The avalanche of accounting scandals in the late 1990s and early 2000s triggered major changes in the corporate accounting world. The Sarbanes-Oxley Act of 2002 (SOX) stampeded in, promising tightened audit regulation aimed at easing the minds of frightened market participants. Given heightened concern over excessively “chummy” relationships between corporate management and its auditors, one rule set forth in SOX requires more frequent client rotation of audit partners (every five years rather than seven) and greater time required before partners may return to the same client (five years rather than two).
While there is little doubt that this rule was … Read more
In recent years, activist investors and the companies they target have attracted considerable attention—in the press, in the business and legal communities, in the political arena, and in academia. The fundamental question under debate is whether activist interventions create or destroy firm value. We have conducted a study of the issue, available here. Our sample includes thousands of activist campaigns conducted over the two decades from 1994 to 2014. We examine five types of evidence: stock market reactions, analyst recommendations, short sales, financial statement fundamentals, and institutional ownership.
We find the initial market reaction to the announcement of an … Read more
On September 13, 2016, the New York Department of Financial Services (“DFS” or the “Department”) issued proposed regulations (the “Proposed Regulations”) designed to guard against the onslaught of cyber-attacks faced by banks, insurance companies and other financial services providers. Billed by Governor Andrew Cuomo as a means to assure that regulated banks and insurance companies “protect consumers and ensure that [their] systems are sufficiently constructed to prevent cyber-attacks to the fullest extent possible,” the Proposed Regulations provide a baseline with respect to companies’ cybersecurity practices regardless of the size, nature or complexity of the business. Though they mirror … Read more
The World Economic Forum threw a knockout punch last month when it released its report, “The Future of Infrastructure: An Ambitious Look at How Blockchain Can Reshape Financial Services.” When Giancarlo Bruno, the World Economic Forum’s Head of Financial Services Industries, stated powerfully and unequivocally, “Rather than to stay at the margins of the finance industry, blockchain will become the beating heart of it,” the world felt the impact.
Like so many other things that we know are important to do, but which we may struggle to find the time for, reading the roughly 130-page World … Read more
The time value of money, measured by the interest rate at which an entity can borrow or invest, plays an incredibly important role in income tax. Every tax teacher emphasizes the value of deferral to taxpayers, explaining that paying a dollar of tax 10 years in the future is worth much less than paying a dollar of tax today, because the taxpayer can invest less than a dollar today, earn interest for 10 years, and then pay the tax obligation.
But, as I explain in my recent short article, “How to Think About and Teach Income Tax When Interest Rates … Read more
On May 17, 2016, the Securities and Exchange Commission issued new Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures. With a fiscal reporting period having passed since the SEC issued the C&DIs, we surveyed the impact that the C&DIs had on company disclosure practices and related developments. Our survey sample included 100 earnings releases issued by Fortune 500 companies since May 17 that included a presentation of two or more non-GAAP financial measures and guidance on at least one non-GAAP measure (the “Survey”). Unsurprisingly, given the nature of the C&DIs, a significant … Read more
In State of Florida v. Espinoza, a trial court in Miami recently dismissed all charges against an individual Bitcoin exchanger, who was arrested in a sting operation after agreeing to sell bitcoins to an undercover detective who purported to need them to buy stolen credit cards.1 The court’s decision, which is now being appealed by the prosecution, includes several notable holdings. In dismissing charges that the defendant had operated a money transmitting business without a license, the court held that bitcoins are not “money,” that selling bitcoins is not money “transmitting,” and that selling bitcoins without charging transaction fees … Read more
A good deal of current American political commentary centers on disputes about whether the American economy has truly recovered from the slump of 2008. Our political candidates offer different narratives about the causes of the slump as well as about how to promote societal flourishing going forward. What should an ordinary citizen make of these sharply divergent narratives? Despite this divergence, both narratives use the same rhetorical imagery of politicians as mechanics, economies as machines, and economic theory as providing tools for the mechanics.
This image has been reinforced by a century of economic theory that treats an economy as … Read more
Financial reform has driven many changes in American governance, but the most dramatic one may prove to be the government’s cautious, but wide-ranging, embrace of a revised global regime to regulate international finance. That reform has moved the equilibrium of the separation of powers in foreign affairs towards Congress and uses the informal way that financial regulatory standards spread across the globe to do the work that customary international law used to do.
Both of these developments derive from the way that international financial cooperation has evolved. The agencies charged with implementing Dodd-Frank have embraced “soft law” in their international … Read more
The positive correlation between oil prices and equity markets over the past few years has been discussed extensively in the media as well as by prominent economists, such as Bernanke and Obstfeld, and has brought into question the generally accepted view that lower oil prices are good for the U.S. and the global economy. However, in a recent study, we illustrate that there has been no stable relationship between real oil prices and equity returns over the last 71 years. Nevertheless, we argue that, as in previous episodes of falling oil prices, lower oil prices improve profit opportunities … Read more
When should changes in markets for financial securities drive changes in law? In my forthcoming essay, available here, I argue that a normative framework for making that examination would increase transparency and legitimacy. It would also help counter the tendency of politics to distort legal responses to market changes. During economic prosperity, for example, the political push for deregulation can leave financial markets under-protected. But when the bubble of prosperity inevitably bursts, the political push for regulation can lead to over-protective laws.
The essay argues that the extent to which financial market changes should drive legal changes should depend on … Read more
Today the bulk of American workers’ retirement savings, worth trillions of dollars, is in self-directed individual retirement accounts (IRAs) and defined contribution pension plans. Understandably, many workers with self-directed accounts turn to financial advisers for help in matching the vast and complicated array of investment options in today’s financial markets to the worker’s particular circumstances. However, the manner by which financial advisers are compensated has long raised concerns about conflicts of interest. Some advisers are compensated by the providers of the financial products that the adviser sells, giving the adviser a financial incentive to recommend the products that provide the … Read more
On July 29, 2016, the board of directors of the Federal Deposit Insurance Corporation (FDIC) released a proposal regarding third-party lending guidance (“Proposed Guidance”) as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices.” The Proposed Guidance elaborates on previously issued agency guidance on managing third-party risks and, if finalized, could apply to all FDIC-supervised institutions that engage in third-party lending programs.
The Proposed Guidance affirms that an institution’s board of directors and senior management are responsible for managing, identifying and controlling the risks associated with lending activities … Read more
After every crisis, academics, policymakers and other observers reflect on what went wrong and what could have been done differently. This in turn leads to some reforms to laws and regulations. In the wake of widespread, multi-country corporate governance failures in the 1990s and 2000s (Enron, Tyco and Xerox in the U.S., for example, Maxwell, BCCI and Polly Peck in the UK, Parmalat in Italy and Ahold in the Netherlands), the call was for company law reforms and better corporate governance practices. The recent global financial crisis has led to many new regulations, and the revamping of existing ones, covering … Read more
Contractarians, who believe that fiduciary relationships are a species of contract, and anti-contractarians, who believe those relationships are sui generis, have long debated what fiduciary duties are and how they should be applied. Contractarians frame the fiduciary duty as one of loyalty that prohibits a fiduciary from engaging in conflicts of interest without the beneficiary’s permission. They see fiduciary duties as gap fillers that help courts determine the parties’ responsibilities if a situation arises that was not contemplated by the parties’ original agreement. Anti-contractarians, on the other hand, view fiduciary duties as a means to protect vulnerable parties from their … Read more
A host of studies have examined the link between accounting and the 2007-2008 global financial crisis, most of them focusing on whether fair value accounting or accounting discretion at financial institutions helped skew valuations on bank balance sheets. In our recent article, “The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis,” available here, we examine how financial reporting at non-financial firms affected the economy during the crisis. Prior studies provide evidence that the financial crisis was a relatively exogenous shock to the supply of external finance (at least with respect to any individual firm) that significantly … Read more
“Culture, more than rule books, determines how an organization behaves.” – Warren Buffet
In recent years, there have been ongoing occurrences of serious professional misbehavior, ethical lapses and compliance failures at financial institutions. It was the crisis that exposed systematic mentality errors in finance.
The hope was that post-crisis regulatory reforms would tackle the typical mindset of short-term oriented self-enrichment in finance, considered as one of the origins of the financial crisis. Now, almost ten years after the crash in 2007, the lack of fundamental change raises the question whether there is an endemic issue within the financial … Read more
2015 and 2016 mark the 30th anniversaries of the Delaware Supreme Court’s landmark decisions in Unocal Corp. v. Mesa Petroleum Co. and Revlon, Inc. v. Macandrews & Forbes Holdings, Inc. Those cases and their progeny called for enhanced scrutiny standards to be applied to negotiated change of control transactions as well as to deal protection devices. During the past three decades, however, it has not been smooth sailing in the courts’ application of these standards. In fact, I have previously argued that the Delaware courts have shifted away from both the Unocal and Revlon enhanced scrutiny standards.… Read more
In 2010, after considering 400 possible targets, Indiana-based funeral casket manufacturer Hillenbrand Inc. announced a plan to acquire K-Tron International Inc., a Pitman, New Jersey firm which makes industrial coal crushers and feeding equipment (including a machine to shoot raisins into breakfast cereal). Despite the considerable difference in product lines, K-Tron provided Hillenbrand CEO Kenneth Camp with a unique benefit. Camp was raised in Pitman and his mother Edith still lived nearby in his childhood home. Although Camp said the location in Pitman had no influence on his decision to buy the company, he acknowledged: “When I heard it … Read more
Merger activity seems to rise in step with the market. Academic papers suggest this may be due to bidders exploiting overvalued shares, a pro-cyclicality of merger economies of scale or available capital for deals, or simply the behavioral pressures of a “me too” mindset among CEOs. But this positive association is not altogether intuitive, as practitioners and academics alike ask “why do we not see merger waves during bear markets in which acquirers are bargain-hunting for undervalued firms.”
In our working paper “Merger Activity, Stock Prices, and Measuring Gains from M&A” we offer a fresh take on the positive … Read more