Clawback provisions authorize firms to recoup compensation from executives upon the occurrence of financial restatements or executive misbehavior. The first clawback provision in U.S. federal law was Section 304 of the Sarbanes-Oxley Act of 2002 (SOX 304). SOX 304 requires CEOs and CFOs to return any earned incentive compensation following a financial restatement due to misconduct and puts the burden of enforcement on the Securities and Exchange Commission (SEC). After SOX 304, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced clawback rules in 2010 requiring firms to adopt and enforce clawback provisions themselves. While Section … Read more
M&A activity in June 2018 weakened from last month across most measures, although still generally strong for the first half of the year. The total number of deals decreased in the U.S. by 28.6% to 528 (the lowest level since the beginning of this publication in 2012) and globally by 17.5% to 2,457 (the lowest level since March 2014). However, while June deal volume by dollar value also decreased globally by 14.0% to $348.56 billion, deal volume increased in the U.S. by 27.6% to $184.30 billion.
Strategic vs. Sponsor Activity
The number of strategic deals decreased by 33.0% to … Read more
A fundamental question in corporate finance is how mergers and acquisitions create value. Possibilities include generating economies of scale or scope, increasing managerial efficiency, improving production techniques, or strengthening market power. Synergies are a leading motive for doing mergers, but direct empirical evidence on how they are created is lacking. In a new study, we investigate a potential source of synergies—improvements in management practices.
We use a novel survey dataset of plant-level management practices from the U.S. Census Bureau. Specifically, we use the 2010 Management and Organizational Practices Survey, the first large-scale management practices survey of manufacturing plants in the … Read more
In response to the growing practice of “appraisal arbitrage,” in 2016 Delaware’s General Assembly amended the state’s appraisal statute, Section 262 of the Delaware General Corporation Law. The amendment to Section 262(h) granted corporations the option to “prepay” appraisal claimants an amount of the corporation’s choosing in order to stop the accrual of interest. While corporations now have the option to pay, should they? Whether, when and how much to prepay is a complex and nuanced judgment that will vary depending on the particular facts and circumstances of a case.
Prior to the amendment, corporations in an appraisal action … Read more
In a new paper, we seek to fill a gap in research on the possible benefits of dual class share structures and how they might promote innovation. We start with a bit of history.
Shareholder democracy has been fundamental to the global rise of equity markets since the mid-19th century. The rule of one-share, one-vote sought to balance two competing interests: 1) entrepreneurial insiders wanting to maintain their control of the firm after the public offering of shares, and 2) minority shareholders concerned about the expropriation of their funds through dividend rights, private benefits of control, etc. However, dual … Read more
Serving on a public company’s board of directors carries responsibilities and risks as well as benefits for directors. If directors do not carry out their duties effectively, they risk damaging their reputation, losing their board seats, and facing shareholder lawsuits. In a recent paper, “Consequences of Restatements for Outside Directors,” I review the academic literature to identify the consequences directors face if the company on whose board they serve must restate its financial reports.
A restatement is required when a firm, its auditor, or the SEC finds that a prior period financial statement is materially inaccurate, forcing the company to … Read more
The shrinking middle class and the widening gap between the rich and the poor threaten social and financial stability. The noted economist Hernando De Soto has explained how the lack of credit increases wealth inequality. Largely due to poverty, 70 percent of the world’s population lacks registered title to their land, even in developed countries. The poor therefore cannot use their homes as collateral to borrow and create wealth. The impact is devastating not only to individuals but also to commerce, because mortgage lending is the primary source of capital used to start small businesses.
My new article, available here… Read more
Over the last half century, finance has made remarkable progress explaining the pricing of financial assets. In relying on portfolio theory, however, mainstream pricing models tend to ignore investor preferences for certain asset types. This is a mistake. In a new paper forthcoming in Harvard Business Law Review and available here, I weave recent empirical findings on the demand for “safe assets” with an institutional account of how financial intermediaries increase the effective supply of such assets to demonstrate how investor preferences can drive financial innovation and radically alter the structure of the financial system. By moving beyond abstract … Read more
On December 22, 2017, President Trump signed Public Law No. 115-97, formerly known as the “Tax Cuts and Jobs Act” (the “Act”), into law. The Act makes a number of major changes to the U.S. federal income taxation of both individual taxpayers and businesses, generally effective for taxable years beginning after December 31, 2017. A number of key considerations for private equity transactions arise as a result of the Act, including:
- Whether pass-through structures, including UP-C structures, continue to be advantageous,
- The new 30% limitation on deductibility of business interest expense,
- Potential changes to financing collateral packages,
- The value of
… Read more
On June 12, 2018, the New York Court of Appeals overruled longstanding Appellate Division precedent and held that fraud claims brought by the New York Attorney General (“NYAG”) under the Martin Act (General Business Law article 23-A, § 352, et seq.) are governed by a three-year statute of limitations, and not the six-year statute applicable to actions “based upon fraud,” because the Martin Act expands liability for “fraudulent practices” beyond that recognized under the common law. The court remitted to the trial court whether the three- or six-year limitations period would apply to related claims brought … Read more
Our new research paper studies the issuers of unregulated crypto-tokens such as EOS and Tether. We examine two dimensions: the success of the Initial Coin Offering (ICO) process, and the capital market patterns following the listing of the tokens on exchanges. Specifically, we study how these issuers signal their quality to investors, and how their disclosure practices affect market quality.
Crypto-tokens are different from crypto-currencies such as Bitcoin, which serve as a medium of exchange like fiat currencies. Instead, crypto-tokens are sold by “virtual organizations” that want to raise capital for their projects through initial coin offerings (ICOs), which are … Read more
Whether corporate social responsibility (CSR) is beneficial to shareholders remains a topic of considerable debate. Recent studies suggest that some socially beneficial corporate expenditures (e.g., to reduce environmental harm and thereby the firm’s risk exposure) create value for shareholders. In contrast, other types of such expenditures (e.g. to improve the environment beyond what is necessary to comply with the law or mitigate risk), are not viewed by shareholders as value-enhancing. However, there is no evidence on whether individual firms differentiate between CSR expenditures that do and do not benefit shareholders.
In a recent study, we examine differences in the CSR … Read more
In large part as a response to China’s national industrial goals and subsequent Chinese acquisitions of U.S. and European companies that are technology leaders in key industries, the U.S. government and a number of European governments are seeking to expand the scope of their national security reviews of foreign investments. Below, we outline ongoing developments affecting U.S. national security reviews of inbound foreign investment.1
FIRRMA Moves Ahead
The Senate and House have recently passed their respective versions of the Foreign Investment Risk Review Modernization Act (FIRRMA) legislation that was originally introduced in November 2017 with significant bipartisan support. FIRRMA … Read more
Does paying employees for blowing the whistle on corporate crime to regulators discourage internal reporting and undermine corporate governance? The answer is not as simple as it might seem. My research shows that, as the amount of reward increases, the probability of internal reporting rises at ﬁrst but then falls.
The question has been discussed in countries that have introduced or contemplated the introduction of legislation to reward whistleblowers but has not yet been fully analyzed. One of the overlooked obstacles is that the standard of proof for external whistleblowing cases is higher than for cases of internal reporting, and … Read more
In a new cross-nation study, we discuss our findings on how the takeover market affects stock-price crash risk, defined as the likelihood of a sudden, drastic decline in the stock price of a firm. An important consideration for risk management and investment decisions, crash risk has received much interest in recent years from academics, regulators, and practitioners due to the series of high-profile corporate scandals (e.g., Enron, WorldCom, Satyam) and the financial crisis of the last decade.
Prior research suggests that the risk of security price crashes stems from agency problems (i.e., managers do not act in the best interests … Read more
Beginning at least as far back as Professor William Carey’s famously withering 1974 Yale Law Journal article about Delaware’s “enabling” of bad corporate actors, critics of the state’s corporate jurisprudence have alluded to a “race to the bottom” in which the state legislature and judiciary turn a blind eye to managerial agency costs in order to attract new business and maintain Delaware’s dominant franchise in corporate law.
But over the past two decades, a better metaphor for the state’s corporate oversight may be a pinball ricocheting from crisis to crisis, with jurisprudential vigilance varying according to the degree of exigency … Read more
In light of evolving—and sometimes actively debated—perspectives on the role of public companies with respect to sustainability, corporate social responsibility and other ESG matters (e.g., Barron’s recent report on Sustainable Investing), we are providing a high-level overview of how boards of directors and senior management teams may wish to approach these issues:
- Be aware that sustainability has become a major, mainstream governance topic that encompasses a wide range of issues, including a company’s long-term durability as a successful enterprise, climate change and other environmental risks and impacts, systemic financial stability, management of human capital, labor standards, resource
… Read more
Short-termism is a loaded phrase in debates over investment time horizons, often used to criticize investors and corporate managers deemed overly focused on near-term gains at the expense of long-term value. One argument is that U.S. mutual funds, as significant investors, are preoccupied with quarterly earnings, which feeds the quarterly anxiety of corporate boards of directors. As such, short-termism is a contagion that can spread from funds to firms. Its proponents, on the other hand, highlight short-term investors’ ability to unlock firm value and counter corporate management’s long-term bias.
In a new project, The Long and The Short: Portfolio Turnover … Read more
William Hinman, Director of the US Securities and Exchange Commission (SEC) Division of Corporation Finance, provided substantial color on the SEC’s evolving view of digital asset classification recently when he shared his thoughts on how to characterize purchases and sales of digital assets under US securities laws (the securities laws), as part of the Yahoo Finance All Markets Summit: Crypto. While the headline moment occurred when he stated his belief that current transactions in Bitcoin and Ether are not securities transactions, he also laid out a framework for his reasoning that has greater implications for digital asset market … Read more
Between January 1 and December 17, 2017, the value of a single Bitcoin skyrocketed from under $1,000 to nearly $20,000. To match Bitcoin’s 1183 percent return during this period, an investor would have needed the equivalent of 38 years’ average equity market returns. Investors and news outlets alike were entranced by Bitcoin’s stratospheric rise, and direct investment in the crypto-asset surged. But Bitcoin’s climb was followed by an equally stomach-turning fall, as its price declined 70 percent in less than two months between December 17 and February 6.
Discussion of Bitcoin’s swing occurred primarily in one of two … Read more
Public firms are increasingly connected through institutional investors’ stock ownership, largely due to individual investors who invest excess cash and retirement savings through financial institutions. Firms with institutional cross-ownership have institutional stockholders with significant stakes in other firms within the same industry. Cross-ownership presents interesting and important dynamics, because an investor, the cross-owner, has an incentive to maximize welfare through joint ownership of the different firms. The investor also has access to private information about the firm’s peers. In a new paper, we examine how cross-owners affect a firm’s ability to raise capital for investment.
Investment opportunities are vital for … Read more
Starting in November 2018, U.S. public, open-ended mutual funds will have the option to adjust the daily pricing of the fund—the net asset value or NAV—to account for and recoup large transaction costs. Currently, the fund, and therefore its remaining shareholders, absorb those costs generated by existing shareholders. This quiet, technical change in the regulation—swing pricing—is a part of the SEC’s sweeping mutual fund Liquidity Management Rules, adopted in 2016.
Swing pricing is an anti-dilution tool protecting shareholders staying in a fund—the sedentary shareholders—by guarding their investment from transaction cost erosion, which by 2014 estimates total $10-17 billion annually. This … Read more
On June 21, in a much anticipated decision, the Supreme Court held that SEC Administrative Law Judges (“ALJs”), who have historically been appointed by SEC staff, are “Officers of the United States” and, hence, under the Appointments Clause, can be appointed only by the President or by the SEC itself. Lucia v. SEC. The Court further ruled that any litigant who has made a “timely challenge” to the validity of an ALJ’s appointment is entitled to a new hearing before a different, properly appointed ALJ or the SEC itself.
In addition to possibly reopening past cases, the Court’s opinion … Read more
On April 3, 2018, the Swedish online music company Spotify Technology disrupted the traditional initial public offering (IPO) marketplace when it directly listed its shares on the New York Stock Exchange (NYSE) under the ticker symbol “SPOT.” With a valuation of $26.5 billion at the end of the first day of trading, it was one of the largest technology listings for the NYSE since Facebook.  While seemingly just another tech venture IPO, this offering represented a watershed event.
The common motivations for firms listing on public stock exchanges such as the NASDAQ or the NYSE are to raise large … Read more
As the spotlight on boards, management teams, corporate performance and governance intensifies, as articles like the Bloomberg and Fortune profiles of Elliott Management (“The World’s Most Feared Investor—Why the World’s CEOs Fear Paul Singer” and “Whatever It Takes to Win—How Paul Singer’s Hedge Fund Always Wins”) and other activist investors become required reading in every boardroom and C-suite, and as activist campaigns against successful companies of all sizes increase worldwide, below are fifteen themes expected to impact boardroom, CEO and investor behavior and decision-making in the coming years.
1. The CEO, the Board and the Strategy
… Read more
Shareholders can generally affect the decisions of companies in two ways: through voice (voting) and through exit (selling their shares). In a new paper, “Management (of) proposals,” we use shareholder voting records on management proposals from 2003 to 2015 to evaluate the effectiveness of voice as a governance mechanism. We analyze whether management opportunistically brings up more proposals in good times and whether it systematically games the voting process to achieve a favorable outcome.
We find first that managers opportunistically choose to hold shareholder votes following good firm performance. We examine this further in the context of the … Read more
On Thursday, June 14, the SEC Director of Corporation Finance, William Hinman, stated his view that current secondary market trades of Ether are not now securities transactions as part of a speech on the treatment of digital assets under the securities laws. While he expressly set aside the question of whether the capital-raising that initially accompanied the sale of Ether in 2014 was a securities offering, he confirmed previous suggestions that Ether is a prime example of a digital asset that may once have been offered as a security, but is now “something else” that is not regulated by the … Read more
One of the hottest antitrust topics of late has been institutional investors’ “common ownership” of minority stakes in competing firms. Writing in the Harvard Law Review, Einer Elhauge proclaimed that “[a]n economic blockbuster has recently been exposed”—namely, “[a] small group of institutions has acquired large shareholdings in horizontal competitors throughout our economy, causing them to compete less vigorously with each other.” In the Antitrust Law Journal, Eric Posner, Fiona Scott Morton, and Glen Weyl contended that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.” Those same authors took to … Read more
There are now more than twice as many entities formed in Delaware as LLCs and other alternative entities as are formed as corporations. Private equity funds and hedge funds often are formed as LLCs or limited partnerships to take advantage of the structural flexibility and tax treatment available. A key advantage is the ability to modify or eliminate traditional corporate-type fiduciary duties and, specifically, to facilitate conflicted transactions which arise due to the fund managers’ various roles in managing multiple funds. Below we outline the key principles relating to the obligations of LLC directors under Delaware law, offer related practice … Read more
Firms generate profits through investments in physical and human capital. In legal regimes that recognize property rights, the firm generally has full ownership over its physical capital, as well as the right to future cash flows generated by these assets. However, human capital is inherently different from other forms of capital because firms cannot “own” employees or the investments made in these employees. Common law, however, sometimes makes an exception for certain restrictive covenants like non-compete agreements – covenants signed by an employee not to compete with her employer for some specified period after employment ends. Non-compete agreements limit employees’ … Read more
Thank you Bill [Dudley] for that kind introduction and for inviting me to speak today. I’m planning to speak for fifteen or so minutes and to open the floor to questions.
I want to extend my congratulations to Bill Dudley on a very successful term. You are now a member of the long line of former leaders and perpetual culture carriers at the New York Fed. The respect for the New York Fed, among national and international regulators and, importantly, market participants of all stripes, is remarkable, but clearly well deserved. Congratulations are also in order for John Williams,
… Read more
The CEO-firm match theory posits that the CEO labor market is efficient and competitive and that the matching between CEOs and firms is optimal. However, both anecdotal and empirical evidence show that CEO departures, particularly unplanned CEO departures, can be disruptive, create friction (i.e., costs associated with appointing a non-optimal CEO replacement), and significantly and negatively affect shareholder value. In a new paper, we demonstrate that the presence of non-CEO inside directors (NCIDs) can help firms reduce friction costs and improve performance during unplanned CEO transitions. Using a comprehensive, manually collected data set of unplanned CEO departures from 1993 to … Read more
M&A activity in May 2018 generally weakened from the prior month. The total number of deals decreased in the U.S. by 1.2% to 667 (the second-lowest level in the last 12-month period) and globally by 4.8% to 2,759 (the lowest level in the last 12-month period). May deal volume by dollar value decreased in the U.S. by 29.9% to $144.39 billion and globally by 21.9% to $401.76 billion.
Strategic vs. Sponsor Activity
The number of strategic deals increased by 2.4% to 564 in the U.S., but decreased by 5.0% to 2,456 globally, the second-lowest level in the last 12-month … Read more
“To take notes or not to take notes – that is the question” often asked in corporate board rooms today. As a matter of good governance, it is important that the minutes serve as the single, clear, official record of each in-person or telephonic board and committee meeting. Board materials that are circulated and discussed at the meeting should be part of the official record and either attached to the minutes or maintained in the corporate secretary’s files, as appropriate. In connection with significant transactions, board minutes will be reviewed by third parties for diligence purposes and to confirm that … Read more
The chief executive officer (CEO) and the top management team are typically viewed as critical to the success or failure of companies. As it is not uncommon for top executives to make value-destroying decisions, the role of internal control mechanisms, such as oversight by a board of directors (BoD), is to safeguard the interests of shareholders by replacing poorly performing incumbent CEOs with new ones.
But does it pay to fire underperforming CEOs? Doing so can cost shareholders a bundle in severance packages and golden parachute payments. When CEOs at Hewlett-Packard, Bank of New York Mellon, Yahoo!, Kellogg’s, and United … Read more
On May 22, 2018, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing to mark up its draft proposed amendment to the Foreign Investment Risk Review Modernization Act (“FIRRMA”). Initially introduced on November 6, 2017, with strong bipartisan support, FIRRMA would — for the first time since 2007 — reform the process by which the Committee on Foreign Investment in the United States (“CFIUS”) assesses “covered transactions.” Proposed in response to a new and evolving macro security environment, FIRRMA would radically impact planning for long-term enterprise investment strategy as well as discrete transactions for U.S. and non-U.S. … Read more
It’s widely assumed that executives are less likely to inflate earnings at high profile companies under a good deal of regulatory oversight. And yet it’s also widely known that managers in high profile companies have an incentive to overstate their company’s performance because of pressure from investors to meet or beat Wall Street estimates every quarter.
How should policymakers looking to curb accounting fraud reconcile these countervailing forces?
When it comes to embellishing corporate earnings, managers weigh the costs and benefits: mainly the probability and consequences of getting caught in an accounting scandal against the potential for a higher stock … Read more
On May 29, 2018, the Department of Justice announced the largest-ever antitrust divestiture in the U.S. in connection with Bayer’s takeover of Monsanto. In addition to being newsworthy in light of its sheer size (at approximately $9 billion), the remedy reflects a number of principles that have been emphasized publicly by key U.S. antitrust agency officials in recent months and provides insight into how the U.S. antitrust agencies might approach remedy negotiations in future transactions. Among the key takeaways are that the agencies may require divestitures that extend beyond overlapping product areas and, building on an emerging U.S. enforcement trend, … Read more
The issue of directors serving on multiple corporate boards has come under increasing scrutiny from both academicians and practitioners. There are two types of arguments associated with the conflicting evidence of how multiple directorships affect firm value and performance. The first is a reputation hypothesis that contends individuals gain valuable experience, skills, and networks from serving on multiple boards. The competing argument, which we refer to as the busyness hypothesis, is that these individuals are over-committed and thus unable to provide the careful monitoring and diligence that their positions require. The literature has not yet established whether the reputation or … Read more
In bankruptcy, as in corporate law, valuation drives disputes. Prior bankruptcy scholarship points to disagreements about valuation and judicial valuation error as key drivers of Chapter 11 outcomes, including the decision whether to reorganize the distressed firm or sell it off pursuant to a Section 363 sale. Avoiding valuation disputes and valuation errors is also the underlying driver of most proposed reforms to Chapter 11, from Douglas Baird’s mandatory auctions to Lucian Bebchuk’s options approach.
In a new paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. We study all reported cases filed between 1990 and … Read more
Beyond the cacophonous din of voices calling for companies to serve a “social purpose,” adopt a variety of governance proposals, achieve quarterly performance targets, and listen to (and indeed even “think like”) activists, there is now, most promisingly, a call from genuine long term shareholders for public companies to articulate and pursue a long term strategy. This latest shareholder demand directly supports the achievement of traditional corporate purposes, and seems, more than any other shareholder demand of the last decade, the most likely to increase shareholder value. Yet in current circumstances, where all corporate defenses have been stripped in … Read more
Among several independent holdings stated by the court on its way to reversing the convictions of Todd Newman and Anthony Chiasson, the Newman court declared that: “in order to sustain a conviction for insider trading [against a remote tippee], the Government must prove beyond a reasonable doubt that [the remote] tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit.” My musings leave aside whether from a doctrinal standpoint, this statement is incorrect, within a range of holdings that the court could have come to, or simply necessitated by the … Read more