Monthly Archives: December 2017

Shaped by Their Daughters: Executives, Female Socialization, and Corporate Social Responsibility

Henrik Cronqvist is Professor of Finance at University of Miami and Frank Yu is Associate Professor of Finance at China Europe International Business School (CEIBS). This post is based on their recent article, forthcoming in the Journal of Financial Economics.

“You’ve already given us a reason to reflect on the world we hope you live in.”
—Facebook’s CEO Mark Zuckerberg in “A letter to our daughter.”

Research in social science has recently demonstrated the importance of the family environment for an individual’s behavior. For example, parents may impact their children by instilling certain values in them. Some emerging work has suggested that the opposite may also be important: Children may shape their parents. In this article, we examine whether one category of top decision-makers, namely corporate executives managing some of the largest public companies in the U.S., is systematically affected by their family environment, in particular by parenting a daughter. Evidence for such a female socialization hypothesis has recently been reported for other categories of top decision-makers, including congress members and federal judges in the U.S., so our study expands this hypothesis into research in financial economics related to corporate executives.


Reexamining Staggered Boards and Shareholder Value

Alma Cohen is Professor of Empirical Practice, and Research Director of the Laboratory for Corporate Governance, at Harvard Law School; Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration at Harvard Business School. This post is based on their recent article, Reexamining Staggered Boards and Shareholder Value, recently published in the Journal of Financial Economics. Related program research includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles Wang.

The Journal of Financial Economics has recently published our article, Reexamining Staggered Boards and Shareholder Value, which seeks to contribute to understanding how staggered boards affect shareholder value.

In an article published in the Journal of Financial Economics in 2013, How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (CW2013), we provided evidence that market participants perceive staggered boards to be, on average, value-reducing. In a subsequent article, Do Staggered Boards Harm Shareholders?, Amihud and Stoyanov (2016) (AS2016) contest our findings, arguing that excluding some observations or amending certain specifications renders our results statistically insignificant (though they largely retain their sign). In our new article, we address the concerns raised by AS2016.  We show that the evidence is overall consistent with the main conclusion of CW2013: market participants view staggered boards as value-reducing on average.

CW2013 examined two rulings by the Delaware courts, which affected the antitakeover force of staggered boards, in the case of Air Products & Chemicals Inc. v. Airgas, Inc. We found that the rulings were accompanied by abnormal stock returns that are statistically significant and consistent with the view that staggered boards are value-decreasing. After replicating the CW2013 results, AS2016 reports that excluding some observations from our sample yields results that largely have the same sign as in CW2013 but are not statistically significant. When an event study is not based on a large sample, the statistical significance of its results is often sensitive to the removal of a small number of observations. However, our new article shows that, in the case of the Airgas rulings, a wide range of additional tests yields results that are significant and reinforce the CW2013 conclusions.


Statement on Cryptocurrencies and Initial Coin Offerings

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. 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.

The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, “this time is different.”

The cryptocurrency and ICO markets have grown rapidly. These markets are local, national and international and include an ever-broadening range of products and participants. They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:


SEC Appoints New Chairman and Board Members to PCAOB

The following post is based on an press release from the U.S. Securities and Exchange Commission announcing the appointment of a new Chairman and Board Members to the Public Company Accounting Oversight Board (PCAOB).

The Securities and Exchange Commission [December 12, 2017] announced the appointment of William D. Duhnke III as Chairman and J. Robert Brown, Kathleen M. Hamm, James G. Kaiser, and Duane M. DesParte as Board members of the Public Company Accounting Oversight Board (PCAOB).

The Sarbanes-Oxley Act of 2002 established the PCAOB to oversee the audits of public companies and broker-dealers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB accomplishes these goals through registering public accounting firms, setting auditing standards, conducting inspections, and pursuing disciplinary actions. The PCAOB is subject to oversight by the SEC.


Critical Update Needed: Cybersecurity Expertise in the Boardroom

David F. Larcker is James Irvin Miller Professor of Accounting, Peter C. Reiss is MBA Class of 1963 Professor of Economics, and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on their recent paper.

We recently published a paper on SSRN, Critical Update Needed: Cybersecurity Expertise in the Boardroom, that evaluates the quality of information presented by management to directors in advance of board meetings. Below is a reproduction of the text.

As part of its oversight responsibilities, the board of directors is expected to ensure that management has identified and developed processes to mitigate risks facing the organization, including risks arising from data theft and the loss of proprietary or customer information. Unfortunately, general observation suggests that companies are not doing a sufficient job of securing this data. Data theft has grown considerably over the last decade. According to the Identity Theft Resource Center, the number of data breaches tripled from 2007 to 2016. The main contributor to this increase was theft by third-party hacking, skimming, and phishing schemes (see Exhibit 1).


Governing Through Disruption: A Boardroom Guide to 2018

Holly J. Gregory is a partner at Sidley Austin LLP. This post is based on a Sidley publication by Ms. Gregory.

Boards of directors govern in an increasingly dynamic environment marked by technological and business model disruption, regulatory and enforcement uncertainty, political unrest, and expanding expectations about the company’s role in addressing societal problems. Innovative uses of technology are driving changes in competitive conditions, and creating opportunities for inventive companies, but peril for those that are slow to adapt. Interrelated changes in consumer behavior, customer expectations, the supply chain, and the labor market add complexity to governing in a rapidly changing environment, as does the social and political unrest that often emerges in transformational times.

These issues will impact the board’s agenda and priorities in 2018, as companies seek to identify opportunities arising from disruption and avoid unexpected risks, and as shareholder activists continue their efforts to influence corporate decisions.


Executives in Politics

Ilona Babenko is Associate Professor at Arizona State University W.P. Carey School of Business; Viktar Fedaseyeu is Assistant Professor in the Department of Finance at Bocconi University; and Song Zhang is a PhD student in Finance at Boston College. This post is based on their recent paper.

Over the last two decades, the share of corporate executives holding political office in the United States increased substantially, which resulted in large benefits for their firms and shifted the balance of power toward corporate interests

On November 8, 2016 Donald Trump won the U.S. Presidency. While his election was unusual in many respects, Trump is just one of several recent examples of corporate executives running for political office. William Harrison Binnie, a former CEO of Carlisle Plastics, Inc., unsuccessfully ran for the U.S. Senate in 2010. In 2000, Jon Corzine, a former CEO of Goldman Sachs, was elected U.S. Senator, and in 2005 became the governor of New Jersey. These examples are far from isolated. In fact, the share of federal office holders (i.e., U.S. Congressmen, Senators, and Presidents/Vice-Presidents) who had executive experience prior to being elected remained relatively flat at around 13-14% between 1980 and 2000 but then increased rather sharply to more than 21% by 2014. Why do so many executives make the switch from a career in business and run for political office? Further, how does the increase in executives’ political participation affect their firms and the legislative agenda in the United States more generally? In a new working paper, we investigate these questions by studying the incidence of corporate executives running in U.S. federal elections between 1980 and 2014.


Derivative Suits and Unlawful Business Practices

Steven M. Haas is a partner at Hunton & Williams LLP. This post is based on a Hunton & Williams publication by Mr. Haas and is part of the Delaware law series; links to other posts in the series are available here.

A Delaware court recently allowed a stockholder’s derivative complaint to proceed where the board of directors allegedly breached their duty of loyalty by knowingly allowing the company to violate a federal regulation. In upholding the complaint, the court examined the company’s prior SEC disclosures describing its business practices to conclude they violated the “plain language” of the regulation. More importantly, the court inferred that the directors knew of the noncompliance, despite the absence of any “red flags” to put the board on notice, because “the Regulation itself is so clear on its face.” The court acknowledged the unusual factual allegations in the complaint, but the ruling nevertheless illustrates one of many potential pitfalls arising from compliance failures, especially in regulated industries.


Representations and Warranties Insurance in M&A Transactions

Jeffrey Chapman is Partner, Jonathan Whalen is an Associate, and Benjamin Bodurian is an Associate at Gibson, Dunn & Crutcher LLP. This post on their recent Gibson Dunn publication.

Under a buy-side representations and warranties insurance (“RWI”) policy, the buyer in an M&A transaction recovers directly from an insurer for losses arising from certain breaches of the seller’s representations and warranties in the acquisition agreement. By shifting the risk of such losses from the seller to an insurer, the buyer and seller can limit or even eliminate the seller’s liability for certain rep breaches, all without materially diminishing the buyer’s coverage.


Leverage, CEO Risk-Taking Incentives, and Bank Failure During the 2007-2010 Financial Crisis

Patricia Boyallian is Assistant Professor at Lancaster University Management School; and Pablo Ruiz-Verdu is Associate Professor of Management at the Universidad Carlos III de Madrid. This post is based on their article, forthcoming in the Review of Finance. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here); and How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here).

The view that bankers’ compensation created the incentives that led to the latest financial crisis has prompted numerous proposals to regulate pay at financial institutions. [1] However, despite the attention devoted to executive pay by regulators, extant research provides mixed support for the hypothesis that CEO compensation in the run-up to the crisis influenced bank risk taking. Thus, although some authors find a positive relation between CEO risk-taking incentives and bank risk or policy choices, others find no such relation. Notably, Fahlenbrach and Stulz (2011) [2] find no significant relation between the most commonly used measure of the risk-taking incentives generated by executive compensation (vega) and bank performance during the crisis. [3]


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