Category Archives: Program Research

Hindering the SEC From Shining a Light on Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as the principal draftsmen of the rulemaking petition that the Committee on the Disclosure of Corporate Political Spending submitted to the SEC. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

In a New York Times DealBook column published today, Hindering the S.E.C. From Shining a Light on Political Spending, we discuss the addition to the omnibus budget agreement of a rider to prevent the SEC from issuing next year a rule that would require public companies to disclose their political spending. This unusual Congressional intervention in S.E.C. rulemaking, we argue, is a troubling development both for investors and for the agency.

In July 2011 we co-chaired a bipartisan committee of 10 corporate and securities law professors that considered this issue and submitted to the SEC a rule-making petition urging the development of rules requiring public companies to disclose their spending on politics. To date, the agency has received more than 1.2 million comments on the proposal—far more comments than those submitted on any rule-making petition in its history.

With submissions to the SEC expressing overwhelming support for the petition, the rider reflects opponents’ interest in avoiding a debate on the merits. The rider also hurts the standing of the S.E.C., and undermines the critical premises upon which the Supreme Court has relied in its Citizens United decision.

The column is available here.

The Long-term Effects of Hedge Fund Activism: A Reply to Cremers, Giambona, Sepe, and Wang

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School; Alon Brav is Professor of Finance at Duke University; Wei Jiang is Professor of Finance at Columbia Business School; and Thomas Keusch is Assistant Professor at the Erasmus University School of Economics. This post relates to a recent article, Hedge Find Activism and Long-Term Firm Value, by Cremers, Giambona, Sepe, and Wang, which was recently made publicly available on SSRN. This post is related to the study on The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

This post replies to a study by Cremers, Giambona, Sepe, and Wang (“the CGSW Study”), Hedge Find Activism and Long-Term Firm Value. The CGSW study, which has recently been publicly released on SSRN and simultaneously announced in a Wachtell Lipton memorandum, aims at contesting existing evidence on the long-term effects of hedge fund activism. As we explain below, the paper overlooks prior opposing evidence on the subject, offers a flawed empirical analysis, and makes claims that are contradicted by its own reported evidence. Furthermore, the paper’s conclusions are inconsistent not just with our work, but with a large body of empirical studies by numerous researchers. CGSW’s claims, we show, should be given no weight in the ongoing examination of hedge fund activism.

In a paper titled The Long-Term Effects of Hedge Fund Activism, (“the LT Effects Study”), three of us tested empirically the “myopic activism claim” that has long been invoked by opponents of shareholder activism. According to this claim, hedge fund activism produces short-term benefits at the expense of long-term value. The LT Effects Study shows that the myopic activist claim is not supported by the data on targets’ Tobin’s Q, ROA, or long-term stock returns during the five years following the activist intervention.

CGSW focus on one part of the results of the LT Effects Study—those concerning Q (financial economists’ standard metric of firm valuation). Accepting that industry-adjusted Tobin’s Q improves in the years following activist interventions, CGSW assert that what has been missing is a comparison of how activist targets perform relative to a matched sample of similarly underperforming firms. CGSW claim that their matched sample analysis shows that the Q of activist targets improves less in the years following the intervention than the Q of matched control firms and that activism therefore decreases, rather than increases long-term value. Although CGSW do not look at stock returns, their conclusions imply that the announcement of an activist intervention represents “bad news” for investors that should be expected to be accompanied immediately or ultimately by negative stock returns for the shareholders of target companies.

Below we in turn comment on:

(i) Our obtaining different results than those reported by CGSW when applying CGSW’s empirical methodology to the same data;

(ii) The inconsistency of CGSW’s claims with some of their own reported results;

(iii) CGSW’s puzzling “discovery” of a well-known selection effect;

(iv) CGSW’s failure to engage with prior work conducting matched sample analysis and reaching opposite conclusions;

(v) CGSW’s flawed empirical methodology;

(vi) The inconsistency of CGSW’s conclusions with the large body of evidence on stock returns accompanying activist interventions; and

(vii) CGSW’s implausible claim that activist interventions have destroyed over 50% of the value of “innovative” target firms.

Although CGSW direct their fire at the Long-Term Effects Study, the discussion below explains that their conclusions are inconsistent not just with this study but with a large number of empirical studies by numerous researchers, including the many studies cited below.

CGSW’s Data and Results

The CGSW paper is based on a dataset of activist interventions that two of us collected and that the LT Effects Study used. Although we are still working with the data to produce additional papers, we agreed to provide the authors with our data to facilitate research in this area. To our surprise, the authors did not provide us an opportunity to comment on their paper before making their paper public, and we first learnt about the paper from Wachtell Lipton’s memorandum announcing it.

Although we view the empirical procedure used by CGSW as flawed, we have attempted to replicate their results using our data (which CGSW used), following the procedure described in their paper and making standard choices for elements of the procedure that the paper does not fully specify. Doing so, we have obtained results that are very different from those of CGSW.

We asked the authors to provide us with the list of the matched sample companies used in their tests. Even though their paper is based on data we shared with them, CGSW declined to provide us with the requested list and stated that they would not do so prior to the publication of their paper in a journal (which might be many months away).

Claims Inconsistent with CGSW’s Own Results

CGSW claim that their matched sample analysis shows that “firms targeted by activist hedge funds improve less in value … than similarly poorly performing firms that are not subject to hedge fund activism.” However, the patterns displayed in the authors’ key Figure 1 do not support this central claim.

This Figure 1, which we reproduce below, reports industry-adjusted Tobin’s Q for firms targeted by hedge funds (blue graph) and industry-adjusted Tobin’s Q for the matched control firms (paired with the target firms by CGSW) during the years before and after the year at which target firms became a target.

Although the authors state that the Figure “confirms” their conclusions, it does not appear to do so. The Figure vividly shows that targets’ valuation increases more sharply than that of matched control firms that are not subject to hedge fund activism during the years following time t (denoting the end of the intervention year).

CGSW might argue that, although target valuation increases more sharply relative to matched control firms from time t (the end of the intervention year) forward, the activist intervention is responsible for the short-term decrease in value relative to control firms that targets experience from time t-1 (the beginning of the year of the intervention) to time t (the end of the year of the intervention). However, this short-term decrease is likely to at least partly precede the intervention and thus be a potential cause rather than a product of it. Furthermore, while opponents of hedge fund activism have been seeking to ground their opposition in claims regarding long-term effects, we are unaware of any claims by such opponents that such activism decreases value in the short term, and the well-documented stock market gains accompanying announcements of activist interventions would make such a claim implausible.

Indeed, CGSW themselves explain that the view that is empirically supported by their paper is that hedge fund interventions pressure management to produce short-term gains that come “at the potential expense of long-term performance.” This view implies a short-term increase in valuation followed by a decline in valuation during the years following the intervention year. The clear improvement in target valuation (relative to control firms) from time t forward displayed in Figure 1 thus contradicts CGSW’s claims and conclusions.

Tobin’s Q around the start of activist hedge fund campaigns (sample of all hedge funds campaigns)

cremers1

Source: Cremers et al., November 2015, page 44.

Although the inconsistency of CGSW’s claims with their own Figure 1 is worth noting in assessing CGSW’s paper, we should stress that, due to the methodological problems noted below, we otherwise do not attach weight to the authors’ results, including those in Figure 1.

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Shedding Light on Dark Pools

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement at an open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today, [November 18, 2015], the Commission considers proposing much-needed enhancements to the regulatory regime for alternative trading systems (“ATSs”) that trade national market system (“NMS”) stocks. I will support these proposals because they could go a long way toward helping market participants make informed decisions as they attempt to navigate the byzantine structure of today’s equity markets.

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19 Law Professors Submit Amicus Brief in Union Political Spending Case

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post relates to a brief submitted by 19 law professors, led by Professor Coates, in the case of Friedrichs v. California Teachers Association. The amicus brief is available here.

In 2010, the Supreme Court ruled in Citizens United v. Federal Election Commission that under the First Amendment, the government could not restrict a corporation’s independent political spending, even in the interest of aligning corporate expression with shareholders’ views. In contrast, an earlier Court case, Abood v. Detroit of Board of Education, conditioned the ability of unions to use fees from non-members for political spending on a mechanism for non-members to opt out of fees not directly used in collective bargaining. In Friedrichs v. California Teachers Associationcurrently awaiting oral argument in the Court’s October Term 2015—again deals with speech by labor unions, which the Supreme Court has compared to speech by corporations.

Presently, California requires that public schoolteachers either join the California Teachers Union or pay “agency fees” to compensate the union for its efforts on their behalf. Plaintiffs, a group of teachers, argue that these fees constitute forced subsidization of the union’s speech. Pinning their claim to the First Amendment, plaintiffs are seeking to invalidate agency fees altogether, or else require non-union members to affirmatively consent to subsidizing the union’s speech. In effect, plaintiffs are seeking to overturn Abood, converting an opt-out to an opt-in. The CTU, on the other hand, argues that the opt-out already required by Abood means that non-union teachers are not forced to pay for union speech at all.

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Corporate Power Ratchet

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Corporate Power Ratchet: The Courts’ Role in Eroding “We the People’s” Ability to Constrain Our Corporate Creations forthcoming in the Harvard Civil Rights-Civil Liberties Law Review and issued earlier as a working paper of the Harvard Law School Program on Corporate Governance. Related research on corporate political spending from the Program on Corporate Governance includes Originalist or Original: The Difficulties of Reconciling Citizens United with Corporate Law History, and Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United, both by Leo Strine and Nicholas Walter (discussed on the Forum here and here), and Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here).

Leo Strine, Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an essay that is forthcoming in the Harvard Civil Rights-Civil Liberties Law Review. The essay, titled Corporate Power Ratchet: The Courts’ Role in Eroding “We the People’s” Ability to Constrain Our Corporate Creations, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

At the beginning of our nation and throughout much of our history, corporations, as the creation of society, were seen as distinctive from human citizens. Human beings were born with certain inalienable rights that government could not take away. By contrast, corporations were the opposite of Lockean-Jeffersonian citizens, in the sense that they had only such rights as society gave them. Under this understanding, society could charter corporations and benefit from their wealth-creating potential while reserving for itself the right to limit corporate activities through externality-reducing legislation and other means so as to protect the public interest.

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Hillary Clinton Announces Support for SEC Rulemaking on Corporate Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

We are pleased that Presidential candidate Hillary Clinton just announced her support for SEC rulemaking that would require public companies to disclose their political spending to their shareholders.

In July 2011, we co-chaired a committee on the disclosure of corporate political spending and served as the principal draftsmen of the rulemaking petition that the committee submitted. The petition urged the SEC to develop rules requiring public companies to disclose their spending on politics. To date, the SEC has received more than 1.2 million comments on the proposal—far more comments than those submitted on any rulemaking petition in the Commission’s history.

A statement just released by the Clinton campaign expressed Clinton’s support for “SEC rulemaking requiring publicly traded companies to disclose all political spending to their shareholders.” It further indicated that “Clinton believes that information about how corporate funds are being used to fuel political activity and influence elected officials is material to investment decisions and should be made available to shareholders.”

In addition to Clinton’s announcement, there have been recently other notable expressions of support for the rulemaking petition. Last week, forty-four U.S. Senators sent a letter to the SEC chair to “express [their] support” for the rulemaking petition” and requested that the SEC Chair make the petition “a top priority for the SEC in the near term” (discussed on the Forum here). Earlier, in a letter in support of the rulemaking petition, former SEC Chairmen Arthur Levitt and William Donaldson and former Commissioner Bevis Longstreth stated that the rulemaking proposed in the petition is a “slam dunk” and that the SEC’s failure to act “flies in the face of the primary mission of the Commission, which since 1934 has been the protection of investors” (discussed on the Forum here).

As we have discussed in previous posts on the Forum, the case for rules requiring disclosure of corporate political spending is compelling. Moreover, as our article Shining Light on Corporate Political Spending shows, a close examination of the full range of objections that opponents of such rules have raised indicates that these objections, both individually and collectively, fail to provide an adequate basis for opposing rules that would make disclose corporate political spending to investors. The SEC should proceed to rulemaking in this area.

More than 300 Research Papers Have Applied the Entrenchment Index of Bebchuk, Cohen and Ferrell (2009)

This post relates to an article by Lucian Bebchuk, Alma Cohen and Allen Ferrel, What Matters in Corporate Governance, available here and discussed on the Forum here. Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Alma Cohen is Professor of Empirical Practice, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School.

As of May 2015, more than 300 research studies have applied the Entrenchment Index put forward in a study published by Lucian Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate Governance. The papers using the Entrenchment Index, including many papers in leading journals in law, economics and finance, are listed here.

The Bebchuk-Cohen-Ferrell paper, first circulated in 2004 and published in 2009 in the Review of Financial Studies, identified six corporate governance provisions as especially important, demonstrated empirically the significance of these provisions for firm valuation and put forward a governance index, commonly referred to as the “Entrenchment Index,” based on these six provisions. The paper has been cited by more than 650 research studies, and more than 300 of these studies made use of the index in their own empirical analysis.

The Bebchuk-Cohen-Ferrell paper putting forward the Entrenchment Index is available for download here.

Executive Compensation in Controlled Companies

Kobi Kastiel is a fellow at the Harvard Law School Program on Corporate Governance. His article, Executive Compensation in Controlled Companies, is forthcoming in the January 2015 issue of Indiana Law Journal and available here. Additional work from the Program on Corporate Governance on executive compensation includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried, discussed on the Forum here.

More than a decade ago, Professors Lucian Bebchuk and Jesse Fried published the seminal work on the role and significance of managerial power theory in executive compensation. Their work cultivated a vivid debate on executive compensation in companies with dispersed ownership. The discourse on the optimality of executive pay in controlled companies, however, has been more monolithic. Conventional wisdom among corporate law theorists has long suggested that the presence of a controlling shareholder should alleviate the problem of managerial opportunism because such a controller has both the power and incentives to curb excessive executive pay.

My Article, Executive Compensation in Controlled Companies, forthcoming in the Indiana Law Journal, challenges that common understanding by proposing a different view that is based on an agency problem paradigm, and by presenting a comprehensive framework for understanding the relationship between concentrated ownership and executive pay. On the theoretical level, the Article shows that controlling shareholders often have incentives to overpay professional managers instead of having an arm’s-length contract with them, and therefore it suggests that compensation practices in a large number of controlled companies may have their own pathologies.

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Why Commissioner Gallagher is Mistaken about Disclosure of Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published last year in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here.

Last week, Securities and Exchange Commissioner Daniel Gallagher took the unusual step of publishing a letter to the editor of the New York Times expressing his opposition to the SEC even considering companies’ disclosure of political spending. In his letter, the Commissioner vows “to fight to keep” the subject off the SEC’s agenda. As explained below, however, his letter fails to provide a substantive basis for his vehement opposition to transparency in corporate spending on politics.

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The Million-Comment-Letter Petition: The Rulemaking Petition on Disclosure of Political Spending Attracts More than 1,000,000 SEC Comment Letters

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published last year in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

In July 2011, we co-chaired a committee of ten corporate and securities law experts that petitioned the Securities and Exchange Commission to develop rules requiring public companies to disclose their political spending. We are delighted to announce that, as reflected in the SEC’s webpage for comments filed on our petition, the SEC has now received more than a million comment letters regarding the petition. To our knowledge, the petition has attracted far more comments than any other SEC rulemaking petition—or, indeed, than any other issue on which the Commission has accepted public comment—in the history of the SEC.

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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
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Brand
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    David Fox
    Stephen Fraidin
    Byron Georgiou
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Rodman Ward