Ownership dispersion is a pre-requisite for liquid stock markets, but it entails a collective action problem: individual investors have no incentives to engage in direct monitoring. Legal devices can provide solutions along three dimensions. One, they can concentrate or dilute voting power. Two, they can affect liquidity. Three, they can give the right or wrong monitoring incentives. This paper shows how these devices are used and how they can depress liquidity. Legal constraints aimed at strengthening minority protection can reduce the scope for monitoring, destroy liquidity and even create incentives for minority abuse: for example one-share-one-vote restrictions can encourage the formation of pyramidal holding companies. The search for solutions that concentrate voting power, provide liquidity and protect minorities continues.
{"title":"European Corporate Governance: Trading Off Liquidity Against Control","authors":"Marco Becht","doi":"10.2139/ssrn.160588","DOIUrl":"https://doi.org/10.2139/ssrn.160588","url":null,"abstract":"Ownership dispersion is a pre-requisite for liquid stock markets, but it entails a collective action problem: individual investors have no incentives to engage in direct monitoring. Legal devices can provide solutions along three dimensions. One, they can concentrate or dilute voting power. Two, they can affect liquidity. Three, they can give the right or wrong monitoring incentives. This paper shows how these devices are used and how they can depress liquidity. Legal constraints aimed at strengthening minority protection can reduce the scope for monitoring, destroy liquidity and even create incentives for minority abuse: for example one-share-one-vote restrictions can encourage the formation of pyramidal holding companies. The search for solutions that concentrate voting power, provide liquidity and protect minorities continues.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"1 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1999-05-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90364691","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 dramatic rise in shareholder power and improvements in corporate governance can be achieved in the next few years by expanding the role of proxy advisory firms. This will require changing the way such firms are paid. They are now paid directly by investors who buy their advice; but this arrangement suffers from a free-rider problem. Instead, they should be paid by each corporation about which they are advising, in accordance with shareholder vote so as to preclude management influence. Any proxy advisor other than the market leader (ISS) stands to gain tremendously by initiating this new system. It would eliminate the natural monopoly feature of the current system, and spread the cost more equitably across all shareholders. It would also enable proxy advisory firms to market their services to individual investors via the internet.
{"title":"The Road to Shareholder Power","authors":"M. Latham.","doi":"10.2139/SSRN.158948","DOIUrl":"https://doi.org/10.2139/SSRN.158948","url":null,"abstract":"A dramatic rise in shareholder power and improvements in corporate governance can be achieved in the next few years by expanding the role of proxy advisory firms. This will require changing the way such firms are paid. They are now paid directly by investors who buy their advice; but this arrangement suffers from a free-rider problem. Instead, they should be paid by each corporation about which they are advising, in accordance with shareholder vote so as to preclude management influence. Any proxy advisor other than the market leader (ISS) stands to gain tremendously by initiating this new system. It would eliminate the natural monopoly feature of the current system, and spread the cost more equitably across all shareholders. It would also enable proxy advisory firms to market their services to individual investors via the internet.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"25 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1999-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82218487","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 is one of a group of papers, at Brookings awaiting publication, celebrating the remarkably sustained value of Albert Hirschman's "Exit, Voice & Loyalty," published in 1971. Those who know that book -- and everyone should -- recognize that exit-voice has particular relevance in corporate governance. It is a conundrum: shareholders "exit" at a turnstile pace -- turnovers of 75% a year in NYSE stocks -- and shareholder "voice" only from a handful of state/local pension funds. Why then has the American corporation come to be seen as the paradigm? The paper focuses on the exceptionally high degree of financial transparency here, far better than elsewhere, which with the high degree of public confidence and interest engendered thereby have produced an extraordinary level of media attention -- the voice of the analysts and other paparazzi -- helping greatly to explain the palace upheavals at GM, Kodak, Westinghouse and elsewhere. Far from being an isolated phenomenon, it is simply one aspect of a society and market structure that could function well only with pervasive sunshine. The paper looks also at Germany, Japan, and (ach!) So. Korea and the like.
{"title":"Corporate Governance and the Voice of the Paparazzi","authors":"L. Lowenstein","doi":"10.2139/SSRN.163386","DOIUrl":"https://doi.org/10.2139/SSRN.163386","url":null,"abstract":"This is one of a group of papers, at Brookings awaiting publication, celebrating the remarkably sustained value of Albert Hirschman's \"Exit, Voice & Loyalty,\" published in 1971. Those who know that book -- and everyone should -- recognize that exit-voice has particular relevance in corporate governance. It is a conundrum: shareholders \"exit\" at a turnstile pace -- turnovers of 75% a year in NYSE stocks -- and shareholder \"voice\" only from a handful of state/local pension funds. Why then has the American corporation come to be seen as the paradigm? The paper focuses on the exceptionally high degree of financial transparency here, far better than elsewhere, which with the high degree of public confidence and interest engendered thereby have produced an extraordinary level of media attention -- the voice of the analysts and other paparazzi -- helping greatly to explain the palace upheavals at GM, Kodak, Westinghouse and elsewhere. Far from being an isolated phenomenon, it is simply one aspect of a society and market structure that could function well only with pervasive sunshine. The paper looks also at Germany, Japan, and (ach!) So. Korea and the like.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"11 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1999-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74324152","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}
In approving settlements of derivative actions that include fees for plaintiff's attorney, courts typically announce that attorney's fees are approved if a substantial benefit is obtained. In fact, courts, particularly Delaware courts, approve settlements in shareholder derivative actions that included substantial fees for plaintiff's attorney, despite the absence of a corresponding benefit to the corporation. Frequently, the "benefit" obtained is a reform in corporate governance, which is of dubious value to the corporation. To deter frivolous litigation, courts should resist the temptation to approve these settlements just to dispose of the litigation. The paper concludes that fees should not be approved unless the settlement (a) generates a common fund out of which such fees may be paid, (b) produces an intangible benefit reasonably susceptible of valuation, or (c) reflects a strong nexus between the relief sought in the complaint and the relief obtained.
{"title":"Shareholder Derivative Litigation and Corporate Governance","authors":"Mark J. Loewenstein","doi":"10.2139/ssrn.140797","DOIUrl":"https://doi.org/10.2139/ssrn.140797","url":null,"abstract":"In approving settlements of derivative actions that include fees for plaintiff's attorney, courts typically announce that attorney's fees are approved if a substantial benefit is obtained. In fact, courts, particularly Delaware courts, approve settlements in shareholder derivative actions that included substantial fees for plaintiff's attorney, despite the absence of a corresponding benefit to the corporation. Frequently, the \"benefit\" obtained is a reform in corporate governance, which is of dubious value to the corporation. To deter frivolous litigation, courts should resist the temptation to approve these settlements just to dispose of the litigation. The paper concludes that fees should not be approved unless the settlement (a) generates a common fund out of which such fees may be paid, (b) produces an intangible benefit reasonably susceptible of valuation, or (c) reflects a strong nexus between the relief sought in the complaint and the relief obtained.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"7 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85977412","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}
Until the last few years, the high yield bond market was essentially a solely U.S. capital market phenomena. That this non-investment grade, fixed income asset class has grown so impressively in the U.S. and now is possibly on the verge of an explosion of new issuance in Europe is primarily based on a simple summary performance statistic -- an average annual net return to investors of about 250 basis points per year above the risk-free rate for the past two decades. Just as the U.S. high yield market rebounded from its debacles in the late 1980's and the Mexican Eurobond market from its peso crisis in early 1995, the long-term key factor in Europe will be the fundamental health of firms issuing bonds. Despite short-term gyrations and flights to quality, there is still no substitute for careful and objective analysis of the underlying firms and securities that comprise the market.
{"title":"The Anatomy of the High Yield Bond Market: After Two Decades of Activity-Implications for Europe","authors":"E. Altman","doi":"10.2139/SSRN.164501","DOIUrl":"https://doi.org/10.2139/SSRN.164501","url":null,"abstract":"Until the last few years, the high yield bond market was essentially a solely U.S. capital market phenomena. That this non-investment grade, fixed income asset class has grown so impressively in the U.S. and now is possibly on the verge of an explosion of new issuance in Europe is primarily based on a simple summary performance statistic -- an average annual net return to investors of about 250 basis points per year above the risk-free rate for the past two decades. Just as the U.S. high yield market rebounded from its debacles in the late 1980's and the Mexican Eurobond market from its peso crisis in early 1995, the long-term key factor in Europe will be the fundamental health of firms issuing bonds. Despite short-term gyrations and flights to quality, there is still no substitute for careful and objective analysis of the underlying firms and securities that comprise the market.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"14 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88926101","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 majority shareholder in a closely held corporation may use its control of the corporate machinery to appropriate wealth from the minority, and it is difficult for the majority to make a binding commitment not to do so. This paper models the interaction between majority and minority shareholders as a trust game in which the majority is constrained by the possibility of non-legal sanctions, including family or social disapproval and loss of reputation. The paper applies the analysis to the longstanding debate over appropriate exit rules for close corporation shareholders. Where the parties are well-informed and rational and judicial valuations are unbiased, giving the minority the unconditional right to e cashed out should reduce majority opportunism without producing opportunistic behavior by the minority. The paper suggests that the apparent failure of close corporation shareholders to bargain for such a right reflects the courts' success in using dissolution and fiduciary duty actions to deter majority misbehavior.
{"title":"Trust and Opportunism in Close Corporations","authors":"P. Mahoney","doi":"10.3386/W6819","DOIUrl":"https://doi.org/10.3386/W6819","url":null,"abstract":"The majority shareholder in a closely held corporation may use its control of the corporate machinery to appropriate wealth from the minority, and it is difficult for the majority to make a binding commitment not to do so. This paper models the interaction between majority and minority shareholders as a trust game in which the majority is constrained by the possibility of non-legal sanctions, including family or social disapproval and loss of reputation. The paper applies the analysis to the longstanding debate over appropriate exit rules for close corporation shareholders. Where the parties are well-informed and rational and judicial valuations are unbiased, giving the minority the unconditional right to e cashed out should reduce majority opportunism without producing opportunistic behavior by the minority. The paper suggests that the apparent failure of close corporation shareholders to bargain for such a right reflects the courts' success in using dissolution and fiduciary duty actions to deter majority misbehavior.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"59 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87651436","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}
Corporate managers who own a majority of the common stock in their company or who represent another firm owning such an interest appear to be less constrained than managers of diffusely held firms, yet their power to harm minority shareholders must be circumscribed by some organizational or legal arrangements. Empirical investigations reveal that boards of directors in majority-owned firms are little different from firms with diffuse stock ownership. Another source of constraints on a majority shareholders -- capital market activity -- also appears to be no different from firms with diffuse ownership. Finally, there is little evidence that new organizational mechanisms have evolved to constrain managers who own large blocks of stock. The frequency and associated wealth effects of reorganizations of majority shareholder firms, however, indicate that the law constrains managerial majority shareholders, both in their day-to-day management and when they redeem the ownership interest of minority shareholders.
{"title":"Constraints on Large-Block Shareholders","authors":"C. Holderness, D. Sheehan","doi":"10.3386/W6765","DOIUrl":"https://doi.org/10.3386/W6765","url":null,"abstract":"Corporate managers who own a majority of the common stock in their company or who represent another firm owning such an interest appear to be less constrained than managers of diffusely held firms, yet their power to harm minority shareholders must be circumscribed by some organizational or legal arrangements. Empirical investigations reveal that boards of directors in majority-owned firms are little different from firms with diffuse stock ownership. Another source of constraints on a majority shareholders -- capital market activity -- also appears to be no different from firms with diffuse ownership. Finally, there is little evidence that new organizational mechanisms have evolved to constrain managers who own large blocks of stock. The frequency and associated wealth effects of reorganizations of majority shareholder firms, however, indicate that the law constrains managerial majority shareholders, both in their day-to-day management and when they redeem the ownership interest of minority shareholders.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"36 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86953671","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 article argues that, once grasped, the fundamental legal principles underlying cross-border finance amount to a kind of universal language that can be utilized in any legal system. The article also explains these fundamental principles.
{"title":"The Universal Language of Cross-Border Finance","authors":"S. Schwarcz","doi":"10.2139/SSRN.10581","DOIUrl":"https://doi.org/10.2139/SSRN.10581","url":null,"abstract":"This article argues that, once grasped, the fundamental legal principles underlying cross-border finance amount to a kind of universal language that can be utilized in any legal system. The article also explains these fundamental principles.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"6 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81452580","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}
Mergers, acquisitions and takeovers often imply dramatic changes for employees, competitors, customers and suppliers. Not surprisingly, the market for corporate control has generated controversy and is frequently regulated by law or business custom. Though transfers of control take place in many countries, explicit and public struggles for control occur most frequently in the U.S. and U.K. During most of the 20th century, critics of mergers and acquisitions in the U.S. pointed to the danger of monopoly and increased concentration. Partly in response to the emergence of new control transactions such as the hostile takeover and leveraged buyout, more recent criticism has focused on the consequences for corporate productivity, profitability and employee welfare. Subject to qualifications, the market for corporate control reallocates productive assets ? in the form of going concerns ? to the highest bidder. In cases where the bidder uses his own money or acts on behalf of the bidding firm1s shareholders, the asset goes to the highest value use. In cases where managers of the bidding firm are able to serve their own interests rather than the interests of shareholders, the market for corporate control plays a paradoxical role. It simultaneously provides (1) a means by which managers may acquire companies using other people's money and (2) a means by which they may themselves be disciplined or displaced.
{"title":"The Market for Corporate Control (Including Takeovers)","authors":"G. Bittlingmayer","doi":"10.2139/ssrn.81808","DOIUrl":"https://doi.org/10.2139/ssrn.81808","url":null,"abstract":"Mergers, acquisitions and takeovers often imply dramatic changes for employees, competitors, customers and suppliers. Not surprisingly, the market for corporate control has generated controversy and is frequently regulated by law or business custom. Though transfers of control take place in many countries, explicit and public struggles for control occur most frequently in the U.S. and U.K. During most of the 20th century, critics of mergers and acquisitions in the U.S. pointed to the danger of monopoly and increased concentration. Partly in response to the emergence of new control transactions such as the hostile takeover and leveraged buyout, more recent criticism has focused on the consequences for corporate productivity, profitability and employee welfare. Subject to qualifications, the market for corporate control reallocates productive assets ? in the form of going concerns ? to the highest bidder. In cases where the bidder uses his own money or acts on behalf of the bidding firm1s shareholders, the asset goes to the highest value use. In cases where managers of the bidding firm are able to serve their own interests rather than the interests of shareholders, the market for corporate control plays a paradoxical role. It simultaneously provides (1) a means by which managers may acquire companies using other people's money and (2) a means by which they may themselves be disciplined or displaced.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"61 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84699735","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 examines four non-mutually-exclusive hypotheses behind the inclusion of different types of directors and the impact they have on firm performance. Strong associations are found between the specific economic needs of companies and the incidence of directors most likely to fulfill these needs. In particular, theoretical and empirical evidence is presented that most affiliated directors are not puppets of management, but are placed on boards to serve specific, strategic needs of firms. In addition, no systematic relation is found between various measures of performance and director type. In total, it appears that, on average, boards of directors are constructed in a rational manner.
{"title":"Affiliated Directors: Puppets of Management or Effective Directors?","authors":"April Klein","doi":"10.2139/ssrn.10569","DOIUrl":"https://doi.org/10.2139/ssrn.10569","url":null,"abstract":"This paper examines four non-mutually-exclusive hypotheses behind the inclusion of different types of directors and the impact they have on firm performance. Strong associations are found between the specific economic needs of companies and the incidence of directors most likely to fulfill these needs. In particular, theoretical and empirical evidence is presented that most affiliated directors are not puppets of management, but are placed on boards to serve specific, strategic needs of firms. In addition, no systematic relation is found between various measures of performance and director type. In total, it appears that, on average, boards of directors are constructed in a rational manner.","PeriodicalId":47357,"journal":{"name":"Corporate Communications","volume":"1 1","pages":""},"PeriodicalIF":2.0,"publicationDate":"1998-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89592255","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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