Monthly Archives: November 2016

ETF Trading and Informational Efficiency of Underlying Securities

Lawrence Glosten is the S. Sloan Colt Professor of Banking and International Finance at Columbia Business School. Suresh Nallareddy is an Assistant Professor at Duke University’s Fuqua School of Business. This post is based on a recent paper by Professor Glosten, Professor Nallareddy, and Yuan Zou.

The asset management industry has witnessed a tremendous growth in exchange-traded funds (ETFs). As a result, roughly 30% of U.S. equity trading volume is attributable to ETFs (Boroujerdi and Fogertey, 2015). [1] Regulators and academics have found evidence that ETFs have distorted the capital markets as a whole, leading to increased volatility, co-movement, and systemic risk, as well as affecting real managerial decisions (see Wurgler (2010) for a review). Despite these findings, there is scant systematic evidence on the relation between ETF trading activity and the informational efficiency of underlying securities. We find that ETF trading increases the informational efficiency of underlying securities by improving the link between fundamentals and stock prices. Specifically, firms with more ETF trading reflect incrementally more earnings news in their current stock returns.

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Do Underwriters Compete in IPO Pricing?

Evgeny Lyandres is Associate Professor of Finance at Boston University’s Questrom School of Business. This post is based on an article by Professor Lyandres; Fangjian Fu, Associate Professor of Finance at the Lee Kong Chian School of Business at Singapore Management University; and Erica X. N. Li, Assistant Professor of Finance at the Cheung Kong Graduate School of Business.

The U.S. IPO underwriting market is highly profitable. IPO gross spreads, most of which cluster at 7% of the proceeds, are high in both absolute terms and relative to those in other countries. In addition, returns on IPO stocks on the first day of trading (i.e. IPO underpricing) are even higher than the gross spreads, leaving much money on the table. Investors who are allocated underpriced IPO shares are beneficiaries of the money left on the table. Since the allocation of IPO shares is at the discretion of the underwriters, interested investors have incentives to reward underwriters for their favorable allocations. This indirect compensation of the underwriters typically takes the form of “soft” dollars, such as abnormally high trading commissions, spinning, and laddering. There is an ongoing debate as to whether the high profitability of the U.S. IPO underwriting market is suggestive of oligopolistic competition among underwriters—i.e. a situation in which each underwriter sets the price for its services with the objective of maximizing its own expected profit—or, alternatively, of implicit collusion in price setting among underwriters—i.e. a situation in which underwriters cooperate in price setting, i.e. they choose underwriting fees and set IPO offer prices with the goal of maximizing their joint expected profit.

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Changes and Challenges in the SEC’s ALJ Proceedings

Breon S. Peace and Elizabeth Vicens are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Peace, Ms. Vinces, and Daniel D. Queen.

In recent years, when pursuing corporations and their officers for violations of the U.S. securities laws, the Securities and Exchange Commission (“SEC”) Division of Enforcement has increasingly brought its claims to the SEC’s in-house administrative law judges (ALJs) rather than the federal civil courts. In fact, last year, over 90% of the SEC’s actions against public companies were brought to the SEC’s ALJs—whereas five years ago, only 33% of those cases were brought as ALJ proceedings. The credit for this remarkable increase in ALJ proceedings belongs in large part to the 2010 Dodd–Frank Act, [1] which expanded the ALJs’ jurisdiction and authorized new penalties that ALJs could impose, making it unnecessary for the SEC to bring many claims in civil courts.

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Banking Agencies’ Proposed Cybersecurity Regulations

Joseph P. Vitale is a partner at Schulte Roth & Zabel LLP. This post is based on a Schulte Roth publication by Mr. Vitale, Michael L. Yaeger, and Noah N. Gillespie.

On Oct. 19, 2016, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC,” collectively the “Agencies”) issued a joint advance notice of proposed rulemaking (“Notice”) inviting public comment on cybersecurity regulations and guidance designed to improve the safety and soundness of the U.S. financial system. The Notice includes 39 questions on which the Agencies seek input, including whether the Agencies ultimately issue a formal regulation, guidance or some combination of those tools. That choice will be particularly important as it may determine whether the regulatory regime remains flexible enough for covered entities to adapt to new technologies and evolving threats. The Agencies will receive public comments until Jan. 17, 2017. The Agencies are “considering establishing enhanced standards for the largest and most interconnected entities under their supervision, as well as for services that that these entities receive from third parties.”

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Stealing Deposits: Deposit Insurance, Risk-Taking and the Removal of Market Discipline in Early 20th Century Banks

Charles W. Calomiris is Henry Kaufman Professor of Financial Institutions at Columbia Business School, Director of the Business School’s Program for Financial Studies and its Initiative on Finance and Growth in Emerging Markets, and a professor at Columbia’s School of International and Public Affairs. Matt Jaremski is Assistant Professor of Economics at Colgate University. This post is based on a forthcoming paper by Professor Calomiris and Professor Jaremski.

Deposit insurance spread throughout the world in the latter half of the 20th century as a result of external and internal political pressures favoring its adoption (Demirgüç-Kunt, Kane and Laeven 2008). Despite its overwhelming political support, there is a large empirical literature suggesting that the moral-hazard costs of deposit insurance have out-weighed its liquidity-risk-reduction benefits and have contributed to the unprecedented waves of banking crises that have washed over the world during the past four decades. [1] The separation between policy recommendations and economic studies begs the question of whether empirical studies may have failed to properly control for the other contributing influences that produced both the rise of deposit insurance and banking instability.

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Weekly Roundup: November 4–November 10, 2016


More from:

This roundup contains a collection of the posts published on the Forum during the week of November 4–November 10, 2016.

Dissenting Directors



Brexit on Ice? Court Ruling That Only UK Parliament Can Trigger Article 50











Privacy in M&A Transactions: Personal Data Transfer and Post Closing Liabilities

Daniel Ilan is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Ilan, Jane Rosen, Emmanuel Ronco, and Natascha Gerlach. This post relates to a recent Cleary Gottlieb publication, Privacy in M&A Transactions: Pre Closing Liabilities, available on the Forum on here.

One aspect of mergers and acquisitions that is receiving growing attention is the relevance of privacy issues [1] under U.S. and European Union (“EU”) laws as well as the laws of a growing number of other jurisdictions. [2] This two-part blog post discusses the principal M&A-related privacy risks and highlights certain “traps” that are often overlooked. In Part 1, we discussed risks associated with a target’s pre-closing privacy-related liabilities and considered ways to mitigate these risks through adequate diligence and privacy-related representations in M&A agreements. In this Part 2, we discuss the risks associated with transferring or disclosing personally-identifiable information (“personal data”) of an M&A target (or a seller) to a purchaser (or prospective purchaser) and those associated with the purchaser’s post-acquisition use of such personal data.

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2016 Corporate Governance & Executive Compensation Survey

Richard Alsop and John Cannon III are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling publication by Mr. Alsop, Mr. Cannon, Stephen Giove, Doreen Lilienfeld, and Rory O’Halloran.

We are pleased to share Shearman & Sterling’s 2016 Corporate Governance & Executive Compensation Survey of the 100 largest US public companies. This year’s Survey, the 14th in our series, examines some of the most important governance and executive compensation practices facing boards today and identifies best practices and emerging trends. Our analysis will provide you with insights into how companies approach governance issues and will allow you to benchmark your company’s corporate governance practices against the best practices we have identified.

Special Committees

Special committees of independent directors are an important tool for boards that can facilitate the discharge of their fiduciary duties in connection with evaluating change of control transactions, shareholder derivative litigation, as well as investigations into potential misconduct at the company.

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Empirical Analysis of Advance Notice Provisions in Company Bylaws

Anita Anand holds the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto. Michele Dathan is a PhD student at the Rotman School of Management at the University of Toronto. This post is based on an article forthcoming in the International Review of Law and Economics (2017).

Historically, corporate bylaws have been the “sleepy hollow” of a corporation’s constitution. They typically specify the offices that comprise the corporation’s leadership team, the corporation’s fiscal year and signing officers for the corporation. Bylaws have tended to be uncontroversial. Today, however, in an era of increased shareholder activism, bylaws have become a venue for corporate governance reform.

In recent years, firms have implemented advance notice provisions (ANPs) in their bylaws. ANPs require shareholders to comply with certain procedures and disclosure requirements if they intend to nominate directors at a shareholders’ meeting. In other words, an ANP places additional burdens on shareholders who seek to implement changes to the composition of the Board. READ MORE »

Activist Investing in Europe: A Special Report

Armand W. Grumberg is partner and head of the European Mergers and Acquisitions practice at Skadden, Arps, Slate, Meagher and Flom LLP. This post is based on a Skadden publication by Mr. Grumberg, Scott C. Hopkins, Lorenzo Corte, Pascal Bine and Lutz Zimmer. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

The inaugural edition of this report, published nearly two years ago, suggested that so long as opportunities presented themselves, activists would continue to seek governance, strategy and capital allocation reforms from European issuers. Indeed they have. After ebbing briefly in 2014, when only 51 companies were publicly targeted (after 61 in 2012 and 59 in 2013), activism has roared back, with 67 companies targeted in 2015 and 64 in the first half of 2016 alone. Assets under management for European activists have grown slowly in that period—from $21.7 billion in 2012 to $27.5 billion in 2015—suggesting the growth has been funded by new entrants and foreign players.

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