Category Archives: Academic Research

The Real Effects of Share Repurchases

Mathias Kronlund is Assistant Professor of Finance at the University of Illinois at Urbana-Champaign. This post is based on an article authored by Professor Kronlund; Heitor Almeida, Professor of Finance at the University of Illinois at Urbana-Champaign; and Vyacheslav Fos, Assistant Professor of Finance at Boston College.

Companies face intense pressure from activist shareholders, institutional investors, the government, and the media to put their cash to good use. Existing evidence suggests that share repurchases are a good way for companies to return cash to investors, since cash-rich companies tend to generate large abnormal returns when announcing new repurchase programs. However, some observers argue that the cash that is spent on repurchase programs should instead be used to increase research and employment, and that the recent increase in share repurchases is undermining the recovery from the recent recession and hurting the economy’s long-term prospects. Repurchases have also been cited as an explanation for why the increase in corporate profitability in the years after the recession has not resulted in higher growth in employment, and overall economic prosperity.

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Crowdfunding and the Digital Shareholder

Andrew A. Schwartz is an Associate Professor at University of Colorado Law School. This post is based on Professor Schwartz’s recent article published in The Minnesota Law Review, available here.

After several years of delay, Internet-based securities crowdfunding is finally poised to go live this year thanks to the SEC’s recent issuance of Regulation Crowdfunding. Through crowdfunding, people of modest means will for the first time be legally authorized to make investments that are currently offered exclusively to “accredited” (wealthy) investors. This democratization of entrepreneurial finance sounds great in theory, but will it work in practice? Will non-accredited investors really buy unregistered securities in speculative startups, over the Internet, with only the barest form of disclosure? The conventional wisdom among most legal scholars is, basically, no. In their view, securities crowdfunding is doomed to failure for myriad reasons, including fraud, [1] costs, [2] dilution, [3] adverse selection, [4] opportunism, [5] and more. [6]

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The Biases of an “Unbiased” Optional Takeover Regime

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University. This post is based on a recent article authored by Prof. Ventoruzzo and Johannes Fedderke, Professor of International Affairs at Pennsylvania State University School of International Affairs.

The conundrum of the perfect balance between mandatory and enabling rules and the role of private ordering in takeover regulation is one of the most relevant and interesting issues regarding the optimal regime for acquisitions of listed corporations. The issue is rife with complex questions and implications, both from a more technical legal perspective and in terms of public choice.

In a recent and compelling article (available here and published in the Harvard Business Law Review in 2014, and discussed on the Forum here), Luca Enriques, Ron Gilson and Alessio Pacces have argued the desirability of an optional, default regime to regulate takeovers particularly in the European Union. According to this approach, which the proponents call “unbiased,” listed corporations should be allowed to opt out of the default regime and use private ordering to tailor more desirable rules on the “pillars” of the European approach: mandatory bid, board neutrality, and breakthrough. More precisely, they suggest a dichotomy, distinguishing already listed corporations and new IPOs: for the former, the default regime should be the one currently in place; for the latter, a regime crafted against the interests of the existing incumbents should be introduced. With adequate protections and procedural rules, the theory goes, it would be easier to achieve a more efficient regulatory structure.

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Corporate Control and Idiosyncratic Vision

Zohar Goshen is the Alfred W. Bressler Professor of Law, Columbia Law School and Professor of Law at Ono Academic College. Assaf Hamdani is the Wachtell, Lipton, Rosen & Katz Professor of Corporate Law, Hebrew University of Jerusalem. This post is based on an article authored by Professor Goshen and Professor Hamdani.

Prominent technology firms such as Google, Facebook, LinkedIn, Groupon, Yelp, and Alibaba have gone public with the controversial dual-class structure to allow their controlling shareholders to preserve their indefinite, uncontestable control over the corporation. Similarly, in the concentrated ownership structure, a person or entity—the controlling shareholder—holds an effective majority of the firm’s voting and equity rights to preserve control. Indeed, most public corporations around the world have controlling shareholders, and concentrated ownership has a significant presence in the United States as well. Unlike diversified minority shareholders, a controlling shareholder bears the extra costs of being largely undiversified and illiquid. Why, then, does she insist on holding a control block?

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Political Values, Culture, and Corporate Litigation

Danling Jiang is Associate Professor of Finance at Florida State University. This post is based on an article authored by Professor Jiang; Irena Hutton, Associate Professor of Finance at Florida State University; and Alok Kumar, Professor of Finance at the University of Miami.

In our paper, Political Values, Culture, and Corporate Litigation, published in the latest issue of Management Science, we examine whether the political culture of a firm defines its ethical and legal boundaries as observed by the propensity for corporate misconduct. Using one of the largest samples of litigation data to date, we show that firms with Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and environmental protection. However, firms with Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than Republican firms whose Party ideology stresses self-reliance, property rights, market discipline, and limited government regulation.

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The Cost of Supermajority Target Shareholder Approval

Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone, Brian Broughman, Associate Dean for Research and Professor of Law at Indiana University, and Antonio Macias, Assistant Professor of Finance at Baylor University. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff. This post is part of the Delaware law series; links to other posts in the series are available here.

Acquisitions via a tender offer can be significantly faster than a traditional merger, but this benefit is only available if the bidder can conduct a short-form merger following the tender, which avoids the need for a proxy statement filing and formal shareholder vote. Until recently this structure was only available if the bidder could convince a supermajority (90%) of shareholders to participate in the tender offer. In August 2013, however, Delaware’s legislature passed a new code provision, section 251(h) of the Delaware General Corporation Law (the DGCL), that allows bidders of targets incorporated in Delaware to conduct a short-form merger after achieving only 50% ownership as opposed to 90% that is required in almost all other states. We use this legal change to investigate how the required level of shareholder support affects acquisition outcomes.

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A New Measure of Disclosure Quality

Shuping Chen is Professor of Accounting at the University of Texas at Austin. This post is based on an article authored by Professor Chen; Bin Miao, Assistant Professor of Accounting at the National Singapore University; and Terry Shevlin, Professor of Accounting at UC Irvine.

In our paper, A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports, recently featured in the Journal of Accounting Research, we develop a new measure of disclosure quality (DQ), which captures the level of disaggregation of accounting line items in firms’ annual reports, with greater disaggregation indicating higher disclosure quality. This measure is based on the premise that more detailed disclosure gives investors and lenders more information for valuation (Fairfield et al., 1996; Jegadeesh and Livnat 2006) and a higher level of disaggregation enhances the credibility of firms’ financial reports (Hirst et al. 2007; D’Souza et al. 2010).

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Private Equity Portfolio Company Fees

Ludovic Phalippou is an Associate Professor of Finance at Saïd Business School, University of Oxford. This post is based on an article authored by Professor Phalippou; Christian Rauch, Barclays Career Development Fellow in Entrepreneurial Finance at Saïd Business School, University of Oxford; and Marc Umber, Assistant Professor of Corporate Finance at Frankfurt School of Finance & Management.

When private equity firms sponsor a takeover, they may charge fees to the target company while some of the firm’s partners sit on the company’s board of directors. In the wake of the global financial crisis, such potential for conflicts of interest became a public policy focus. On July 21st 2015, thirteen state and city treasurers wrote to the SEC to ask for private equity firms to reveal all of the fees that they charge investors. The SEC announced on October 7th 2015, that it “will continue taking action against advisers that do not adequately disclose their fees and expenses” following a settlement by Blackstone for $39 million over accelerated monitoring fees.

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Bebchuk Leads SSRN’s 2015 Citation Rankings

Statistics released publicly by the Social Science Research Network (SSRN) indicate that, as was the case at the end of each of the eight preceding years, Professor Lucian Bebchuk led SSRN citation rankings for law professors at the end of 2015. As of the end of December 2015, Bebchuk ranked first among all law school professors in all fields in terms of the total number of citations to his work (as well as second in the total number of downloads of his work on SSRN).

Professor Bebchuk’s papers (available on his SSRN page here) have attracted a total of 4,373 citations. His top ten papers in terms of citations are as follows:

SSRN is the leading electronic service for social science research, and its electronic library contains (as of December 2015) 539,398 full-text documents by 297,574 authors. SSRN’s rankings in terms of citations are available here and SSRN’s rankings in terms of downloads are available here.

Economic Downsides and Antitrust Liability Risks from Horizontal Shareholding

Einer Elhauge is the Petrie Professor of Law at Harvard Law School. This post is based on Professor Elhauge’s recent article, forthcoming in the Harvard Law Review.

In recent decades, institutional investors have grown and become more active in influencing corporate management. While this development has often been viewed as salutary from a corporate governance perspective, the implications for product market competition have become deeply troubling. As I show in a new article called Horizontal Shareholding (forthcoming in the Harvard Law Review), this growth in institutional investors means that a small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
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    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

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