How Investors React to Corporate Communications on Twitter, YouTube, and Instagram

Can social media help firms improve communication with investors? In a recent paper, I argue that social media communication can give a firm an advantage over competitors in attracting attention to earnings announcements and lead to stronger price reaction to news announcements. This is because investors have limited resources for acquiring and processing to information, and social media makes it easy for them—and particularly retail investors—to learn about company results.

To test the hypothesis, I look at FTSE100 companies that are active users of social media. For example, 64 percent of FTSE 100 companies used Twitter to communicate with investors … Read more

Wachtell Lipton Offers Acquisition Financing Year in Review: From Break-Neck to Brakes-On

The credit bull market finally exhibited signs of fragility in the fourth quarter of 2018, putting the brakes on what had seemed poised to be another banner year for corporate borrowers.  The skies may yet clear, but for savvy borrowers the New Year is a good time to prepare for turbulence.  Looking ahead to 2019, we contemplate strategies for M&A in choppy financing markets, the practical impact of credit rating downgrades, and the risks posed by the rise of “default activism” in the debt markets.

The Financing Markets in 2018: A Sharp Transition

A Hot Start… 

Through its first three … Read more

How Lenders React When Activists Target Borrowers

A number of recent news stories have recounted the quick and dramatic changes that activist hedge funds trigger in the companies they target. In the Atlantic magazine, for example, a 2016 article describes DuPont’s decision to cut 10 percent of its workforce in response to an activist campaign by investor Nelson Peltz and his company Trian Fund Management. The recent saga involving David Loeb’s Third Point hedge fund and Campbell Soup illustrates the typical pattern where activist investors take a small but meaningful stake in a target company and demand significant say over the strategic and financial policies of the … Read more

Is It Time to Get Rid of Earnings-per-Share?

Do U.S. companies focus too much on short-term profits at the expense of long-term investments, profits, and growth? There is considerable debate among academics, practitioners, and politicians about the relevance of short-termism, its possible sources, and potential mechanisms to mitigate it.

In a recent article, I propose that earnings-per-share (EPS) targets are a very likely driver of short-termism and discuss what we can do to break the link between EPS targets and short-termism. Earlier survey evidence shows that managers admit to short-termism driven by earnings management—they are willing to sacrifice positive net present value long-term investments to meet earnings goals.… Read more

Why Dismantling Nonbank SIFI Regulation Is a Serious Mistake

The unnerving events of fall 2008 removed all doubt that investment banks and other nonbank financial firms can propagate systemic risk and endanger the world’s financial system.  In response, Congress instituted a robust system for regulating systemic risk posed by nonbanks.  The Dodd-Frank Act created two approaches to nonbank systemic risk regulation.  The first, known as entity-based regulation, authorized the new Financial Stability Oversight Council (FSOC) to designate individual nonbank financial firms as systemically important financial institutions (SIFIs) for heightened regulation and oversight by the Federal Reserve.  The second, dubbed activities-based regulation, gave FSOC the power to make … Read more

Bitcoin Futures: From Self-Certification to Systemic Risk

December 2017 marked a milestone in the short history of virtual currency. On Friday, December 1, 2017, the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for cash-settled bitcoin futures products. The self-certification process allows designated contract markets (DCMs) to list new derivative products one day after submitting in writing to the Commodity Futures Trading Commission (CFTC) that the product complies with the Commodity Exchange Act (CEA) and CFTC regulations.

Prior to December 2017, there were limited options for investors that wanted access to bitcoin derivatives. In 2014, TeraExchange, LLC, a Swap Execution Facility … Read more

Skadden Discusses Proposed Updates to Banking Rules for Derivative-Contract Exposure

On October 30, 2018, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the agencies) jointly invited comment on a proposed regulation that, if adopted, should provide regulatory capital relief for certain derivative exposures. If adopted, the regulation would amend the agencies’ risk-based and leverage capital requirements for banking organizations. The proposal is subject to public comment for 60 days following its publication in the Federal Register.

The proposal would implement a “standardized approach for counterparty credit risk” (SA-CCR) to replace the current exposure methodology … Read more

The Lost Volume Seller, R.I.P.

One of the mysteries in life is how different jurisdictions can be faced with the same legal problem and manage to come up with the same wrong answer. Case in point. Both English and American contract law hold that if a buyer cancels an order (breaches) and the seller resells the item at the same price, the seller’s remedy need not be the contract/market differential (zero). Rather, they both say, if the seller could have sold this item and another as well, the seller could have made the profits on both items. The seller would be a “lost volume seller” … Read more

The Unwise and Illegal Deregulation of Prudential Financial

On October 18, federal regulators released the largest U.S. insurance group, Prudential Financial, Inc., from enhanced government oversight.  Prudential had been the last remaining systemically important financial institution (SIFI)—a designation Congress created in the Dodd-Frank Act for nonbank financial companies that could threaten U.S. financial stability.  Prudential’s deregulation fulfills a years-long effort by Dodd-Frank critics to weaken a crucial post-crisis regulatory reform.

In my new essay, “The Last SIFI: The Unwise and Illegal Deregulation of Prudential Financial, Inc.,” I contend that overturning Prudential’s “systemically important” status was not only misguided, it was also against the law.  By illegally … Read more

Wachtell Lipton Discusses Default Activism in the Debt Markets

We have recently seen an increase in contentious disputes, some public and many not, between companies and their debt investors.  Clashes between borrowers and their lenders are as old as debt itself, but what we are seeing now is something different.  In these situations, debt investors are not merely seeking to enforce their contractual entitlement to payment, or to challenge transactions that will impair the borrower’s ability to pay.  Rather, they are purchasing debt on the theory that the borrower is already in default and then actively seeking to enforce that default in a manner by which they stand to Read more

The Operating Returns to Acquired Intangible Assets

Accounting rule makers have long debated whether companies should recognize intangible assets on their balance sheets. At the heart of this debate is whether recognized values can predict future income and cash flows, or whether the high degree of measurement uncertainty embedded in intangible asset values precludes such predictive ability. While many agree intangibles like patents, trademarks, and goodwill contribute significantly to value creation and profitability, separately identifying and reliably measuring intangibles is costly. In fact, due to measurement-related concerns, accounting rules generally do not allow companies to recognize internally generated intangibles on their balance sheets. Intangibles acquired externally in … Read more

Investor-Paid Credit Ratings and Conflicts of Interest

Credit ratings provide information regarding a company’s default probability.  Ratings are relied upon extensively in regulation and private contracting and play a crucial role in the functioning of the capital markets.  However, since the major credit rating agencies (CRAs) operate under a business model whereby they are paid by their issuers, there is reason to believe that issuer-paid ratings are inflated.  Many market observers view this conflict of interest as a contributing factor of the global recession of 2008-2009.  This indictment has also allowed for the emergence of several CRAs that operate under an alternative “investor-pays” business model, which some … Read more

The Identity Challenge in Finance

Identity is fundamental in finance. At a time when huge TechFins like Amazon are making inroads into the financial services industry, major questions are arising as to the most effective methods of customer identification and meeting Know Your Customer obligations (KYC). Does the solution lie in redefining identity, in the methodology of retrieving identification, in some mix of the two, or in other ways? We have recently explored these issues, here.

To date, forms of analogue and digitized identity (i.e paper documents and scanned ID documents respectively) have been relied upon to prove an individual’s identity to, say, a … Read more

Do Public and Private Firms Invest Differently?

Equity markets are an important source of capital financing for firms, particularly in the United States. These large, liquid markets channel capital from savers to firms and facilitate corporate investment by distributing risks among many smaller investors. There is concern, however, that along with these benefits, equity financing has significant costs. One of the most prominent criticisms of the public ownership of firms is that investor pressure over short-term stock market performance causes public firms to forgo profitable, long-term investments.

This criticism has prompted such notable corporate leaders as Jamie Dimon of J.P. Morgan Chase and Warren Buffett of Berkshire … Read more

Paul Weiss Discusses New Trends in Private Equity Transactions

The private equity market is more competitive than ever.  Target company multiples have skyrocketed due to both a robust strategic acquisition market, and stiff competition from PE buyers as they vie with one another to deploy $1 trillion in dry powder that remains from the $3 trillion raised in the past five years.[1]  As traditional investment strategies become more challenging, PE firms are adopting innovative strategies to adapt.

In this issue of the Private Equity Digest, we look at four methods PE firms have used to adapt to the current competitive environment – (i) engaging in more buy-and-build approaches … Read more

Split Derivatives: Inside the World’s Most Misunderstood Contract

Derivatives are the “bad boys” of modern finance: exciting, dangerous, and fundamentally misunderstood.  Their supporters defend them as important instruments for measuring, managing, and transferring risk, enhancing both the efficiency and resilience of the financial system.  Their critics label them everything from “socially useless” to “financial weapons of mass destruction” to “the crystal meth of finance.”  They have been singled out by policymakers as one of the catalysts of the global financial crisis.  They have even been condemned by the Pope.  Indeed, in the wake of the crisis, it often seems like everyone who is anyone has an opinion about … Read more

Debevoise Discusses OCC Efforts to Modernize Community Reinvestment Act Regulations

On August 28, 2018, the Office of the Comptroller of the Currency (“OCC”) published an advance notice of proposed rulemaking (“ANPR”) inviting public comment on ideas for modernizing the regulatory framework for the Community Reinvestment Act of 1977 (“CRA”).[1] Comments must be received by November 19, 2018.

The ANPR addresses concerns from banks, community groups, academics and other stakeholders that CRA regulations have become ineffective because they no longer reflect the banking activities of many banks or consumers, given the dramatic growth of digital banking and technologies that have allowed banks to become active in communities where they do … Read more

Did Deregulation End the “Quiet Period” of Low-Risk Banking?

From the New Deal until the 1970s, banks were on a tight leash. Regulators controlled the rate of interest they could pay on deposits. Banks could not underwrite or deal in corporate securities. With some exceptions, they could not expand geographically.

These restrictions were gradually eliminated beginning in the 1970s. Simultaneously, banking grew riskier. From the end of World War II to 1970, bank failures were virtually nonexistent. From that time on, the U.S. experienced waves of bank distress culminating in the financial crisis of 2007-09.

It is tempting to conclude that the deregulation caused the instability. I believe, however, … Read more

The Deregulation Debate: The Challenge of Using Static Rules to Govern a Dynamic System

In their lively disagreement about the role of deregulation in contributing to the 2007-2009 financial crisis, professors Arthur Wilmarth and Paul Mahoney inadvertently illuminate why the processes through which finance is regulated are so ill-suited to that purpose.  Finance is dynamic.  Today’s financial system bears only a coarse resemblance to the financial system of the 1950s.  Tomorrow, the system will evolve yet further and in ways we may not be able to imagine today.   In contrast, the legal regime is designed to stagnate. Frictions make statutes and regulations difficult to change, even when market changes have already altered the substantive … Read more

Do Investors Care Who Did the Audit?

In 2008, the U.S. Department of the Treasury’s Advisory Committee on the Auditing Profession called for a “standard-setting initiative to consider mandating the engagement partner’s signature on the auditor’s report” as a way to increase audit transparency.[1] The Public Company Accounting Oversight Board (PCAOB) considered this call, weighing investor benefits (e.g., increased transparency) against potential costs to the audit profession (e.g., increased litigation risk and administrative costs). After considerable discussion with registrants, investors, and audit firms, the PCAOB responded in December 2015 by enacting Rule 3211, Auditor Reporting of Certain Audit Participants.

The new rule mandates that auditors … Read more