Behavioral finance raises questions about market efficiency, suggesting that noise, and not just information, moves securities prices. This creates a conundrum for the fraud on the market theory. While some fraud remedy is arguably necessary to ensure adequate disclosure, behavioral finance raises doubt about the efficiency of fraud remedies in noisy markets. These issues are particularly important in the wake of the Supreme Court's opinion in Dura v. Broudo Pharmaceuticals, Inc., which tightens proof of loss causation in fraud on the market cases and creates uncertainty about the future of the fraud on the market theory. This paper argues for interpreting Dura to sharply constrain the fraud on the market theory. It also proposes dealing with the need to deter fraud by allowing state courts and legislatures to supplement federal liability. More broadly, this paper suggests that, contrary to the assertions of many of its proponents, the indeterminacy of behavioral economics generally, and behavioral finance in particular, may support reducing rather than increasing legal paternalism.
行为金融学提出了有关市场效率的问题，认为影响证券价格的是噪音，而不仅仅是信息。这就给市场欺诈理论制造了一个难题。虽然某些欺诈补救措施对于确保充分披露是必要的，但行为金融学对嘈杂市场中欺诈补救措施的效率提出了质疑。这些问题在最高法院对Dura v. brodo Pharmaceuticals, Inc.的判决之后显得尤为重要，该判决收紧了市场欺诈案件中损失因果关系的证明，并对市场欺诈理论的未来产生了不确定性。本文主张通过对Dura的解释，对市场上的欺诈行为进行尖锐的约束。它还建议通过允许州法院和立法机构补充联邦责任来解决防止欺诈的需要。更广泛地说，这篇论文表明，与许多支持者的断言相反，行为经济学的不确定性，尤其是行为金融学，可能会支持减少而不是增加法律上的家长式作风。
{"title":"Fraud on a Noisy Market","authors":"Larry E. Ribstein","doi":"10.2139/ssrn.803064","DOIUrl":"https://doi.org/10.2139/ssrn.803064","url":null,"abstract":"Behavioral finance raises questions about market efficiency, suggesting that noise, and not just information, moves securities prices. This creates a conundrum for the fraud on the market theory. While some fraud remedy is arguably necessary to ensure adequate disclosure, behavioral finance raises doubt about the efficiency of fraud remedies in noisy markets. These issues are particularly important in the wake of the Supreme Court's opinion in Dura v. Broudo Pharmaceuticals, Inc., which tightens proof of loss causation in fraud on the market cases and creates uncertainty about the future of the fraud on the market theory. This paper argues for interpreting Dura to sharply constrain the fraud on the market theory. It also proposes dealing with the need to deter fraud by allowing state courts and legislatures to supplement federal liability. More broadly, this paper suggests that, contrary to the assertions of many of its proponents, the indeterminacy of behavioral economics generally, and behavioral finance in particular, may support reducing rather than increasing legal paternalism.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-09-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123809661","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I have worked for many years as senior consultant and advisor for the majority of European Pulp&Paper companies, the majority of Nordic Packaging and Nuclear companies and other industries, and have found that values corresponding to billions of dollars are destroyed in the industry. Not because market assumptions etc are incorrect - that is one item that always will be uncertain - but because the industry's view on financial performance has consequences that are extremely costly to the shareholders. Examples of costly consequences are: 1. It is difficult to identify where the company should be expanding and where it should improve the current business. The company does not grasp the expansion opportunities it has. 2. The renewal of the business is too slow, low propensity for renewal. 3. Low performance is cemented The reason for this money-wasting is profitability information based on accounting.
{"title":"Why Current Profitability Measures Destroy Billions in the Industry","authors":"F. Weissenrieder","doi":"10.2139/SSRN.794570","DOIUrl":"https://doi.org/10.2139/SSRN.794570","url":null,"abstract":"I have worked for many years as senior consultant and advisor for the majority of European Pulp&Paper companies, the majority of Nordic Packaging and Nuclear companies and other industries, and have found that values corresponding to billions of dollars are destroyed in the industry. Not because market assumptions etc are incorrect - that is one item that always will be uncertain - but because the industry's view on financial performance has consequences that are extremely costly to the shareholders. Examples of costly consequences are: 1. It is difficult to identify where the company should be expanding and where it should improve the current business. The company does not grasp the expansion opportunities it has. 2. The renewal of the business is too slow, low propensity for renewal. 3. Low performance is cemented The reason for this money-wasting is profitability information based on accounting.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-08-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117297337","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the trading behavior of a large sample of individual (retail) investors around securities litigation events. We test the hypothesis that the response of these investors around the end of the litigation class period (at the time of a corrective disclosure) and the start of the class period (at the time of disclosure of allegedly false positive information) differs on the basis of the informedness of the investors. Our tests reject the hypothesis that more informed investors exhibit the same trading behavior as less informed investors. These results contribute to the literature by documenting differences in individual investor trading around events that reveal the start and end of an alleged financial fraud. These events can be relatively difficult to interpret and, so, it is not unreasonable that we should observe differences on the basis of informedness. We also examine individual investor trading within the class period and adduce that trading intensity is higher earlier in the class period, and higher overall relative to a control period. These findings are inconsistent with the often-applied proportional trading model for the calculation of class action damages, which assumes all shares trade with equal probability.
{"title":"Are All Individual Investors Created Equal? Evidence from Individual Investor Trading Around Securities Litigation Events","authors":"P. Griffin, Ning Zhu","doi":"10.2139/ssrn.740485","DOIUrl":"https://doi.org/10.2139/ssrn.740485","url":null,"abstract":"This study examines the trading behavior of a large sample of individual (retail) investors around securities litigation events. We test the hypothesis that the response of these investors around the end of the litigation class period (at the time of a corrective disclosure) and the start of the class period (at the time of disclosure of allegedly false positive information) differs on the basis of the informedness of the investors. Our tests reject the hypothesis that more informed investors exhibit the same trading behavior as less informed investors. These results contribute to the literature by documenting differences in individual investor trading around events that reveal the start and end of an alleged financial fraud. These events can be relatively difficult to interpret and, so, it is not unreasonable that we should observe differences on the basis of informedness. We also examine individual investor trading within the class period and adduce that trading intensity is higher earlier in the class period, and higher overall relative to a control period. These findings are inconsistent with the often-applied proportional trading model for the calculation of class action damages, which assumes all shares trade with equal probability.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"30 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-06-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117131544","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
M. Greenstone, Annette Vissing-Jorgensen, Paul D. Oyer
Author(s): Greenstone, Michael; Oyer, Paul E; Vissing-Jorgensen, Annette | Abstract: The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). We find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. First, a firm-level event study reveals that the OTC firms most affected by the 1964 Amendments had abnormal excess returns of about 3.5 percent in the weeks immediately surrounding the announcement that they had begun to comply with the new requirements. Second, we estimate that the most affected OTC firms had abnormal excess returns ranging between 11.5 and 22.1 percent in the period between when the legislation was initially proposed and when it went into force. These returns are adjusted for the standard four factors and are relative to NYSE/AMEX firms, matched on size and book-to-market equity, that were unaffected by the legislation. While we cannot determine how much of shareholders' gains were a transfer from insiders of these same companies, our results suggest that mandatory disclosure causes managers to focus more narrowly on maximizing shareholder value.
{"title":"Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments","authors":"M. Greenstone, Annette Vissing-Jorgensen, Paul D. Oyer","doi":"10.2139/ssrn.597142","DOIUrl":"https://doi.org/10.2139/ssrn.597142","url":null,"abstract":"Author(s): Greenstone, Michael; Oyer, Paul E; Vissing-Jorgensen, Annette | Abstract: The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). We find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. First, a firm-level event study reveals that the OTC firms most affected by the 1964 Amendments had abnormal excess returns of about 3.5 percent in the weeks immediately surrounding the announcement that they had begun to comply with the new requirements. Second, we estimate that the most affected OTC firms had abnormal excess returns ranging between 11.5 and 22.1 percent in the period between when the legislation was initially proposed and when it went into force. These returns are adjusted for the standard four factors and are relative to NYSE/AMEX firms, matched on size and book-to-market equity, that were unaffected by the legislation. While we cannot determine how much of shareholders' gains were a transfer from insiders of these same companies, our results suggest that mandatory disclosure causes managers to focus more narrowly on maximizing shareholder value.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121914014","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The advancement of their risk management activities makes it profitable for major banks to rely on internal credit ratings to calculate Basel II capital requirements (IRB approach). Firms and, more generally, market participants would benefit from the disclosure of these ratings, as it would reduce their cost of capital and facilitate investment diversification. Banks, however, have no interest in making their data publicly available. This paper proposes a regulatory framework to efficiently solve this incentive issue. It first shows that there are net benefits in requiring the disclosure of internal ratings. The paper then sketches regulatory requirements that would minimize disclosure costs and interest group opposition. Banks opting for the IRB approach would have to provide their internal ratings to one of several regional entities. The latter would consolidate the data collected and giver each borrower a rating equal to the average of the ratings it gets from its lenders. The average rating would be disclosed to the public unless the borrower has opted for non-disclosure. Relying upon multiple regional entities may cause some uncertainty (a given firm may get diverging average ratings), but it would also reduce moral hazard effects and foster competition in the rating industry.
{"title":"Using Basel Ii to Facilitate Access to Finance: The Disclosure of Internal Credit Ratings","authors":"G. Hertig","doi":"10.2139/ssrn.698762","DOIUrl":"https://doi.org/10.2139/ssrn.698762","url":null,"abstract":"The advancement of their risk management activities makes it profitable for major banks to rely on internal credit ratings to calculate Basel II capital requirements (IRB approach). Firms and, more generally, market participants would benefit from the disclosure of these ratings, as it would reduce their cost of capital and facilitate investment diversification. Banks, however, have no interest in making their data publicly available. This paper proposes a regulatory framework to efficiently solve this incentive issue. It first shows that there are net benefits in requiring the disclosure of internal ratings. The paper then sketches regulatory requirements that would minimize disclosure costs and interest group opposition. Banks opting for the IRB approach would have to provide their internal ratings to one of several regional entities. The latter would consolidate the data collected and giver each borrower a rating equal to the average of the ratings it gets from its lenders. The average rating would be disclosed to the public unless the borrower has opted for non-disclosure. Relying upon multiple regional entities may cause some uncertainty (a given firm may get diverging average ratings), but it would also reduce moral hazard effects and foster competition in the rating industry.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"62 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126416628","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides a framework to analyze voluntary and mandatory disclosure. Since improved disclosure reduces the entrepreneur's ability to extract private benefits, it secures funding for new investments, but also provides existing claimholders with a windfall gain. As a result, the entrepreneur may choose to forgo investment in favor of extracting more private benefits. A mandatory disclosure standard reduces inefficient extraction and increases investment efficiency. Although the optimal standard is higher than the entrepreneur's optimal choice, it can be less than complete in order not to deter investment. The model also shows that better legal shareholder protection goes together with higher disclosure standards and that harmonization of disclosure standards may be detrimental.
{"title":"Disclosure, Investment and Regulation","authors":"P. Östberg","doi":"10.2139/ssrn.675967","DOIUrl":"https://doi.org/10.2139/ssrn.675967","url":null,"abstract":"This paper provides a framework to analyze voluntary and mandatory disclosure. Since improved disclosure reduces the entrepreneur's ability to extract private benefits, it secures funding for new investments, but also provides existing claimholders with a windfall gain. As a result, the entrepreneur may choose to forgo investment in favor of extracting more private benefits. A mandatory disclosure standard reduces inefficient extraction and increases investment efficiency. Although the optimal standard is higher than the entrepreneur's optimal choice, it can be less than complete in order not to deter investment. The model also shows that better legal shareholder protection goes together with higher disclosure standards and that harmonization of disclosure standards may be detrimental.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123539462","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Note, being the first comprehensive critique of the SEC's Reproposed Regulation NMS, tries to evaluate the core Trade-Through Rule from an interdisciplinary perspective, expose some of the problems that can arise as a consequence of the rule and expound on certain approaches which may offer better alternatives. To be sure, the newly reproposed Regulation NMS scores many strong points in making regulations more align with the evolving market realities. Even the much criticized trade-through rule reflects laudable efforts by the SEC to reconcile divergent interests of various market constituents. Nevertheless, the unbalanced competitive strengths of NYSE, which holds the largest liquidity pool and offers best opportunities for price improvement but lags behind in terms of fast execution and other dimensions of execution quality, would make SEC's balancing act of engrafting flexible exceptions on a rigid best price rule untenable to improving liquidity and price discovery, and unappealing to electronic markets competing on multiple dimensions of execution quality. In light of a new environment where investors now demand more than low execution costs and markets compete not just on the basis of price, an all encompassing standard of best execution would be better suited, to balancing multidimensional needs of investors with a necessary degree of uniformity in regulating a broker's duty to seek best price across markets. The bottom line is that a piecemeal approach within the confine of the old NMS framework and without the recognition of changing governance structures and evolving economic function of stock exchanges will never prove to be satisfactory and the time has ripened to a point where the SEC should reassess its role in market regulation before articulating a new set of guidelines for the future of U.S. securities market.
{"title":"Treading Through Trade-Through: A Law and Economics Analysis of Sec Proposed Regulation Nms","authors":"Xiang Cai","doi":"10.2139/SSRN.666962","DOIUrl":"https://doi.org/10.2139/SSRN.666962","url":null,"abstract":"The Note, being the first comprehensive critique of the SEC's Reproposed Regulation NMS, tries to evaluate the core Trade-Through Rule from an interdisciplinary perspective, expose some of the problems that can arise as a consequence of the rule and expound on certain approaches which may offer better alternatives. To be sure, the newly reproposed Regulation NMS scores many strong points in making regulations more align with the evolving market realities. Even the much criticized trade-through rule reflects laudable efforts by the SEC to reconcile divergent interests of various market constituents. Nevertheless, the unbalanced competitive strengths of NYSE, which holds the largest liquidity pool and offers best opportunities for price improvement but lags behind in terms of fast execution and other dimensions of execution quality, would make SEC's balancing act of engrafting flexible exceptions on a rigid best price rule untenable to improving liquidity and price discovery, and unappealing to electronic markets competing on multiple dimensions of execution quality. In light of a new environment where investors now demand more than low execution costs and markets compete not just on the basis of price, an all encompassing standard of best execution would be better suited, to balancing multidimensional needs of investors with a necessary degree of uniformity in regulating a broker's duty to seek best price across markets. The bottom line is that a piecemeal approach within the confine of the old NMS framework and without the recognition of changing governance structures and evolving economic function of stock exchanges will never prove to be satisfactory and the time has ripened to a point where the SEC should reassess its role in market regulation before articulating a new set of guidelines for the future of U.S. securities market.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"133 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-02-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116719685","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper compares securities settlement gross and netting architectures. It studies settlement risk arising from exogenous operational delays and compares settlement failures between the two architectures as functions of the length of the settlement interval under different market conditions. While settlement failures are non monotonically related to the length of settlement cycles under both architectures, there is no clear cut ranking of which architecture delivers greater stability. We show that while, on average, netting systems seem to be more stable than gross systems, rare events may lead to contagious defaults that could affect the all system. Furthermore netting system are very sensitive to the number and initial distribution of traded shares. JEL Classification: C6, D4, G20, O33
{"title":"An Analysis of Systemic Risk in Alternative Securities Settlement Architectures","authors":"G. Iori","doi":"10.2139/ssrn.601024","DOIUrl":"https://doi.org/10.2139/ssrn.601024","url":null,"abstract":"This paper compares securities settlement gross and netting architectures. It studies settlement risk arising from exogenous operational delays and compares settlement failures between the two architectures as functions of the length of the settlement interval under different market conditions. While settlement failures are non monotonically related to the length of settlement cycles under both architectures, there is no clear cut ranking of which architecture delivers greater stability. We show that while, on average, netting systems seem to be more stable than gross systems, rare events may lead to contagious defaults that could affect the all system. Furthermore netting system are very sensitive to the number and initial distribution of traded shares. JEL Classification: C6, D4, G20, O33","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"85 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127007760","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A Securities Class Action lawsuit is initiated by a large class of shareholders against managers whom they suspect of wrongdoing. This paper proposes that Securities Class Action litigation is an ex post substitute for effective ex ante governance and monitoring. To elaborate this idea, I outline a model in which shareholders see a noisy signal of possible managerial fraud. Since the signal is imperfectly informative, and with costly litigation, shareholders' decision of whether to sue or not is based on the signal as well as the governance and monitoring mechanisms in place in the company. If the signal comes from a strong governed, vigilantly monitored company, shareholders are more likely to attribute it to noise. However if it comes from a company with poor controls in place, then the managers are more likely to have committed fraud and the shareholders sue with a higher probability. I test this idea using various measures of governance and monitoring, and find that firms with high total and abnormal compensation are more likely to be sued. I also find that firms with large institutional blockholders are less likely to be sued, suggesting that blockholders play a monitoring role. However my results find no evidence that outsider-dominated boards or small boards provide effective ex ante governance as a substitute to ex post litigation.
{"title":"Corporate Governance, Monitoring and Litigation as Substitutes to Solve Agency Problem","authors":"S. Mohan","doi":"10.2139/ssrn.606625","DOIUrl":"https://doi.org/10.2139/ssrn.606625","url":null,"abstract":"A Securities Class Action lawsuit is initiated by a large class of shareholders against managers whom they suspect of wrongdoing. This paper proposes that Securities Class Action litigation is an ex post substitute for effective ex ante governance and monitoring. To elaborate this idea, I outline a model in which shareholders see a noisy signal of possible managerial fraud. Since the signal is imperfectly informative, and with costly litigation, shareholders' decision of whether to sue or not is based on the signal as well as the governance and monitoring mechanisms in place in the company. If the signal comes from a strong governed, vigilantly monitored company, shareholders are more likely to attribute it to noise. However if it comes from a company with poor controls in place, then the managers are more likely to have committed fraud and the shareholders sue with a higher probability. I test this idea using various measures of governance and monitoring, and find that firms with high total and abnormal compensation are more likely to be sued. I also find that firms with large institutional blockholders are less likely to be sued, suggesting that blockholders play a monitoring role. However my results find no evidence that outsider-dominated boards or small boards provide effective ex ante governance as a substitute to ex post litigation.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132655623","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate which provisions, among a set of twenty-four governance provisions followed by the Investor Responsibility Research Center (IRRC), are correlated with firm value and stockholder returns. Based on this analysis, we put forward an entrenchment index based on six provisions - four constitutional provisions that prevent a majority of shareholders from having their way (staggered boards, limits to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority requirements for charter amendments), and two takeover readiness provisions that boards put in place to be ready for a hostile takeover (poison pills and golden parachutes). We find that increases in the level of this index are monotonically associated with economically significant reductions in firm valuation, as measured by Tobin's Q. We present suggestive evidence that the entrenching provisions cause lower firm valuation. We also find that firms with higher levels of the entrenchment index were associated with large negative abnormal returns during the 1990-2003 period. Moreover, examining all sub-periods of two or more years within this period, we find that a strategy of buying low entrenchment firms and selling short high entrenchment firms out-performs the market in most such periods and does not under-perform the market even in a single sub-period. Finally, we find that the provisions in our entrenchment index fully drive the correlation, identified by prior work, that the IRRC provisions in the aggregate have with reduced firm value and lower stock returns during the 1990s; we do not find any evidence that the other eighteen IRRC provisions are negatively correlated with either firm value or stock returns during the 1990-2003 period. Data on the entrenchment index for the period 1990-2007, and a list of over seventy-five studies using our entrenchment index, is available for downloading at Lucian Bebchuk's home page.
{"title":"What Matters in Corporate Governance?","authors":"L. Bebchuk, Alma Cohen, Allen Ferrell","doi":"10.2139/ssrn.593423","DOIUrl":"https://doi.org/10.2139/ssrn.593423","url":null,"abstract":"We investigate which provisions, among a set of twenty-four governance provisions followed by the Investor Responsibility Research Center (IRRC), are correlated with firm value and stockholder returns. Based on this analysis, we put forward an entrenchment index based on six provisions - four constitutional provisions that prevent a majority of shareholders from having their way (staggered boards, limits to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority requirements for charter amendments), and two takeover readiness provisions that boards put in place to be ready for a hostile takeover (poison pills and golden parachutes). We find that increases in the level of this index are monotonically associated with economically significant reductions in firm valuation, as measured by Tobin's Q. We present suggestive evidence that the entrenching provisions cause lower firm valuation. We also find that firms with higher levels of the entrenchment index were associated with large negative abnormal returns during the 1990-2003 period. Moreover, examining all sub-periods of two or more years within this period, we find that a strategy of buying low entrenchment firms and selling short high entrenchment firms out-performs the market in most such periods and does not under-perform the market even in a single sub-period. Finally, we find that the provisions in our entrenchment index fully drive the correlation, identified by prior work, that the IRRC provisions in the aggregate have with reduced firm value and lower stock returns during the 1990s; we do not find any evidence that the other eighteen IRRC provisions are negatively correlated with either firm value or stock returns during the 1990-2003 period. Data on the entrenchment index for the period 1990-2007, and a list of over seventy-five studies using our entrenchment index, is available for downloading at Lucian Bebchuk's home page.","PeriodicalId":336554,"journal":{"name":"Corporate Law: Securities Law","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132091314","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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