranteed bonuses, and the French Economy Minister recently called for limits on guaranteed bonuses. While many now focus on how using guaranteed bonuses affects the level of pay, it is important to recognize their effect on incentives. Guaranteed bonuses create perverse incentives to take excessive risks, and they consequently could well be worse for incentives than straight salary.

Introducing a guarantee into a bonus plan eliminates some downside risk but leaves the bonus compensation sensitive to performance on the upside. At first glance, a bonus plan with such a guarantee seems superior in terms of incentives to a fixed payment that isn’t sensitive to performance on either the upside or the downside. A closer inspection, however, reveals that the incentives produced by such a plan could well be counter-productive.

Consider a bank that sets annual compensation for an executive running a trading unit that is expected to generate between zero and $100 million in profit at the end of the year. Suppose that the bank was initially considering a fixed salary of $1 million and a bonus plan rewarding the executive with $1 million for each $10 million of profit – a plan that, depending on the unit’s performance, would provide the executive with an amount between $0 and $10 million. And assume also that, concerned about losing the executive to competitors, the bank decides to guarantee the executive’s getting a bonus of at least $5 million and thus a total compensation of at least $6 million.

The introduction of a $5 million floor for the bonus would insulate the trader from the downside risk of low profit levels: the trader would get the same bonus amount of $5 million whether the unit’s profits are zero or $50 million. But the bonus plan would still give the trader an incentive to seek a high profit level: the trader’s bonus would increase by $5 million if the profit is $100 million rather than $50 million.

Thus, compared with an average performance of $50 million in profits, the compensation structure under consideration would produce an extra $5 million in the event of stellar performance but not reduce compensation in the event of poor performance. As a result, the executive’s interest will be served by taking a bet that would increase the odds of a $100 million profit even if the bet would produce an even higher increase in the odds of no profit.

Indeed, taking as given that it’s necessary to provide the executive with a $6 million floor on compensation, a $1 million salary together with a guaranteed $5 million bonus would produce worse risk-taking incentives than a salary of $6 million coupled with a bonus plan that would reward the executive with $500,000 for each $10 million of the unit’s profits. Although this bonus plan would also reward the executive with an extra $5 million in the event profits reach $100 million , it would make the bonus compensation sensitive both on the upside and the downside. As a result, this bonus plan won’t distort risk-taking choices: the executive would take a risk only if doing so would increase the odds of a good outcome by more than it would raise the odds of a bad outcome.

The above discussion has implications that go beyond the question of guaranteed bonuses. It’s now well recognized that bonus plans based on short-term results which may turn out to be illusory can produce excessive risk-taking, and that plans should therefore be structured to account for the time horizon of risks. But even though tying bonus plans to long-term results is desirable, it isn’t sufficient to avoid excessive incentives to take risks. Bonus plans tied to long-term results can still produce such incentives if they reward executives for the upside produced by their choices but insulate them from a significant part of the downside.

Bonus plans that provide executives with such insulation from downsides – either by establishing a guaranteed floor or otherwise – can seriously backfire. Firms setting bonus plans, and regulators monitoring compensation structures, would do well to recognize and pay close attention to this problem.

A Critique of the President’s Financial Regulation Reforms

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 27, 2009
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(Editor’s Note: This post by Richard A. Posner is the second part of a two-part series, and is based on a recent article in Lombard Street; the first part was posted on the Forum here.)

If the proposals in the Obama Administration’s report on financial regulatory reform are adopted, the restriction on the size or form of executive compensation on Tier 1 Financial Holding Companies (FHCs) may be the one that most alarms financial enterprises. Let me turn to that issue.

We should separate issues of compensation of CEOs and other top management from issues concerning the compensation of traders, loan officers, and other financial executives at the operating rather than the management level. The Federal Reserve would be authorized to regulate compensation at both levels, but at the top level the aim would be to make management a more faithful agent of the shareholders, while at the operating level it would be to curb the risk‐taking incentives of financial executives by requiring that much of their compensation be deferred. The deferred component might consist of restricted stock that could not be sold for a period of years. Or the deferred component might consist of cash bonuses that could be recovered by the company if the deals for which the bonuses were a reward later soured.

The two aims—better aligning executives’ incentives with those of the shareholders, and reducing the riskiness of executives’ compensation—are inconsistent. Shareholders are generally less risk averse than executives because they have less stake in the enterprise, as they can diversify away any risk that is peculiar to the enterprise by holding a diversified portfolio of securities. Top executives have much more to lose, in reputation and future earnings prospects, from the collapse of their company.

That means that top executives, provided that they are allowed by the Federal Reserve to remain imperfect agents of the shareholders, have strong incentives to establish procedures that will prevent traders, loan officers, and other subordinate executives from taking excessive risks. But “excessive” from the standpoint of private businessmen means something crucially different from “excessive” as perceived by the Federal Reserve. Risks, including the risk of bankruptcy, that are cost‐justified from a corporation’s standpoint may be unacceptable from a broader social standpoint because of their potential for bringing down the entire financial system, and in its wake the nonfinancial economy as well. But the measures that have been suggested for reducing risk‐taking by traders and other financial executives have their own problems. Many things can affect a stock’s price besides a trader’s deals, as critics of stock options as devices for compensating top executives point out, and retractable cash bonuses (would they have to be placed in escrow?) make it difficult for recipients to manage their finances.

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Using Nonfinancial Measures to Assess Fraud Risk

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, August 26, 2009
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This post comes to us from Joseph F. Brazel of North Carolina State University, Keith L. Jones of George Mason University, and Mark F. Zimbelman of Brigham Young University.

 

In our paper, Using Nonfinancial Measures to Assess Fraud Risk, which is forthcoming in the Journal of Accounting Research, we investigate whether publicly available nonfinancial measures (NFMs), such as the number of retail outlets, warehouse space, or employee headcounts, can be used to assess the likelihood of fraud.

More specifically, we test whether inconsistencies between financial and NFM data can be used to detect fraud. By doing so, we also implicitly provide evidence on whether systematic NFM manipulation is occurring at fraud firms. We also test whether NFMs can be used to detect when a firm’s reported financial performance does not accurately portray its economic performance. This study also expands the NFM literature by providing an empirical test of their potential to verify current financial results, as the extant NFM research looks at the ability of NFMs to predict future firm performance. We believe both roles of NFMs are valuable—one to validate and the other to forecast. We find that the relation between reported financial performance and NFMs can distinguish fraud from non-fraud firms.

Our fraud sample includes firms charged by the SEC with having fraudulently reported revenue in at least one 10-K filing. We do not include frauds that involve quarterly data and we also limit our sample to firms for which we were able to access the original 10-K filing and subsequent filings of restated data. Students enrolled in undergraduate and graduate auditing courses at three universities selected the non-fraud competitors and collected NFM data for our sample of fraud firms. Our sample includes NFMs that are quantitative, non-financial, non-employee related, and relate to firm capacity. Using this matched-pair sample, we document that fraud firms are more likely than non-fraud firms to report inconsistent revenue growth relative to their growth in NFMs. We analyze the growth from the year prior to the fraud to the first year of the fraud for each matched-pair. When we include a variable that measures the difference between a firm’s financial performance and its NFM performance in a model that includes other factors that have been found to be indicative of fraud, we find the difference is a significant discriminator between fraud and non-fraud firms. Thus, we provide evidence showing that comparisons between financial measures and NFMs can be effectively used to assess fraud risk.

Overall, our results provide empirical evidence suggesting that nonfinancial measures can be effectively used to assess the likelihood of fraud.

The full paper is available for download here.

Is the Supreme Court Determined to Expand Corporate Power?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, August 25, 2009
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(Editor’s Note: This essay was written by Robert Monks and Harvard Law School Visiting Professor Peter Murray.)

One of the phrases bandied about during the confirmation hearings for Judge Sonia Sotomayor’s nomination to the United States Supreme Court is “judicial activism” – a tendency of judges to use the cases they decide to implement their own notions of public policy. Of course, all recent Supreme Court nominees have steadfastly denied any shred of judicial activism and have uniformly maintained that the proper role of a judge, even a Supreme Court Justice, is to apply existing law, whether Constitutional, statutory or precedent, to the facts of the case before him or her. No one has been more outspoken against the evils of judicial activism than Chief Justice Roberts.

Now it appears that the Chief may be undertaking a bit of judicial activism of his own. The case is Citizens United v. FEC. The conservative group that sponsored Hillary: The Movie just before the Democratic primary is seeking to avoid or roll back the 2002 McCain-Feingold campaign finance law that prohibits the use of corporate funds to influence elections. Chief Justice Roberts and his conservative Supreme Court majority are getting ready to use Citizens United as the vehicle to overrule established precedent (and overturn carefully drafted legislation) and grant business corporations a constitutional right to use their funds to participate in political debate, not only on public issues, but even in the election of candidates to office. Such a move would be judicial activism on a grand scale!

1. Freedom of Speech for Corporations

Business corporations and their owners have participated in political life in many ways for many years. Corporate lobbying, campaign contributions by business leaders, “soft money campaign support” by businesses, the “revolving door” of businessmen and public servants: these are only a few of the many ways that corporations interact with politicians and political institutions in an effort to influence public action to their advantage. The American public has learned to live with a strong connection between business and politics.

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Financial Decisions and Firm Location

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, August 24, 2009

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This post comes to us from Andres Almazan of the University of Texas, Adolfo de Motta of McGill University, Sheridan Titman of the University of Texas, and Vahap Uysal of the University of Oklahoma.

 

In our paper Financial Structure, Acquisition Opportunities, and Firm Locations, which was recently accepted for publication in the Journal of Finance, we investigate the relation between firms’ locations and their corporate finance decisions. More specifically, we examine whether these choices are related to whether or not the firm is located within an industry cluster, that is, close to many of its industry peers.

We start by developing a simple model that describes the relation between a firm’s location, financial structure and acquisition activities. Our model assumes that firms located in industry clusters have more acquisition opportunities but also face greater competition from other potential acquirers. To take advantage of these opportunities, the firms in clusters maintain more financial slack, because by doing so they can bid more aggressively for acquisitions.

To test this model we examine the extent to which firms located in industry clusters are more acquisitive, the interaction between financial structure, location and acquisition activity, and finally, the extent to which firms in clusters maintain more financial slack. We find that after controlling for industry affiliation, firms located in clusters make more acquisitions, which is consistent with the idea that firms in clusters have more opportunities. In addition, we find that firms with more financial slack tend to make more acquisitions, which is consistent with firms maintaining more slack when opportunities are greater. More importantly, we show that the positive relation between acquisition activity and financial slack is stronger in clusters. If we assume that competition for targets is more intense in clusters then this finding is consistent with our model’s implication that debt plays a more important role when there is competition. Moreover, the fact that this relation is stronger for acquisitions of public targets and within industry targets, which are likely to attract more competition, provides further support for this implication of the model. Our results indicate that firms in clusters have less debt and hold more cash, and these relations continue to hold after controlling for the empirical determinants of capital structure. The relation between financial slack and location is particularly robust and economically significant. After controlling for other determinants of capital structure and cash holdings, firms located in clusters decrease their net market leverage by 19% and increase their cash holdings by 43% with respect to the sample averages.

Since an industry cluster is somewhat of a nebulous concept our empirical tests examine the robustness of our results with respect to a number of cluster definitions. One set of definitions uses the absolute number of firms within an industry in a metropolitan area. A second set defines clusters as the proportion of firms in an industry located in the metropolitan area. Finally, we do an in-depth analysis of the software industry (SIC code 737) since this is an industry with a large number of firms and a very well defined industry cluster in Silicon Valley. We document that firms in high tech cities and growing cities also maintain more financial slack.

The full paper is available for download here.

The Case For Aggressive Enforcement Of The Sarbanes-Oxley “Claw Back” Provison

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Sunday, August 23, 2009
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(Editor’s Note: This post comes to us from Daniel J. Hurson of the Hurson Law Firm LLP, and relates to a recent client memorandum by Mr. Hurson, which can be found here.)

In a recent forum post, John F. Savarese and Wayne M. Carlin of Wachtell Lipton are critical of the SEC’s recent filing of a case against former CEO Maynard Jenkins of CSK Auto Corp., seeking payback of over $4 million in bonuses and stock sale proceeds. The SEC alleges that his company engaged in a massive accounting fraud, requiring a restatement, and thus Jenkins must payback these funds under Section 304 of SOX, the so-called “claw back” provision. Section 304, rarely used in the past by the SEC and never before against a CEO who was not personally accused of fraud, requires repayment to his company of certain bonuses and stock sale profits from a CEO or CFO whose company must make a restatement based on “misconduct.” The SEC pointedly did not accuse Mr. Jenkins of personal participation or knowledge of the fraud.

The Wachtell authors question the SEC’s taking action under Sec. 304 against a CFO not personally accused of fraud, calling it a “regrettable policy choice” and an “unfortunate contribution to the overheated atmosphere surrounding executive compensation.” Other commentators have also questioned the lawsuit, suggesting that it will have unfortunate consequences if successful. They too feel the statute is too ambiguous regarding whose “misconduct” is required to hit the CEO or CFO with claw back actions. The SEC, however, appears very much committed to the case and eager to test its new enforcement agressivness in an area with considerable potential deterrent impact.

In my recent client advisory, published thru the Mondaq news service, I argue the contrary. I believe there should be strict and aggressive enforcement by the SEC under the clear language of Sec. 304 to seek claw back from CEO’s and CFO’s who certify financial statements which ultimately have to be restated. There should be consequences to top managers who give these sweeping certifications to investors only later to have to issue restatements, often disclosing material weaknesses in internal controls or worse, which have the effect of making the certifications worthless. Since several courts have held there is no private remedy under Section 304, the SEC alone bears the responsibility to enforce this provision of SOX and give teeth to the certification requirements.

As I point out in the article, the legislative history, while sparse, supports a broad interpretation of Section 304 in which personal misconduct by the CEO or CFO, as opposed to management in general, is not required. Neither the Bush administration nor either branch of Congress, I submit, intended the statute to require proof that the individual managers from whom claw back is sought have to be proven guilty of personal misconduct. Rather, the fact that they preside over the filing of, and personally certify, financial statements which subsequently have to be restated, often leading to market value declines and substantial costs to the company, is enough to hold them responsible under Section 304 to repay compensation and profits which might not have been awarded or obtained had the truth come out or the weaknesses been corrected.

I further argue that going forward, the SEC should establish clear criteria for future cases, including a better definition of what kind of “misconduct” and materiality meets the threshold for claw back actions. The SEC should also, if it succeeds in the Jenkins suit, seriously consider revisiting the many restatements filed over the past several years, particularly among companies caught up in the present financial crisis, to see if other CEO’s and CFO’s have unduly profited from misstated financials, and initiate similar Section 304 claw back actions against them. In my view, shareholders who relied on the rosy certifications deserve no less.

The Need for a Principled Approach to Compensation Reform

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Saturday, August 22, 2009
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This post by John F. Olson first appeared in BNA’s Corporate Accountability Report. This post was written together with Mark A. Borges, Charles M. Elson, Ann Habernigg, Michael J. Halloran and Carol Hansell.

 

The global economic crisis has aggravated existing concerns about executive compensation practices. Executive and key employee pay practices among large financial sector companies in particular have drawn public scrutiny and condemnation. Lost jobs and lost savings, as well as extensive government support for the financial sector and the automobile industry, means that executive compensation is a concern not just to shareholders, but for everyone affected by the faltering economy. The issues are now seen as so significant and systemic that our elected representatives are taking the matter out of the hands of the private sector. Congressional proposals for sweeping corporate governance and executive compensation reforms and the new Administration’s interest in tackling this subject means that there is a very real prospect for significant changes to executive compensation regulation later this year.

We do not advocate a political solution to executive compensation issues, but if a legislative response is inevitable, it is imperative that it take the right form. As we have seen in the past, a piecemeal response to an assortment of perceived, and often isolated, executive compensation abuses will create as many problems as it solves—and is unlikely to take account of the systemic issues that must be addressed. After all, the intricacies of determining the ‘‘right’’ executive compensation across the diverse range of businesses and industries comprising corporate America defy a single solution, no matter how well intended and thoughtfully crafted.

Any government regulation of executive compensation should encourage compensation practices that will contribute to the sustainable long-term value of America’s business as we emerge from this crisis, rather than simply ‘‘fixing’’ specific compensation practices which are seen as having contributed to the crisis. What is needed is a set of principles to guide the design and operation of any responsible executive compensation program. The guidelines announced by the Obama Administration recently do this, focusing in part on pay for performance and, in particular, long-term performance. However, for guidelines of this nature to have real practical application, they must provide guidance to—and reinforce accountability by—the body that makes the decisions about executive compensation—the board of directors. A measured and principled approach overseen by corporate boards is the only way to ensure that the eroding trust between companies and their shareholders is restored, based on a shared commitment to the sustainable long-term value of the enterprise. Under the Administration’s plan, responsibility for crafting this approach will fall largely to the Securities and Exchange Commission.

Fortunately, there is no need to create a new set of governing principles out of whole cloth. Legislators should look closely at the work that has already been done in this area. A useful example is the guidance developed by the Aspen Institute’s Corporate Values Strategy Group. The thinking of this group was motivated by a concern with excessive short-term pressures in the capital markets that result from intense focus on quarterly earnings and incentive structures that encourage companies and investors to pursue short-term gain with inadequate regard to long-term effects. The Aspen group recommends that companies and investors do three things to promote sustainable long-term value creation. First, define the metrics of long-term value creation. Second, focus corporate-investor communication around long-term metrics. Third, align compensation policies with those long-term metrics. While the group’s guidance describes several features of a compensation structure that supports long-term value creation, it does not purport to prescribe any particular framework.

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Competitive Effects of IPOs

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 21, 2009
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This post comes to us from Hung-Chia Hsu of the University of Wisconsin Milwaukee, Adam V. Reed of the University of North Carolina at Chapel Hill, and Jörg Rocholl of the ESMT European School of Management and Technology.

 

In our paper The New Game in Town: Competitive Effects of IPOs, which was recently accepted for publication in the Journal of Finance, we investigate the returns and operating performance of publicly traded firms around the time of large IPOs in their industry with two goals in mind.

First, we seek to measure the performance of publicly traded firms around IPOs in their industries. If IPO firms can successfully compete against publicly traded firms, then we would expect these competitors to perform worse after the IPO. We indeed show that industry competitors experience negative stock price reactions around IPOs and a significant deterioration in their operating performance after these IPOs. As further evidence that IPOs are responsible for this underperformance, we show that withdrawn IPOs have the opposite effect: publicly traded firms respond positively to the withdrawal of an IPO in their industry.

Second, we seek to explain the underperformance of publicly traded firms by examining the relation of cross sectional differences in performance and survival to firm competitiveness. We identify three determinants of the competitive advantage of IPOs over industry peers. First, as a direct consequence of the IPO, the offering recapitalizes the issuing firm in a way that generally results in a low debt-to-equity ratio. Low leverage may give issuing firms an advantage over their more highly leveraged competitors by allowing them more flexibility in their investments. This effect has been documented empirically in papers outside the IPO literature. Second, issuing firms have the advantage of being recently certified by investment banks. To the extent that the certification effect is stronger for new issues, the certification role of investment banks affects investors’ willingness to purchase new issues as opposed to shares of other firms in the same industry. Third, new entrants may have some nonfinancial advantage over their industry competitors; a non-financial advantage may make issuing firms more attractive to investors.

We find that performance and survival of publicly traded competitors are each related to all three of these determinants. Controlling for a number of factors such as market timing and the hotness of the IPO environment, we document that competing companies show relatively better operating performance after large IPOs in their industry if they have less leverage, if their IPO has been underwritten by a highly ranked investment bank, and if they spend more on research and development. In addition, we find empirical evidence that these factors also affect a competitor’s probability of survival for the three year period after the IPO.

The full paper is available for download here.

HLS and HBS Professors Recommend Modifying SEC’s Proposed Proxy Access Rules

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 20, 2009
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(Editor’s Note: An earlier post regarding a comment letter by seven major corporate law firms in opposition to the SEC’s proposed proxy access reform is available on the Forum here.  An earlier post regarding a comment letter by 80 professors of law, business, economics, or finance in support of the proposed proxy access reform is available here.)

Several contributors to the Harvard Law School Forum on Corporate Governance and Financial Regulation — including four HLS professors, five HBS professors, and one HLS/HBS professor — submitted to the SEC last week a comment letter generally supporting the SEC in proposing proxy access for large shareholders, but recommending several modifications to the proposed rule that would reduce the odds that the rule, as adopted, would have unexpected disruptive effects on firms or markets, or force on shareholders a governance system that a majority would oppose at any given firm. A copy of the comment letter filed with the SEC is available here.

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