Yearly Archives: 2016

Corporate Use of Social Media

Posted by Matteo Tonello, The Conference Board, Inc., on

Tuesday, May 17, 2016

Capital markets, Disclosure, Earnings announcements, Engagement, Financial reporting, Information environment, Market reaction, Social capital, Social media
More from: Ahmed Tahoun, Clare Wang, James Naughton, Matteo Tonello, Michael Jung, The Conference Board

Matteo Tonello is managing director at The Conference Board, Inc. This post relates to an issue of The Conference Board’s Director Notes series by Michael Jung, James Naughton, Ahmed Tahoun, and Clare Wang.

While companies devote considerable effort to creating and managing social media presences, little is known about how they use social media to communicate ﬁnancial information to investors. This report examines the use of social media by S&P 1500 companies to disseminate ﬁnancial information and the response from investors and traditional media. The ﬁndings show that companies use social media to overcome a perceived lack of traditional media attention and that social media usage improves the company’s information environment. There is also evidence that, in contrast with other types of company communications, the beneﬁcial effects of social media on the company’s information environment are offset when the investor-focused social media communications are disseminated by other social media users. The ﬁndings are relevant for managers and boards establishing corporate social media disclosure policies, since they suggest that companies may beneﬁt from developing different approaches to disseminating positive versus negative earnings news.

The Shadow Cost of Bank Capital Requirements

Posted by Asaf Manela, Washington University in St. Louis, on

Tuesday, May 17, 2016

Banks, Capital requirements, Compliance & ethics, Cost of capital, Debt-equity ratio, Financial crisis, Financial institutions, Financial regulation, Leverage, Liquidity
More from: Asaf Manela, Roni Kisin

Asaf Manela is Assistant Professor of Finance at Washington University in St. Louis. This post is based on a recent article by Professor Manela and Roni Kisin, Assistant Professor of Finance at Washington University in St. Louis, available here.

Capital requirements are an important tool in the regulation of financial intermediaries. Leverage amplifies shocks to the value of an intermediary’s assets, increasing the chance of distress, insolvency, and costly bailouts. Following the recent financial crisis, prominent economists and policy makers have called for a substantial increase in capital requirements for financial intermediaries. Nevertheless, proposals to increase capital requirements face fierce and successful opposition from financial intermediaries, apparently driven by their private costs of capital requirements. Despite the central role of these costs in shaping the regulation, they have not been measured empirically.

Defending Director Discretion

Posted by Eric Geringswald, Corporation Service Company, on

Monday, May 16, 2016

Boards of Directors, Derivative suits, Institutional Investors, Mutual funds, Pension funds, Proxy voting, SEC, SEC enforcement, Securities regulation, Settlements, Shareholder activism, Shareholder suits, Shareholder voting, Whistleblowers
More from: Eric Geringswald, Thomas Dougherty, CSC

Eric Geringswald is Director of CSC^® Publishing at Corporation Service Company. This post is an excerpt from the 2016 Edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps.

In this year’s Foreword, Dougherty examines three developments that increasingly impact director discretion: the threatened demise of derivative court case protections; increasing judicial skepticism toward settlements of challenges to corporate disclosure; and the potential intrusion of SEC whistleblower protocols into corporate arenas.

The Impact of Funds

Of all the forms of institutional investor, mutual funds have become the dominant owners of U.S. corporations, largely due to invested 401K personal pension capital. Mutual funds currently hold approximately 30 percent of U.S. corporate shares, versus less than 10 percent twenty-five years ago. Yet, those families and complexes of mutual funds, with rare exception, do not assert control over corporate governance of the businesses they invest in.

Systemic Financial Degradation Due to the Structure of Corporate Taxation

Posted by Mark J. Roe, Harvard Law School, and Michael Tröge, ESCP-Europe, on

Monday, May 16, 2016

Banks, Corporate debt, Debt, Debt-equity ratio, Equity capital, Financial crisis, Financial institutions, Financial regulation, Incentives, Risk, Risk-taking, Systemic risk, Taxation
More from: Mark Roe, Michael Troege

Mark J. Roe is the David Berg Professor of Law at Harvard Law School, and Michael Tröge is Professor of Finance at ESCP-Europe. This post is based on a recent article by Professors Roe and Tröge.

In our article, Systemic Financial Degradation Due to the Structure of Corporate Taxation, which was recently posted to SSRN, we examine how financial sector safety is undermined by the structure of the corporate tax. Regulators have sought since the 2008 financial crisis to strengthen the financial system. Yet a core source of weakness and an additional instrument for strengthening, namely the effect of the corporate tax on the choice between debt and equity, is hardly on the regulatory agenda. Current corporate tax rules allow firms to deduct the cost of debt but not the cost of equity. This penalty for equity encourages high levels of debt, lower levels of equity, and concomitantly riskier firms. But this not an inevitable property of taxation. Alternative tax schemes, that are either capital structure neutral or favor equity instead of debt, exist and have been successfully tested in other countries.

Stock Markets, Banking Crises, and Economic Recoveries

Posted by Ross Levine, University of California, Berkeley, on

Monday, May 16, 2016

Banks, Capital markets, Equity capital, Equity offerings, Failed banks, Financial crisis, Financial institutions, Financial regulation, Firm performance, Investor protection, Legal systems, Liquidity, Profitability, Shocks, Systemic risk
More from: Chen Lin, Ross Levine, Wensi Xie

Ross Levine is Professor of Finance at the University of California, Berkeley. This post is based on an article authored by Professor Levine; Chen Lin, Professor of Finance at the University of Hong Kong; and Wensi Xie, Assistant Professor of Finance at the Chinese University of Hong Kong.

Over twenty-five years ago, Alan Greenspan, then Chairman of the Federal Reserve System, asserted that stock markets act as a “spare tire” during banking crises, providing an alternative corporate financing channel when banking systems “go flat.”

In our paper, Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries, recently featured in the Journal of Financial Economics, we provide the first assessment of three core predictions emerging from this spare tire view. The first prediction is that if firms can issue equity at low cost when banking crises limit the flow of bank loans to firms, this will ameliorate the impact of the banking crisis on firm profits and employment. Second, when a systemic banking crisis reduces lending to firms, the benefits of a sound stock market will accrue primarily to firms that depend heavily on bank loans. For those firms that do not rely on financing from banks, the crisis is less likely to harm them in the first place. Third, the spare tire view stresses that the ability of the stock market to provide financing during a banking crisis, not the size of the market before the crisis, is what matters for how well stock markets reduce the harmful effects of banking crises on corporate performance. Although bank loans might be the preferred source of financing during normal times, the spare tire view holds that when this preferred source goes “flat,” equity issuances can, at least partially, substitute for bank loans. Critically, for the stock market to play this role, the legal infrastructure must be in place before the banking system falters. To push the analogy further, it is not the use of the spare tire before the regular tire goes flat that mitigates the adverse effects of getting a flat tire; it is having a sound spare in the trunk.

SEC and Modernizing Regulation S-K

Posted by Holly J. Gregory, Sidley Austin LLP, on

Sunday, May 15, 2016

Accounting, Compliance & ethics, Disclosure, Information environment, Investor protection, JOBS Act, Regulation S-K, Reporting regulation, Risk disclosure, SEC, SEC rulemaking, Securities regulation
More from: Claire Holland, Holly Gregory, John Kelsh, Rebecca Grapsas, Thomas Kim, Sidley Austin

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. The complete publication, including footnotes and Appendix, is available here.

On April 13, 2016, the SEC issued a concept release requesting comment on existing disclosure requirements in Regulation S-K relating to a public company’s business and financial information. The concept release is part of a comprehensive “Disclosure Effectiveness Initiative” led by the SEC’s Division of Corporation Finance to review the effectiveness of public company disclosure requirements and to consider ways to improve them for the benefit of registrants and investors. The comment period will end 90 days after the concept release is published in the Federal Register.

The Concept Release

The concept release explores the following principal issues:

Genuine Parts Co. v. Cepec: Business Registration and Personal Jurisdiction

Posted by John D. Donovan, Jr. and Gregg L. Weiner, Ropes & Gray LLP, on

Saturday, May 14, 2016

Commercial litigation, Corporate liability, Delaware cases, Delaware law, Forum selection, Incorporations, Jurisdiction, State law, Written consent
More from: Gregg Weiner, John Donovan, Ropes & Gray

John D. Donovan, Jr. is partner in the litigation department, and Gregg L. Weiner is co-head of the business & commercial litigation practice, at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Donovan and Mr. Weiner. This post is part of the Delaware law series; links to other posts in the series are available here.

On April 18, 2016, the Delaware Supreme Court held that corporations not incorporated in Delaware that register to do business in that state are not subject to the “general” jurisdiction of the Delaware courts. In Genuine Parts Co. v. Cepec, the Court held that under the U.S. Constitution, Delaware’s business registration statute cannot be read to constitute a “consent” to general jurisdiction by out-of-state corporations. Business conduct in Delaware leading to a claim—and not just registration to do business—is now the key to the Delaware courthouse door for plaintiffs seeking to sue in that forum. As one of the most important jurisdictions addressing claims against business entities, Delaware now joins the growing list of states that will refuse to adjudicate cases arising out of business activity conducted elsewhere, and that has nothing to do with the forum state.

Corporate Litigation and Non-Reliance Provisions

Posted by Joseph M. McLaughlin and Yafit Cohn, Simpson Thacher & Bartlett LLP, on

Friday, May 13, 2016

Acquisition agreements, Contracts, Corporate fraud, Delaware cases, Delaware law, Due diligence, Fair values, Fairness review, Liability standards, Merger litigation, Mergers & acquisitions, Reliance
More from: Joseph McLaughlin, Yafit Cohn, Simpson Thacher

Joseph M. McLaughlin is a partner and Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. McLaughlin and Ms. Cohn. This article appeared in the April 14, 2016 edition of the New York Law Journal. This post is part of the Delaware law series; links to other posts in the series are available here.

This month we continue our discussion of contractual non-reliance provisions. Under Delaware law, a prima facie claim for fraudulent misrepresentation requires the plaintiff to plead facts supporting an inference that, among other things, the plaintiff acted in justifiable reliance on the misrepresentation. In the context of private mergers and acquisitions, a buyer bringing a post-transaction fraud claim against the seller may be precluded from claiming reasonable reliance on any representations made by the seller outside the four corners of the contract if the agreement contained a clear “non-reliance provision.”

Such a provision, which is often included in acquisition agreements in private transactions, amounts to a representation by the buyer that it has made its investment decisions based on its own knowledge and independent investigation—without regard to anything the seller has said or not said—and/or that the buyer only relied on the specific representations contained in the parties’ definitive agreement.

Do Compensation Consultants Have Distinct Styles?

Posted by Omesh Kini, Georgia State University, on

Friday, May 13, 2016

Agency costs, Agency model, Behavioral finance, Compensation consultants, Conflicts of interest, Executive Compensation, Incentives, Management, Market efficiency
More from: Chen Cai, Omesh Kini, Ryan Williams

Omesh Kini is Professor of Finance at Georgia State University. This post is based on an article authored by Professor Kini; Chen Cai of the Department of Finance at Georgia State University; and Ryan Williams, Assistant Professor of Finance at the University of Arizona.

In our paper, Do Compensation Consultants have Distinct Styles?, which was recently made public on SSRN, we investigate whether the choice of a specific compensation consultant affects the compensation level and structure of top managers. This question is crucially important because existing studies that examine the compensation of CEOs show that compensation schemes influence their behavior and, consequently, impact firm economic outcomes. Compensation consultants are typically hired by the board of directors’ compensation committee to help craft compensation policies for the top managers of the corporation. Although they serve at the behest of the board, consultants can imprint their own distinct styles in fashioning compensation policies for a firm. We examine whether individual compensation consultants influence compensation policies in unique ways, i.e., exhibit distinct “styles,” after controlling for the known economic determinants of these policies.

Weekly Roundup: May 6–May 12, 2016

Posted by HLS Forum on Corporate Governance and Financial Regulation, on

Friday, May 13, 2016

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of May 6–May 12, 2016.

Tags: Advanced notice, Business judgment rule, Change in control, Conflicts of interest, Delaware cases, Delaware law,Director liability, Disclosure, Duty of good faith, Financial advisers, Liability standards, Merger litigation, Mergers & acquisitions, Negligence, Securities damages, Shareholder suits

Tags: Accountability, Anti-corruption, Bernard Madoff, Compliance & ethics, Conflicts of interest, Dodd-Frank Act, Due diligence, Financial institutions, Financial regulation, International governance, Liability standards, Misconduct, Money laundering, SOX, Whistleblowers

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Yearly Archives: 2016

The Shadow Cost of Bank Capital Requirements

Defending Director Discretion

The Impact of Funds

Systemic Financial Degradation Due to the Structure of Corporate Taxation

Stock Markets, Banking Crises, and Economic Recoveries

SEC and Modernizing Regulation S-K

The Concept Release

Corporate Litigation and Non-Reliance Provisions

Do Compensation Consultants Have Distinct Styles?

Weekly Roundup: May 6–May 12, 2016

Takeovers and Takings in the Next Economic Crisis

In re Kenneth Cole: Business Judgment Review of Controlling Stockholder Mergers

DOL Final “Investment Advice” Regulation

Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed

Redacting Proprietary Information and IPOs

Corporate Governance in an Era of Compliance

Responding to Shareholder Directives to Directors

Defenses Available to Directors and Financial Advisors

Disclosure in the Digital Age

Reforming the Delaware Law to Address Appraisal Arbitrage

Collaborative Gatekeepers

Subscribe or Follow

Program on Corporate Governance Advisory Board

HLS Faculty & Senior Fellows