Operating risk is a major concern for firm management and stakeholders. Stark examples of losses due to corporate operations include BP’s $17.2 billion loss in June 2010 following the Deepwater Horizon incident (Wong and Yousuf, 2010) and Freeport-McMoRan’s $13.9 billion loss in 2008 due to plunging metal prices and difficulty with the acquisition of a rival company (James, 2009). The consequences of these and other operating losses are significant, and spill over to connected firms (Wu, 2016). Managers may be willing to make risky operating decisions if they are unaware of the risk or measure it poorly, or if their … Read more
On January 30, 2017, the Federal Reserve published a final rule, initially proposed on September 26, 2016, that will modify the CCAR capital plan and stress testing rules applicable to bank holding companies (“BHCs”) with $50 billion or more in total consolidated assets and U.S. intermediate holding companies (“IHCs”) of foreign banking organizations (collectively, “CCAR firms”). Most notably, beginning with the 2017 CCAR and DFAST cycle, the final rule will exclude the capital plans of “large and noncomplex” CCAR firms (those that are not global systemically important banks (“G-SIBs”), … Read more
In a bank examination, regulators evaluate a financial institution’s compliance with applicable laws and regulations. The process is generally non-public, and the bank examination privilege helps keep it confidential. But questions have recently arisen about how the privilege is meant to work, and the answers to them may significantly affect financial institutions and their dealings with federal and state regulators.
In our new legal treatise, The Bank Examination Privilege, we offer a comprehensive overview of the bank examination privilege and its essential role in bank supervision. As we point out, there are two key reasons why confidentiality is vital. First, … Read more
The Comptroller of the Currency (the “OCC”) has been working for over a year to develop a comprehensive framework to improve the OCC’s ability to identify and understand trends and innovations in the financial services industry, as well as evolving customer needs.[i] The OCC is taking a comprehensive approach to financial innovation, including innovative products and services. As part of this initiative, the OCC formed a team including policy experts, examiners, lawyers and other’s (the “Team”) to gain a better understanding of emerging technology and new approaches in financial services and to design the OCC’s … Read more
The pressure to meet earnings expectations has grown intense for U.S. companies, and may be damaging the health and safety of workers. Missing analyst estimates, even by a small amount, can lead to significant negative reactions from investors. For example, eBay’s share price plunged 22 percent when it missed its fourth-quarter 2004 consensus estimate by just one penny. Facing such market pressures, managers may look for ways to improve their firm’s bottom line. They can create incentives for employees to become more productive, reduce discretionary expenditures, or seek ways to boost profits in the short term. These actions often come … Read more
If 2008 through 2010 were years of tumult and recession in U.S. financing markets, and 2011 through 2015 years of recovery and growth, marked by ever-lower yields and record-setting financing activity even in the face of new compliance regimes, 2016 felt like a tipping point. After hitting record lows in the first half of the year, interest rates at last experienced a sustained rise, and the U.S. election results opened the door to major regulatory and legislative changes, including the potential roll-back of portions of Dodd-Frank and the potential roll-out of consensus-fueled fiscal stimulus.
During the course of a year … Read more
The tax affairs of large corporations have recently come under intense scrutiny. One symptom of this scrutiny has been increasing disclosure requirements, both to the public and to taxing authorities. One form of increased disclosure includes putting more information about the firm’s tax affairs in the hands of the public. For instance, public release of tax data in the form of public country-by-country reporting is a possibility in the U.S. and all European Union member states by 2018. In 2013, the Australian legislature began debating making public certain tax-return data that were previously available only to the taxing authority. Amid … Read more
Over the last 30 years, institutional investors have dramatically increased their stakes in U.S. companies. In the 1980s, they held approximately 20 percent to 30 percent of the average firm in the U.S. By 2010, they held over 65 percent. This increase in institutional holdings coincides with the growing complexity of markets and importance of corporate governance. Prior research has focused on the different effects on firms of the informed “smart money” of the institutional investor in contrast to the less sophisticated individual “retail” investor. Yet, as SEC Commissioner Luis Aguilar said in a recent speech, “Institutional investors are not … Read more
In our new article, available here, we examine what we term “regulatory entrepreneurship”: companies pursuing a line of business in which changing the law is a significant part of the business plan. Regulatory entrepreneurship is not a new phenomenon, but it has become increasingly salient in recent years, as a host of high-profile companies – from startups such as Airbnb, DraftKings, and Uber to public companies such as Tesla and Alphabet (formerly Google) – have adopted this strategy. These companies, and other regulatory entrepreneurs, have spent enormous amounts of resources pursuing lines of business that reside in legal gray … Read more
In common law countries such as the U.S., corporate governance aims primarily to protect shareholders from managers’ self-dealing. Post-Enron reforms such as the Sarbanes-Oxley Act of 2002 and various Securities and Exchange Commission rules are examples of this shareholder-oriented approach. However, to the extent that the interests of shareholders and debtholders are not entirely aligned, governance reforms that beneﬁt shareholders may harm debtholders. Similarly, some public polices such as state anti-takeover laws (ATLs) may entrench management and harm shareholders but benefit debtholders by reducing both the variance of cash flow from operations and the firm’s risk of default.
In our … Read more
In December 2015, Ukraine defaulted on a $3 billion loan made two years previously by the Russian government. Governments lend to one another all the time, but this loan was extraordinary, and so were the events that followed in its wake.
Like most government-to-government loans, this one had political motivations. For Russia, these included the desire to reward President Victor Yanukovych for backing out of an Association Agreement that would have deepened Ukraine’s ties to the European Union. The structure, however, was unusual for a government-to-government loan. Whereas governments typically lend funds directly, the Russian loan took the form of … Read more
The fiduciary standards for institutions and individuals providing investment advice throughout the retail investment and municipal securities markets are currently undergoing significant change. Following on the heels of the issuance of a final Department of Labor (the “DOL”) fiduciary rule is the pending effectiveness of new fiduciary standards for municipal advisors, and the expected release of a proposed uniform fiduciary standard for investment advisers and broker-dealers by the U.S. Securities and Exchange Commission (“SEC”). The election of Donald J. Trump as President of the United States, along with a Republican majority in both the House of Representatives and the Senate, … Read more
In the U.S. general election held on November 8, 2016, Donald J. Trump was elected to become the 45th President of the United States. Republicans also retained their majorities in both the U.S. House of Representatives and the U.S. Senate for the new Congress convening in January, meaning that Rep. Paul Ryan (R-WI) is likely to remain the Speaker of the House and Sen. Mitch McConnell (R-KY) is likely to remain the Majority Leader of the Senate. For the benefit of non-U.S. readers, this result means that Republicans will control of all three lawmaking bodies of the U.S. federal … Read more
The syndicated loan market is one of the largest sources of financing for U.S. firms. This market has experienced tremendous growth over the past 20 years. In fact, some recent estimates suggest that U.S. firms obtain over $1 trillion in new syndicated loans each year and that this represents more than 50 percent of total equity and debt issuances.,
The primary players in the syndicated loan market are large banks that have developed strong reputations over time, likely due to their performance in issuing high quality loans. These banks employ loan officers and corporate bankers who screen … Read more
There are two established explanations for bank runs: coordination problems among depositors and information asymmetries between bank managers and depositors. In a new paper, “Information Gaps and Shadow Banking,” forthcoming in the Virginia Law Review and available here, I offer a novel, complementary explanation for why short-term creditors run: information nobody possesses.
Both the banking and shadow banking systems use short-term debt to fund longer-term, less liquid assets. That short-term debt is designed to pose sufficiently minimal credit, liquidity, and duration risk that holders can treat the claims as close substitutes for money. This reduces funding costs and has … Read more
We believe the recent election will have less impact on the Department of Labor’s (DOL) fiduciary duty rule than some in the media are currently speculating. While some provisions may be modified by a new Administration, we believe the rule’s core framework will remain intact. The industry has already made significant progress toward complying with the rule, and there is general recognition of the importance of removing conflicts of interest between financial advisers and retirement investors. A Trump Administration is unlikely to want to immediately restore such conflicts that could harm the very voters who propelled him into office.… Read more
Small and medium-size enterprises (SMEs) play a significant role in the global economy, accounting for a substantial portion of employment and domestic production. According to some estimates, SMEs’ contribution to gross domestic product exceeds 51 percent in high-income countries, consistent with the general consensus that SMEs are “engines” of economic growth. With an increasing number of SMEs engaging in international transactions, their influence on the volume of international trade has increased as well. In the U.S alone, SMEs represented 97 percent of all importers and 98 percent of all exporters, and accounted for 31 percent and 33 percent of imported … Read more
It is well established that venture capitalists can improve the product market value — the quality of projects and employees — at the private firms they invest in, either by making the firms more efficient (Chemmanur, Krishnan, and Nandy (2011)) or through monitoring (see, e.g., Gompers (1995) or Lerner (1995)). However, entrepreneurs and investors also talk about venture capitalists helping to create value for the firm in the financial market at the time the firm goes public. The channels through which such value is created, however, are less well-understood. In our new paper, available here, we explore a new … Read more
This is the fourth in a series examining the increased regulatory scrutiny on new and innovative financial technologies (“FinTech”).
This update considers the initiatives of two federal regulatory agencies—the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”)—and their approaches to balancing regulation with FinTech innovation. In examining these two models, we first discuss the OCC’s recent issuance of a framework regarding responsible innovation and the establishment of an office to implement the framework. Then, we discuss the CFPB’s Project Catalyst, and its recent report on its efforts … Read more
Dividend payment is a major corporate decision that occurs regularly, involves substantial amounts of money, interacts with all other important company decisions, and has a significant impact on firm value. Our recent study, available here, examines whether financial reporting quality affects dividend policy.
Financial reporting quality, defined broadly as how informative financial reports are about a firm’s underlying economics, can affect dividend policy through three channels. First, reporting quality can affect dividends by mitigating the so-called free cash flow problem: managers’ incentive to underpay dividends and spend free cash flows on value-destroying projects that maximize their benefits at the … Read more