Monthly Archives: September 2017

Corporate Debt Maturity Profiles

Jaewon Choi is Assistant Professor of Finance at the University of Illinois at Urbana-Champaign; Dirk Hackbarth is Professor of Finance at Boston University Questrom School of Business; and Josef Zechner is Professor of Finance at Vienna University of Economics and Business. This post is based on a recent article, forthcoming in the Journal of Financial Economics, by Professor Choi, Professor Hackbarth, and Professor Zechner.

The article Corporate Debt Maturity Profiles, forthcoming in the Journal of Financial Economics, studies a novel aspect of a firm’s capital structure, namely the dispersion of debt maturities. Extant literature offers little guidance on this aspect of capital structure, and lack of evidence is at variance with practitioners emphasizing that rollover risk affects debt maturity choice. Surveys of financial managers often suggest that avoiding so-called “maturity towers” (i.e. spreading debt maturity dates over time) is a key factor when firms choose debt maturities.


Activism and Board Diversity

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh which originally appeared in the New York Law Journal.

Activism at public companies can reduce board diversity, or it can increase it, depending on the circumstances. In recent years, activist hedge funds have installed dissident nominees who collectively have trailed the S&P 1500 index significantly in terms of gender and racial diversity. In contrast, institutional shareholders and asset managers are promoting board diversity to an unprecedented extent, with concerted public efforts already producing results. Several institutional investor initiatives, announced earlier this year, and the New York Comptroller’s Boardroom Accountability Project 2.0, announced earlier this month, may be game-changing initiatives on the path to greater board diversity.


Long-Term Pay-For-Performance Alignment

Aubrey E. Bout is Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Bout, Mr. Martin, Perla Cruz, Bryce Gerboc, and Phil Johnson. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

With the introduction of say-on-pay (SOP) in 2011 and the increased clout of proxy advisory firms on executive compensation program designs, the performance share unit (PSU) has become a common feature of executive long-term incentive (LTI) programs among U.S. public companies.

PSUs at many companies have now been in place for ≥10 years, which provides an opportunity to thoroughly review the historical trend in PSU payouts in order to assess critical questions regarding program success:

  1. What has been the historical payout trend in PSU awards over the 10 most recently completed performance cycles (2005-2014 grants)?
  2. How did the payouts for PSU awards that included relative total shareholder return (TSR) metrics compare to that of plans based entirely on operating financial results?
  3. Were PSU payout trends aligned with company TSR performance over the 3-year performance period?

This post provides a historical analysis of trends in PSU award results. With hindsight, we can objectively assess the success of this relatively modern LTI element that has become increasingly important in executive compensation programs since 2011.


Weekly Roundup: September 22–28, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 22–28, 2017.

President Trump Blocks Chinese Acquisition of Lattice Semiconductor Corporation

Merger Negotiations in the Shadow of Judicial Appraisal

The Evolution of the Private Equity Market and the Decline in IPOs

Activism’s New Paradigm

Gregory Taxin is Managing Director at Spotlight Advisors and Betsy Atkins is a American business executive and entrepreneur. This post is based on a publication which originally appeared in Corporate Board Member magazine. 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); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Shareholder activism in the US has increased greatly over the past decade, measured not only in scope and the pools of capital dedicated to it but also in sophistication and in the range of tactics employed. There is currently more than $120 billion in dedicated activist funds at work, and these funds launched nearly 300 activist campaigns globally in 2016. Another 400 campaigns were launched by “occasional” activists. Indeed, a fair number of companies should expect a knock at their door soon—21% of the S&P 500 were approached publicly by an activist in 2016 according to FactSet (and many others received quiet, private overtures). Such activism will likely grow more prevalent, as it has proven to generate alpha (i.e. uncorrelated returns) for these funds’ investors.


The Evolution of the Private Equity Market and the Decline in IPOs

Michael Ewens is Associate Professor of Finance and Entrepreneurship at the California Institute of Technology; Joan Farre-Mensa is Senior Economist with Cornerstone Research. This post is based on their recent paper.

Recent years have seen a sharp decline in the number of initial public offerings (IPOs) in the U.S. While this decline has garnered considerable attention both in academic and policy circles and in the press, its causes remain unclear (Gao, Ritter, and Zhu (2013); Doidge, Karolyi, and Stulz (2013, 2017)). The debate on the causes behind the IPO decline has been accompanied by a no less intense debate on the consequences of this decline for the U.S. entrepreneurial finance market. Doidge, Karolyi, and Stulz (2013) conclude that while the low IPO rate is “consistent with the view that U.S. financial markets became less hospitable for young, small firms, direct tests of this view, while needed, are beyond the scope” of their study. Our paper, The Evolution of the Private Equity Market and the Decline in IPOs, helps fill this gap by analyzing how the dearth of IPOs has impacted VC-backed startups’ ability to finance their growth.


What Makes the Bonding Stick? Testing the Legal Bonding Hypothesis

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya, Israel. This post is based on a recent article, forthcoming in the Journal of Financial Economics, by Professor Licht; Christopher Poliquin, a doctoral student at Harvard Business School; Jordan Siegel, Associate Professor of Strategy at the University of Michigan Ross School of Business; and Xi Li, Associate Professor at Hong Kong University of Science and Technology.

Securities fraud class actions are a key feature of the US regime of corporate governance. Firms from all around the world that cross-list on US markets consequently become subject to this regime. While some countries endeavor to imitate it, others prefer to shun this mode of private enforcement. In our article, forthcoming in the Journal of Financial Economics, we use the US Supreme Court case in Morrison v. National Australia Bank as a natural experiment to assess the role and effect of this enforcement mechanism. We find surprising evidence that suggests implications for firms and law-makers alike.


CEOs and ISS’ Proxy Contest Framework

This post is based on a publication by Institutional Shareholder Services, Inc. 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 Dancing with the Activists by Lucian Bebchuk, Alon Brav, Wei Jiang and Thomas Keusch (discussed on the Forum here).

A pair of high-profile proxy contests currently underway—Trian’s campaign to add Nelson Peltz to Procter & Gamble’s board, and Pershing Square’s effort to replace three members of Automatic Data Processing’s board—reflect diverging paths in the ongoing evolution of activism. While the ADP contest may be seen, to some extent, as a continuation of this spring’s trend toward increasingly contentious fights, Trian seems to be deliberately distancing itself from such hostilities. The outcome of these two contests, at the ballot box as well as reconfiguring the income statements of these corporations over the next few years, will likely have a lasting impact on the overall strategy and tone of future activist campaigns.


Oversight of the U.S. Securities and Exchange Commission

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks before the U.S. Senate Committee on Banking, Housing and Urban Development. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

It is an honor to testify before this Committee for the first time since my confirmation. Since joining the SEC, my experience has strongly reinforced my view that our talented and committed staff is fundamental to the agency’s effectiveness. The SEC’s mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation is deeply ingrained throughout our offices and divisions. I also want to thank Commissioners Stein and Piwowar for their valuable counsel and guidance to me as well as for their unwavering commitment to the Commission.

With a workforce of about 4,600 staff in Washington and across our 11 regional offices, the SEC oversees, among other things (1) approximately $72 trillion in securities trading annually on U.S. equity markets; (2) the disclosures of over 8,100 public companies, of which 4,300 are exchange listed; and (3) the activities of over 26,000 registered entities, including investment advisers, broker-dealers, transfer agents, securities exchanges, clearing agencies, mutual funds, exchange traded funds, the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB), among others. We also engage and interact with the investing public on a daily basis through a number of activities ranging from our investor education programs to alerts on our portal. Additionally, on a typical day, investors and other market participants view disclosure documents filed on our EDGAR system more than 50 million times.


Enjoying the Quiet Life: Corporate Decision-Making by Entrenched Managers

Naoshi Ikeda is Assistant Professor, Kotaro Inoue is Professor, and Sho Watanabe is a Research Student at Tokyo Institute of Technology’s School of Engineering. This post is based on a recent paper by Professor Ikeda, Professor Inoue, and Mr. Watanabe. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here).

This study uses Japanese firm data to empirically test the “quiet life hypothesis,” which predicts that managers who are subject to weak monitoring from shareholders avoid making difficult decisions such as risky investment and business restructuring. We employ cross-shareholder and stable shareholder ownership as the proxy variables of the strength of a manager’s defense against market disciplinary power. We examine the effect of the proxy variables on manager-enacted corporate behaviors and the results indicate that entrenched managers who are insulated from the disciplinary power of the stock market avoid making difficult decisions such as large investments and business restructures. However, when managers are closely monitored by institutional investors and independent directors, they tend to be active in making difficult decisions. Taken together, our results are consistent with the managerial quiet life hypothesis.


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