Tag: Ownership


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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Corporate Governance and Blockchains

David Yermack is Professor of Finance at the NYU Stern School of Business. This post is based on a recent article authored by Professor Yermack.

In the paper, Corporate Governance and Blockchains, which was recently made publicly available on SSRN, I explore the corporate governance implications of blockchain database technology. Blockchains have captured the attention of the financial world in 2015, and they offer a new way of creating, exchanging, and tracking the ownership of financial assets on a peer-to-peer basis. Major stock exchanges are exploring the use of blockchains to register equity issued by corporations. Blockchains can also hold debt securities and financial derivatives, which can be executed autonomously as “smart contracts.” These innovations have the potential to change corporate governance as much as any event since the 1933 and 1934 securities acts in the United States.

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Investor-Advisor Relationships and Mutual Fund Flows

Leonard Kostovetsky is Assistant Professor of Finance at Boston College. This post is based on Professor Kostovetsky’s recent article, available here.

In my paper, Whom Do You Trust? Investor-Advisor Relationships and Mutual Fund Flows, forthcoming in the Review of Financial Studies, I investigate the role of trust in the asset management industry. While there is plenty of anecdotal and survey evidence which underlines the general importance of trust in finance, academic research has been scarce due to the difficulty of quantifying and measuring trust. In this paper, I use an exogenous shock to the relationships between investors and mutual fund advisory companies (e.g. Fidelity, Wells Fargo, Vanguard, etc.) to try to tease out the effect of trust.

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Active Ownership

Oğuzhan Karakaş is Assistant Professor of Finance at Boston College. This post is based on an article authored by Professor Karakaş; Elroy Dimson, Professor of Finance at London Business School; and Xi Li, Assistant Professor of Accounting at Temple University. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Allen Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

In our paper, Active Ownership, forthcoming in the Review of Financial Studies, we analyze highly intensive engagements on environmental, social, and governance (ESG) issues by a large institutional investor with a major commitment to responsible investment (hereafter “ESG activism” or “active ownership”). Given the relative lack of research on environmentally and socially themed engagements, we emphasize the environmental and social (ES) engagements throughout the paper and use the corporate governance (CG) engagements as a basis for comparison.

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Is Institutional Investor Stewardship Still Elusive?

Simon C.Y. Wong is an adjunct professor of law at the Northwestern University School of Law, and a visiting fellow at the London School of Economics and Political Science. This post is based on an article that recently appeared in the Butterworths Journal of International Banking and Financial Law.

 

The idea that institutional investors should behave as active, long-term oriented “stewards” has caught on globally. Five years after the launch of the landmark UK Stewardship Code, counterparts can be found on four continents (see Figure 1).

When the UK code was promulgated, I argued that institutional investor stewardship was an elusive quest due to, inter alia: ––

  • Inappropriate performance metrics and financial arrangements that promote trading and a short-term focus;
  • ––Excessive portfolio diversification that makes monitoring of investee companies challenging; ––
  • Lengthening chain of ownership that weakens an ownership mindset; ––
  • Passive/index funds that pay scant attention to corporate governance; and ––
  • Pervasive conflicts of interest among asset managers.

The fifth anniversary of the UK code provides an opportune moment to examine the notable achievements and continuing challenges in the drive to encourage institutional investors to be informed and engaged owners.

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Development of Corporate Governance in Toulouse from 1372 to 1946

Sébastien Pouget is Professor of Finance at Toulouse School of Economics. This post is based on an article authored by Professor Pouget; David Le Bris, Assistant Professor of Finance at KEDGE Business School; and William Goetzmann, Professor of Finance at Yale University.

In our recent NBER working paper, The Development of Corporate Governance in Toulouse 1372-1946, we study the birth and evolution of the oldest shareholding companies in the world: the grain-milling companies of Toulouse. Shareholding companies that began in the 11th century formally incorporated themselves into two large-scale, widely held firms: the Bazacle Company (1372) and the Castel Company (1373). In the years that followed, they experienced the economic challenges and conflicts we now recognize as inherent in the separation of ownership and control.

The historian of law, Germain Sicard, in his 1953 landmark study of the Toulouse companies in the Middle Ages that has recently been translated in English by the Yale University Press, shows that they resembled modern corporations in many respects. We build upon the archival research by Sicard and extend the analysis of the archives of these early firms from the 16th through the 19th centuries in order to trace the evolution of corporate governance mechanisms over the “longue durée.”

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Court of Chancery Upholds Customary Release in Spin-Off Transactions

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on a Wachtell Lipton publication by Mr. Katz, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Court of Chancery last week validated a release of liability that extinguished certain claims a recently spun-off company may have had against its former parent and its directors. In re AbbVie Inc. Stockholder Derivative Litig., C.A. No. 9983-VCG (Del. Ch. July 21, 2015). The decision confirms that the mutual releases customary in spin-off arrangements are presumptively appropriate and enforceable.

Abbott Laboratories spun off AbbVie, its research-based pharmaceutical subsidiary, in January 2013. Before the spin, Abbott was a defendant in a False Claims Act action alleging unlawful off-label marketing of an AbbVie product. As part of the spin-off, AbbVie broadly released all claims it might have against Abbott or any Abbott affiliate relating to assets transferred to AbbVie, including liability for the False Claims Act claim.

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Managerial Ownership and Earnings Management

Phil Quinn is Assistant Professor of Accounting at the University of Washington. This post is based on an article by Mr. Quinn.

In my paper, Managerial Ownership and Earnings Management: Evidence from Stock Ownership Plans, which was recently made publicly available on SSRN, I exploit the initiation of ownership requirements to examine the relation between managerial ownership and earnings management. Prior work provides mixed evidence on the relation between managerial ownership and earnings management. Many studies provide evidence of a positive relation between managerial ownership and earnings management, which is consistent with an increase in stock price increasing the portfolio value of high-ownership managers more than the value of low-ownership managers (i.e., the “reward effect”) (Cheng and Warfield 2005; Bergstresser and Philippon 2006; Baber, Kang, Liang, and Zhu 2009; Johnson, Ryan, and Tian 2009). Other work notes that earnings management is a risky activity and posits that risk-adverse managers will be less likely to engage in risky activities as their ownership increases. Consistent with the “risk effect” increasing with managerial ownership, several studies find no relation or a negative relation between earnings management and managerial ownership (Erickson, Hanlon, and Maydew 2006; Hribar and Nichols 2007; Armstrong, Jagolinzer, and Larcker 2010). Armstrong, Larcker, Ormazabal, and Taylor (2013) note that the theoretical reward effect and risk effect are countervailing forces, and the countervailing forces may explain why prior empirical work finds mixed evidence on the relation between ownership and earnings management. By examining stock ownership plans, a governance reform that limits the reward effect, I seek to inform the discussion on the relation between ownership and earnings management.

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Controlling Stockholders in Delaware—More Than a Number

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf and David B. Feirstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Two recent Chancery Court decisions, Crimson Exploration and KKR Financial, confirm that Delaware takes a flexible and fact-specific approach to determining whether a stockholder is deemed to be “controlling” for purposes of judicial review of a transaction. It is important for dealmakers to understand when the courts may make a determination of control, both to properly craft a defensible process and to understand the prospects for resulting deal litigation.

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Governance and Comovement Under Common Ownership

The following post comes to us from Alex Edmans, Professor of Finance at London Business School; Doron Levit of the Finance Department at the University of Pennsylvania; and Devin Reilly of the Department of Economics at the University of Pennsylvania.

Most existing theories of blockholder governance consider a single firm. However, in reality, many institutional investors hold blocks in multiple firms. In our paper, Governance and Comovement Under Common Ownership, which was recently made publicly available on SSRN, we study the implications of common ownership for corporate governance and asset pricing. In particular, we address two broad questions. First, does holding multiple blocks weaken governance by spreading a blockholder too thinly, as commonly believed? If not, under what conditions can multi-firm ownership improve governance? Second, can common ownership lead to correlation between stocks with independent fundamentals, and if so, in which direction?

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