Yearly Archives: 2013

Measuring Intentional Manipulation: A Structural Approach

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, June 7, 2013
, , , , ,
More from:

The following post comes to us from Anastasia Zakolyukina of the University of Chicago Booth School of Business.

In the paper, Measuring Intentional Manipulation: A Structural Approach, which was recently made publicly available on SSRN, I suggest a structural model of a manager’s manipulation decision that allows me to estimate his costs of manipulation and to infer the amount of undetected intentional manipulation for each executive in my sample. The model follows the economic approach to crime (Becker, 1968) and incorporates the costs and benefits of manipulation decisions. The model is a dynamic finite-horizon problem in which the risk-averse manager maximizes his terminal wealth. The manager’s total wealth depends on his equity holdings in the firm and his cash wealth. The model yields three predictions. First, according to the wealth effect, managers having greater wealth manipulate less. Second, according to the valuation effect, the current-period bias in net assets increases in the existing bias. Third, the manager’s risk aversion, the linearity of his terminal wealth in reported earnings, and the stochastic evolution of the firm’s intrinsic value produce income smoothing. Furthermore, the structural approach allows partial observability of manipulation decisions in the data; hence, I am able to estimate the probability of detection as well as the loss in the manager’s wealth using the data on detected misstatements (i.e., financial restatements).

READ MORE »

Quadratic Vote Buying, Square Root Voting, and Corporate Governance

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, June 6, 2013
, , , ,
More from: ,

The following post comes to us from Eric Posner, Kirkland & Ellis Distinguished Service Professor of Law and Aaron Director Research Scholar at the University of Chicago, and E. Glen Weyl, Assistant Professor in Economics at the University of Chicago.

Imagine that a corporation holds a shareholder vote on a project like a merger, and, under the corporation’s bylaws, each shareholder can cast a number of votes equal to the square root of the number of shares that he holds. This might seem like a gimmick, but it actually provides a natural, smooth form of minority shareholder protection without the external intervention of the courts. In fact, under reasonable conditions square root voting (SRV) ensures that the project is approved if and only if it maximizes the value of the firm and thus achieves the efficiency goals of minority shareholder protection without the messy legal procedures that usually accompany them.

To see why, suppose that a corporation proposes a merger. An investor believes that the merger will increase the value of the corporation by $1000 per share, and that a vote in favor of the merger increases the probability of approval by 0.01. Thus, the marginal benefit from buying a share is $10. The investor can buy shares of the corporation at an opportunity cost of $1 (in the sense that she would rather use her money in another way and she incurs brokerage fees, but can otherwise sell the share for net expected profit of $0 if the merger is not approved). Because of the square-root rule, however, she must buy the square of the number of shares for every vote she casts. Thus, if she wants to cast 1 vote, she must buy 1 share at a cost of $1; if she wants to cast 2 votes, she must buy 2 shares at a cost of $4; if she wants to buy 3 shares, she must pay $9; and so on.

READ MORE »

Striving to Restructure Money Markets Funds to Address Potential Systemic Risk

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Thursday, June 6, 2013
, , , , ,
More from:

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s statement at a recent open meeting of the SEC; the full text is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [June 5, 2013], the Commission considers amending the rules that govern money market funds to address potential systemic risks. Before I begin, I would like to recognize the efforts of the staff throughout the SEC, especially the Division of Investment Management and the Division of Risk, Strategy, and Financial Innovation. I acknowledge and appreciate the staff’s good work in examining the 2010 amendments to Rule 2a-7 and the staff’s report, which concluded that, among other things, the 2010 amendments would not have been adequate to prevent the systemic risks that we saw in 2008. This report has resulted in the much-improved proposal that is before us today.

The staff’s work is a testament as to why the SEC should take the helm of matters that are within its jurisdiction. I appreciate that the Financial Stability Oversight Council (“FSOC”) recently said as much in its 2013 Annual Report. [1] The SEC’s expertise brings a clear-eyed experience and practical knowledge that can target needed change, while being mindful of unintended consequences.

I am supportive of the staff’s recommendations and will first put the proposed amendments in context, and then highlight a few items.

READ MORE »

Only the Right CEO Can Create a Culture of Integrity

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, June 5, 2013
, , ,
More from:
Editor’s Note: 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 article that appeared in Corporate Counsel.

Corporate Counsel recently ran an article entitled “Bringing Compliance to the C-Suite,” based on a Rand Corporation conference of a similar name and previewing a subsequent report-out. The focus of the conference, as reflected in papers presented there and referenced in the article, is that a variety of pressures cause CEOs to act badly or, at the least, to be indifferent to issues of corporate integrity. This is, of course, an important perspective.

But, despite the headlines, many CEOs, supported by boards of directors and top company leaders, are trying to do the right thing. Indeed, how a corporation fuses high performance with integrity—from the CEO to the shop or trading floor—is a venerable topic. And, despite important roles for the board and top company leaders like finance, legal, compliance, and HR officers, the profound reality, in my view, is that only the right CEO can create a robust culture of integrity.

Given the often-dour public perception of CEOs and given the contrasting reality of their centrality in a company’s fusion of performance with integrity, I thought it worth re-emphasizing core principles of private-ordering that can serve as practical ideals for CEOs and for companies seeking to do the right thing. These core principles should be kept in view as various discrete problems about aberrant CEO behavior are discussed in venues like the Rand conference, and it is helpful to think of them as arising in two dimensions of corporate governance.

READ MORE »

Incentive Schemes for Nominees of Activist Investors

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, June 5, 2013
, , , , , , , ,
More from: ,

The following post comes to us from Neil Whoriskey, partner focusing on mergers and acquisitions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Whoriskey, titled “Golden Leashes, Honest Brokers, Risk Tolerances and Market Imperfections: Incentive Schemes for Nominees of Activist Investors.”

Golden leashes – compensation arrangements between activists and their nominees to target boards – have emerged as the latest advance (or atrocity, depending on your point of view) in the long running battle between activists and defenders of the long-term investor faith. Just exactly what are we worried about?

With average holding periods for U.S. equity investors having shriveled from five years in the 1980s to nine months or less today, the defenders of “long-termism” would seem to have lost the war, though perhaps not the argument. After all, if the average shareholder is only sticking around for nine months, and if directors owe their duties to their shareholders (average or otherwise), then at best a director on average will have nine months to maximize the value of those shares. Starting now. Or maybe starting nine months ago.

But this assumes that the directors of any particular company have a real idea of just how long their particular set of “average” shareholders will stick around, and it also assumes that the directors owe duties primarily to their average shareholders, and not to their Warren Buffett investors (on one hand) or their high speed traders (on the other). So, in the absence of any real information about how long any then-current set of shareholders will invest for on average, and in the absence of any rational analytical framework to decide which subset(s) of shareholders they should be acting for, what is a director to do?

Here is what I think directors do, in one form or fashion or another:

READ MORE »

Corporate Funding: Who Finances Externally?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, June 5, 2013
, , , , , ,
More from: ,

The following post comes to us from B. Espen Eckbo, Professor of Finance at Dartmouth College, and Michael Kisser of the Department of Finance at the Norwegian School of Economics.

In our paper, Corporate Funding: Who Finances Externally?, which was recently made publicly available on SSRN, we provide new information on security issues and external financing ratios derived from annual cash flow statements of publicly traded industrial companies over the past quarter-century. Our use of cash flow statements permits us to differentiate between competing forms of internal financing, including operating profits, cash draw-downs, reductions in net working capital, and sale of physical assets. Unlike leverage ratios which dominate the focus of the extant capital structure literature, our cash-flow-based financing ratios are measured using market values (cash) and are unaffected by the firm’s underlying asset growth rate.

The empirical analysis centers around three main issues, the first of which is to establish the importance of external finance in the overall funding equation. In our pool of nearly 11,000 (Compustat) non-financial firms, the net contribution of external cash raised (security issues net of repurchases and dividends) was negative over the sample period. Moreover, the average (median) firm raised merely 12% of all sources of funds externally. Also, annual funds from total asset sales contributed more to the overall funding equation than net proceeds from issuing debt.

READ MORE »

The Role of Governments and Proxy Advisory Firms in Corporate Governance

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on
Tuesday, June 4, 2013
, , , , ,
More from:

Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Gallagher’s remarks at the 12th European Corporate Governance & Company Law Conference in Dublin, Ireland. The full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am delighted to be able to participate in this conference, and especially proud as an Irish-American that it is being held in conjunction with Ireland’s Presidency of the Council of the European Union. This conference is particularly valuable because it provides a forum for executives, directors, investors, and policy makers to have a frank and productive dialogue on important corporate governance issues.

I would like to talk about the increasing role that governments – particularly, in the United States, the federal government – play in corporate governance as well as the increasingly prominent influence of proxy advisory firms on how companies are governed and on how shareholders vote. These changes have led to, among other things, new limitations and requirements being imposed on boards of directors and companies. And while the resulting costs to investors are easily apparent, the purported benefits are harder to discern. Although today I will for the most part discuss these issues as they apply to U.S. companies, I note that there is a related trend in Europe. As such, I hope that my comments may help inform your approach to regulating corporate governance as well.

READ MORE »

Delaware Court of Chancery Criticizes Board’s Sale Process

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, June 4, 2013
, , , , , ,
More from: ,

The following post comes to us from Robert B. Schumer, chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Koehler v. NetSpend Holdings Inc., the Delaware Court of Chancery found that the directors of NetSpend likely breached their Revlon duty to obtain the highest price reasonably available for stockholders by pursuing a single-bidder strategy for selling the company. The board’s lack of knowledge as to the company’s value and related failure to contact potentially interested parties set it apart from other single bidder cases such as Plains Exploration, a recent case where the court found a single-bidder sale process to be reasonable. Nevertheless, the Court declined to enjoin the merger because an injunction could risk the stockholders’ opportunity to receive a substantial premium over the market price for their shares.

READ MORE »

Hardwired Conflicts: Big Bang Protocol, Libor and Paradox of Private Ordering

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, June 4, 2013
, , , , , , ,
More from:

The following post comes to us from Daniel Awrey of the University of Oxford Faculty of Law.

The working paper, Hardwired Conflicts: The Big Bang Protocol, Libor and the Paradox of Private Ordering, examines the darker side of the private market structures at the heart of the global financial system.

Imagine we allowed referees to place bets on the sporting events they officiated. On one level, this would almost certainly offend our sense of fair play. On another level, however, we might ultimately view this as unproblematic insofar as teams were able to freely contract with those referees willing to make credible commitments not to exploit such conflicts of interest, and so long as compliance with these contracts was relatively easy to monitor and enforce. Imagine now, however, that there exists a limited number of qualified referees, that these referees coordinate in the development of a standard form contract which does not prohibit betting on games, and that they collectively enjoy sufficient market power to ensure that these contracts receive widespread adoption. Imagine further that the costs of determining whether a referee had in fact wagered on a game are extremely high and, as a corollary, that there exists no credible threat of either private contractual enforcement or market-based (reputational) sanctions. Given these additional facts, we might be of the view that this state of affairs is likely to undermine confidence in the integrity of the game. Indeed, it is precisely for this reason that professional sports leagues prohibit referees from wagering on games. It seems remarkable, therefore, that we permit this type of activity in the most high stakes game of all: finance.

READ MORE »

Responding to Objections to Shining Light on Corporate Political Spending (6): The Claim that Disclosure Rules are Prohibited by the Constitution

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Monday, June 3, 2013
, , , , , ,
More from: ,

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law, Milton Handler Fellow, and Co-Director of the Millstein Center at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published last month in the Georgetown Law Journal. This post is the sixth in a series of posts, based on the Shining Light article, in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending; the full series of posts is available here.

The Securities and Exchange Commission is currently considering a rulemaking petition that we filed along with eight other corporate and securities law professors asking the Commission to develop rules requiring that public companies disclose their spending on politics. In our first five posts in this series (collected here), we examined five objections raised by opponents of such rules and explained why these objections provide no basis for opposing rules requiring public companies to disclose their political spending. In this post, we consider a sixth objection: the claim that the Constitution prohibits the SEC from requiring companies to disclose their spending on politics.

READ MORE »

Page 35 of 67
1 … 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 … 67