Monthly Archives: April 2021

Comment Letter on Rule 144 Holding Period and Form 144 Filings

Daniel Taylor is Associate Professor of Accounting at the Wharton School of the University of Pennsylvania; Bradford Lynch is a PhD student at The Wharton School; and David F. Larcker is the James Irvin Miller Professor of Accounting at Stanford Graduate School of Business. This post is based on their recent comment letter to the U.S. Securities and Exchange Commission.

We applaud the Commission for putting forth the Proposed Rule 144 Holding Period and Form 144 Filings (“Proposal”) and appreciate the opportunity to comment. Our comments and analysis relate primarily to the request for comments in Sections I.C.2, II.D, and III.D of the Proposal.

The Proposal would meaningfully alter the reporting requirements surrounding the trades of corporate insiders reported on Form 144 and Form 4. Having studied the trading of corporate insiders for over a decade, written numerous academic studies on the topic, and consulted with multiple companies, counsels, and enforcement agencies, we believe that the Proposal will substantially benefit the public interest with minimal or no cost to filers.

We support the modernization of Form 144. Under the current rule, 99.3% of Form 144s are filed on paper every year (over 700,000 from 2001 to 2020). The Commission’s current practice is to retain hard copies of these paper filings for 90 days in the Commission’s Public Reading Room in Washington DC and not post them on EDGAR (see Exhibit 1 for an example of a Form 144). This arcane practice would be of little consequence if the information contained in Form 144s was of no interest to investors; on the contrary, the demand for information on these Form 144s is sufficiently high that data providers regularly visit the Reading Room to scan, digitize, and disseminate Form 144s to corporate clients. As a result, data on over 700,000 Form 144s is available from third-party data providers (e.g., The Washington Service and Thomson/Refinitiv) but not EDGAR. In effect, the Commission has created a two-tiered disclosure system that makes “public disclosure” accessible to large institutional clients, but inaccessible to individual investors. The Proposal would end this practice by mandating Form 144 be filed electronically on EDGAR.


Does Target Firm Insider Trading Signal the Target’s Synergy Potential in Mergers and Acquisitions?

Inho Suk is Associate Professor of Accounting and Law at the State University of New York at Buffalo School of Management; and Mengmeng Wang is Assistant Professor of Accounting and Finance at University of North Carolina at Greensboro Bryan School of Business and Economics. This post is based on their recent paper, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

In our paper forthcoming in the Journal of Financial Economics, we raise a question: can a firm looking for a takeover target use a target firm’s net insider buying as a signal of the potential worthiness of this acquisition? Prior studies have not examined the implication of insider trading for the outcomes of corporate mergers and acquisitions (M&As), possibly due to target insiders’ uncertain foreknowledge about acquisition outcomes and the stringent insider trading regulations prior to M&As. Our study fills this void by investigating whether target firm insider trading helps to reduce the “lemons” problem in the M&A market.

Corporate insiders’ trading activities are often used as a way to sign various potential firm-level events (e.g., dividend policy changes, seasoned equity offerings, open market share repurchases, corporate disclosures, etc.) as good or bad. However, it is not ex ante clear whether target insider trading can be used to infer the success of future M&As because the informational implications of target insider trading for acquisition outcomes are quite different from those of insider trading for the outcomes of other corporate events. In particular, prior to M&As, (1) target insiders are often uncertain about the bidder’s synergy potential, sometimes even lacking the knowledge of a potential acquisition, and (2) the Short Swing rule (i.e., SEC rule Section 16b), which requires any profits earned by insiders on round trip trades within any six-month period to be paid back to the firm, curbs target insiders’ trading prior to takeovers more severely than insider trading prior to other corporate events because takeover completion forces the sale of the target stock. (Facing any upcoming corporate events other than M&As, however, insiders can avoid the violation of the Short Swing rule simply by holding the stock over six months. If the limited target insider trading prior to M&As is unlikely to reflect target insiders’ private information, it would not be informative of M&A outcomes.) Due to these dissimilarities in the information structure and the regulatory environment of insider trading between M&As and other firm-level events, it is a discrete and important empirical issue to test whether target firm insider trading helps to reduce the adverse selection problem in the M&A setting.


Weekly Roundup: March 26–April 1, 2021

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 26–April 1, 2021.

The Long-Term Effects of Short Selling and Negative Activism

Board Refreshment

Tailoring Executive Pay for Long-Term Success

Integrating ESG Into Corporate Culture: Not Elsewhere, but Everywhere

Energizing the M&A Market Post-Crisis

Signaling Through Carbon Disclosure

Revisiting the SEC Approach to Financial Penalties

Deals in the Time of Pandemic

How Valuable is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis

How Valuable is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis

Rüdiger Fahlenbrach is Swiss Finance Institute professor at Ecole Polytechnique Fédérale de Lausanne (EPFL) College of Management; Kevin Rageth is Swiss Finance Institute doctoral student at EPFL; and René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on their recent paper, forthcoming in The Review of Financial Studies.

In our forthcoming Review of Financial Studies publication (available here), we examine the value of financial flexibility for large, publicly listed companies in the US during the initial phase of the COVID-19 crisis.

The COVID-19 shock led to a dramatic temporary decrease in revenues for many firms, because production and selling activities conflicted with social distancing practices. For some firms, production halted, because production would have led to workers being highly exposed to COVID-19. For other firms, customer demand flatlined, because the firm’s goods and/or services entailed exposure to COVID-19.

Firms differ in how their financial affairs are organized. Some firms hold large amounts of cash to help them cope with unexpected events. They also keep debt capacity and limit their exposure to debt rollover risk. These firms have financial flexibility, so that they can more easily fund a cash flow shortfall, such as the one created by the COVID-19 shock. In contrast, firms with less financial flexibility might rapidly descend into financial distress and be forced to take actions that healthy firms would consider detrimental to long-term shareholder wealth.


Creating Long-Term Value With ESG Metrics

Erin Lehr is a Research Specialist at Equilar. This post is based on her Equilar memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

During the last few years, ESG has transformed from a buzzword into a priority in the corporate world. More recently, a plethora of events has accelerated this demand for corporate change and accountability—COVID-19, the resurgence of racial justice movements and climate change. Additionally, there is mounting pressure from institutional investors on this front. ESG measures, while in the past viewed as costly to the bottom line, are increasingly viewed as key for ensuring long-term success and sustainability. Corporations may also avoid additional costs related to turnover and lawsuits through ESG practices. One way in which companies demonstrate to their shareholders that they value ESG matters is through executive compensation. In order to understand the connection between ESG and executive incentives, Equilar performed an analysis of ESG compensation metrics disclosed by Fortune 100 companies over the last year.

Among the Fortune 100, 38 companies disclosed compensation metrics that were tied to ESG goals. Out of these companies, three referenced forward-looking practices only, while the rest applied to the past year. There were 53 metrics disclosed in total, most of which corresponded to annual incentive plans. Only one company incorporated an ESG metric into their long-term incentive plan. While it’s clear that ESG is on the mind of compensation committees, the category of ESG is rather broad in itself. The actual metrics companies are using vary widely. For the purpose of this study, Equilar broke down ESG metrics into seven categories: general ESG, human capital, safety, environmental, culture, diversity and other.


Executive Compensation under Covid: What to Look for in the 2021 Proxy Season

Blair Jones is Managing Director at Semler Brossy Consulting Group. This post is based on her Semler Brossy memorandum.

Even just a year later, it may be difficult to remember the uncertainty and confusion of the early months of the coronavirus pandemic. Corporate boards soon realized that the crisis was far more extensive than the 2008-2009 downturn, but they scrambled to understand the implications for their industry and company. Many leadership teams were desperate as they watched their businesses decline for reasons beyond their control. They sought solutions to motivate employees in this chaotic environment, and their boards did the same. And then George Floyd’s death in May sparked an intensified corporate commitment toward diversity, equity, and inclusion. Investors upped the ante, asking for more visible responsiveness on these issues.

In setting or adjusting executive compensation for 2020, boards employed a variety of reactions and solutions. All of these were well intended, and some look to hold up well over time. Other compensation arrangements, by contrast, will look incongruous given what we know now. As of March 26 in the 2021 proxy season, 3.5% of the Russell 3000 companies had had a “no” vote in “say-on-pay” resolutions, a jump from last year’s rate of 1.4%. [1] Say on Pay failures are even higher to date among the larger S&P 500 companies including Starbucks, Walgreens Boots Alliance, and Acuity Brands.

It is still early days, but proxy advisors and investors seem to be questioning the pay-performance connection at a higher number of companies. They must decide whether each company’s compensation actions, in their unique context including the experience of employees and other stakeholders, were fair and well-constructed to ensure sustained overall performance over time.


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