We show that positive daily stock returns contain more information on the long-term change in stock value than do negative daily stock returns that are noisier on average and more prone to subsequent reversals. This difference in the informativeness of negative and positive returns is larger on nondisclosure days and decreases significantly on disclosure days. Our findings suggest that while positive information about firms is constantly flowing to the market, the flow of negative information is more limited and mostly confined to disclosure days.
There are reasons why negative information is more likely to reach investors on disclosure days rather … Read more
The Financial Stability Oversight Council’s (FSOC) recently revised guidelines (the 2019 Guidelines) on how it will identify and address financial stability risks are a major shift from the guidelines it issued in the immediate aftermath of the Financial Crisis (the 2012 Guidelines). The 2019 Guidelines draw upon lessons learned from FSOC’s ultimately fruitless attempts to designate nonbank financial companies as systematically important. Instead, building on one of the original purposes of the Dodd-Frank Act, which was then emphasized in one of the Treasury Reports, the 2019 Guidelines focus on identifying and regulating systemically important … Read more
Delaware corporate law differs from other areas where fiduciary obligations apply – such as agency, LLCs, partnerships, and trusts. Three distinct actors owe fiduciary duties – executive officers, directors, and controlling shareholders – and numerous aspects of their duties greatly differ. But Delaware corporate law is not unique in the way many believe. Conventional wisdom holds that, uniquely, corporate law’s standards of conduct (fiduciary duties) diverge from judicial standards of review, the latter being more deferential. Yet, the two sets of standards often converge and are identical. The supposed distinction is not uniformly accurate, and unenforceable standards of conduct may … Read more
Channel Medsystems, Inc. v. Boston Scientific Corporation (Dec. 18, 2019) is the Delaware Court of Chancery’s first decision issued since the Delaware Supreme Court’s 2018 Akorn decision to evaluate whether an acquiror had a right, under a merger agreement, to terminate a pending acquisition on the grounds that there was a “Material Adverse Effect” or “Material Adverse Change” in the target company. (We use “MAE” and “MAC” interchangeably in this memorandum.) Akorn was the first case in which the Court of Chancery, post-trial, found the existence of an MAE and the first post-trial Delaware decision to find that an acquiror … Read more
Regulation A+, an exemption from registration that took effect in 2015 and allows small companies to issue stock to the general public, presents interesting questions of corporate governance.
The maximum offering size of $50 million means that most Reg A+ issuers will not qualify for listing on a national exchange, which means that they will not be subject to the minimum corporate governance requirements contained in the national exchanges’ listing standards.
This has led to some criticism of Reg A+ offerings on corporate governance grounds. In a recent comment letter, state securities regulators charged that Reg A+ issuers often:… Read more
2019 was another strong year for corporate borrowers, continuing a decade-long run marked by historically low interest rates and strong credit markets. Over the last 10 years, total U.S. corporate bonds outstanding rose from $6 trillion to nearly $10 trillion, while leveraged loans expanded to $1.2 trillion from $500 billion.
But even in the midst of this bull market, new opportunities and challenges arose. Two major trends from the last year stand out—the increased participation of “non-traditional lenders” as a financing source and the continued evolution of “debt default activism” as a material concern for borrowers.
The Acquisition Financing Markets
… Read more
M&A activity declined across most measures in December 2019. The number of deals fell by 17.3% in the U.S., to 613, and by 7.1% globally, to 2,665. Total deal value decreased by 21.2% in the U.S., to $122.92 billion, but increased by 3.9% globally (driven primarily by sponsor-related activity), to $347.75 billion. Average deal value also decreased by 4.7% in the U.S., to $200.53 million, but increased by 11.9% globally (again driven primarily by sponsor-related activity), to $130.49 million. Figure 1. The good news, however, is that U.S. M&A activity was up overall for 2019, as we will … Read more
Firms regularly grant stock and stock options to their employees as a way to align the incentives of employees and shareholders. This is particularly relevant for executives, because they routinely make decisions that have an appreciable effect on firm value and their incentives often clash with those of shareholders. It is unclear, however, whether the alignment motivation is relevant for rank-and-file (R&F) employees, because their individual behavior in the workplace has a trivial effect on firm value.
An alternative motivation for awarding stock options is to reduce employee turnover. All firms incur costs from recruiting and training replacement employees, including … Read more
Amazon, eBay, Etsy, and Pinterest offer hundreds of items, from t-shirts to coffee mugs to posters, warning against agreement for the sake of agreement.* My wife has, on more than one occasion, reminded me of the danger. And now, Delaware’s Supreme Court has reason to be on alert.
In oral argument on the appeal of Sciabacucchi before the Delaware Supreme Court, petitioners and respondents concurred that federal forum provisions are not “internal corporate claims” as defined by DGCL 115. But neither side reconciled this assertion with the statute’s plain text or legislative history, and no justice pressed … Read more
Election and Impeachment
The presidential race will garner much of the attention during the 2020 election cycle, but there is fierce competition elsewhere, too. Republicans and Democrats are fighting for both U.S. House of Representatives and U.S. Senate seats in the 116th U.S. Congress, with the Republican Party trying to regain House majority. Meanwhile, impeachment proceedings against President Donald Trump are shaping up to be a potential game changer for certain members of the Senate who are running for president. They’ll lose valuable time on the campaign trail while serving as jurors for the duration of the impeachment trial.
… Read more
In a new article, we aim to identify the elements and stages that have led to increased attention to corporate social responsibility issues, especially with regard to environmental, social, and governance factors, and to focus on the meaning of each element of the ESG acronym. Moving from a theoretical to an empirical study, we also analyze the 2017 non-financial disclosure reports (released in 2018) of all European listed companies and examine the resulting 1194 companies that, according to Thomson Reuters Business Classification data, are mainly from the financial industry (296, or 24.79 percent) and the consumer goods and industrial sectors … Read more
On December 30, 2019, the Securities and Exchange Commission (SEC) announced proposed amendments to its auditor independence requirements. Comments on the proposed amendments will be due 60 days after publication in the federal register, meaning comments likely will be due by the beginning of March 2020. If approved, these proposed amendments would significantly modify the framework that public companies and their auditors use to evaluate auditor independence, providing additional clarity for certain particularly difficult and recurring issues. The proposed amendments principally focus on complications that arise from auditor independence assessments with respect to affiliates of the audit client. Such issues … Read more
A major issue in United States v. Blaszczak, 2019 WL 7289753 (2d Cir.), was whether the government needed to prove the elements of a Rule 10b-5 tipping violation from Dirks v. SEC, 463 U.S. 646 (1983), when charging a tipper and tippees with the crimes of wire fraud and securities fraud in Title 18. The Second Circuit’s answer was no. In an insider trading case based on tipping charged as a Title 18 fraud, the government did not need to prove that an insider received a personal benefit in exchange for disclosing material, non-public information to an outsider.… Read more
2019 was, by many measures, the most significant year ever in Foreign Corrupt Practices Act (“FCPA”) enforcement. More than $2.6 billion in corporate fines sets a new high-water mark, driven by the two largest corporate resolutions in the statute’s history. Fifty-four FCPA enforcement actions, or 73 total cases including ancillary actions, brought by the FCPA Units of the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), each rank second only to 2010 in the annals of FCPA enforcement. Four FCPA and FCPA-related trials is the most ever. Add on top of this new FCPA enforcement policy guidance … Read more
As issuers prepare their Form 10-K and 20-F filings for fiscal year 2019, they should consider recent changes to Securities and Exchange Commission (“SEC”) disclosure rules, trending disclosure topics and the implementation of critical audit matters disclosure in the audit report. This memorandum summarizes several of those disclosure and accounting considerations, and highlights the key changes to SEC rules that will affect Form 10-K and 20-F filings this upcoming reporting season.
General Disclosure Trends
As issuers prepare their annual SEC reports, they should consider a number of disclosure topics that have continued to receive SEC and investor attention over the … Read more
Thank you as always to our dedicated Staff, especially Christian Sabella, David Shillman, Deborah Flynn, John Roeser, and Jennifer Colihan, for their extensive work on today’s proposed order. I’m also deeply grateful to Division Director Brett Redfearn, whose leadership in this area—and so many others—continues to reflect the very best in public service.
As today’s release explains, America’s stock markets are riven by a fundamental conflict of interest: exchanges both operate public data feeds and profit from selling superior private ones. Because exchanges have no economic reason to produce robust public data on stock prices, investors have long demanded … Read more
I want to start by thanking Chairman Clayton, Director Redfearn, and our dedicated staff for their work over the past couple of years to address some of the more complex and conflicted areas of equity market structure such as the transaction fee pilot, order handling disclosure reforms, and the regulation of alternative trading systems. I’m grateful for this work and the continued focus on these issues, including today’s proposal.
Our regulatory regime currently places for-profit trading venues in the position of setting many of the rules and costs for how our markets function. The regime was established decades ago, and … Read more
The progress and promise realized and presented by artificial intelligence in finance has been remarkable. It has made finance cheaper, faster, larger, more accessible, more profitable, and more efficient in many ways. Yet for all the significant progress and promise made possible by financial artificial intelligence, it also presents serious risks and limitations.
My recent article, Artificial Intelligence, Finance, and the Law, in the Fordham Law Review, offers a study of those risks and limitations – the ways artificial intelligence and misunderstandings of it can harm and hinder law, finance, and society. It provides a broad examination of inherent … Read more
In a recent article I explore the history of the law of corporate purpose, a subject recently highlighted by the Business Roundtable’s “Statement of the Purpose of a Corporation.” This August 19 statement was signed by more than 180 CEOs who committed to “delivering value to . . . customers,” “investing in . . . employees,” “dealing fairly . . . with suppliers,” “supporting . . . communities,” and “generating long-term value for shareholders.” “Each of our stakeholders is essential,” the statement concluded; “We commit to deliver value to all of them, for the future success of our companies, … Read more
In a year of robust M&A activity, the U.S. antitrust agencies investigated and challenged transactions in many sectors of the economy. The Federal Trade Commission and the U.S. Department of Justice initiated court challenges to block four proposed transactions and required remedies in 17 more. Companies also abandoned five transactions due to antitrust agency opposition, including three transactions abandoned shortly after the agency filed its court challenge. In addition, a coalition of state attorneys general challenged in federal court the merger of T-Mobile and Sprint, a transaction cleared, with the imposition of conditions, by the DOJ and the Federal Communications … Read more
By last count, there are now 29 U.S. law firms with at least 1,000 lawyers. In a few weeks, this number should rise to 32, primarily as the result of mergers. My prediction is that this number will climb to well over 50 by the end of this decade. Still, two inconsistent trends are peaking at the same time: (1) large firms are growing in size, but (2) growth in the number of equity partners at these firms has stalled (and may even have declined). According to the annual survey by the National Law Journal, the number of … Read more
On December 4, 2019, the Financial Stability Oversight Council (the “Council”) voted unanimously to finalize amendments to its interpretive guidance (the “Final Guidance”) on designating nonbank financial companies as “systemically important financial institutions” (“SIFIs”). The Final Guidance, which will replace the Council’s interpretive guidance on SIFI designations issued in April 2012 (the “Prior Guidance”), implements an “activities-based” approach to identifying and addressing potential risks to financial stability, and is intended to enhance the “analytical rigor and transparency” of the Council’s process for designating SIFIs.
The Final Guidance, which adopts the … Read more
Insider trading is back in the news, although some would argue it never left. Last month, the U.S. House of Representatives passed the Insider Trading Prohibition Act, which seeks to create a new provision, Section 16A of the 1934 Securities Exchange Act, devoted to banning the trading of securities while “aware of material nonpublic information.” If the bill is enacted, it would represent the first time the phrase “insider trading” has been defined by congressional statute. Typically, charges of insider trading are brought under Section 10(b) and the SEC’s Rule 10b-5, which does not mention the term “insider trading” but … Read more
If there was one thing most people could agree on after the 2008 financial crisis, it was that “too-big-to-fail” banks were to blame for the market crash. This shared understanding was accompanied by a corollary: Small banks were not the problem. These so-called community banks were perceived to be innocent bystanders, overrun by market turmoil caused by much larger financial institutions.
Community banks have long been sympathetic figures in financial regulatory circles. Generally speaking, the term refers to banks with less than $10 billion in assets that focus on traditional financial products. Reasoning that such firms pose little risk, policymakers … Read more
As empirical evidence of labor-market concentration mounts, academics and policymakers advance proposals to challenge or reverse its effects on workers’ wages and labor-market options. Prominent among these is more aggressive review of the labor-market effects of mergers by the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”). My forthcoming essay, Interagency Merger Review in Labor Markets, argues for an alternative intervention: N.
Increasing evidence of labor market concentration and mergers’ suppressive effects on wages has drawn attention to labor market regulation by antitrust scholars and enforcers, creating an unprecedented reform effort to apply antitrust law to employers. … Read more
This year, each of the major index fund managers, the Business Roundtable, the British Academy, the UK Financial Reporting Council, the World Economic Forum and a number of other organizations (both governmental and nongovernmental) announced that they did not support shareholder primacy and do support sustainable long-term investment and considering ESG matters. However, the initial reaction of the Council of Institutional Investors in denouncing the BRT position from both an economic and legal standpoint, although quickly moderated, has continued to echo in Wall Street trading rooms, at activist hedge funds and in corporate boardrooms. I continue to hear that the … Read more
Does regulation deter insider trading? This has been a controversial question, with mixed empirical findings. One set of studies finds that insider trading regulations have been effective in reducing the frequency and profitability of opportunistic trades (e.g., Agrawal and Jaffe (1995) and Garfinkel (1997)), while several other studies cast doubt on the efficacy of regulations (see, e.g., Seyhun (1992), and Banerjee and Eckard (2001)). A possible reason for the disagreement is the difficulty in establishing a causal connection between regulation and insider trading. There are two main obstacles to doing so. First, most modern insider trading laws in the United … Read more
Corporate Focus on the “Social Good”
Importantly, the Business Roundtable (an influential group of almost 200 CEOs of America’s most influential companies) issued a “Statement on the Purpose of a Corporation,” which has intensified a developing focus on the social impact of corporate decisions. The BRT Statement contains no specific commitments or directives and does not represent a change in law, but reflects a view that there is a social responsibility component to corporate decision-making. The Statement emphasizes that directors should not be single-focused on the maximization of profits for shareholders and should weigh heavily the interests of the other … Read more
Tying executive pay to corporate performance has become increasingly important in creating incentives for corporate managers. Theoretical models argue that compensation contracts that reward managers contingent on performance, especially performance relative to peer firms, can increase managerial effort (e.g., Holmstrom, 1979, 1982). The effectiveness of performance-based pay in motivating managers, however, could be limited, especially if self-interested managers can negate its incentive effect. In a new paper, I investigate one such action, insider trading.
Theoretical models suggest that insider trading may be a suboptimal way to compensate management. For instance, Fischer (1992) argues that allowing insider trading can exacerbate existing … Read more
When Saudi Arabia’s Crown Prince Mohammad Bin Salman announced plans to sell stakes in state-owned Saudi Arabian Oil Co. (Saudi Aramco) in 2016, he was also setting the stage for the biggest initial public offering (IPO) in history. On December 5, 2019 Saudi Aramco, the world’s largest oil company, confirmed the price of its shares at SAR 32 ainitiapiece, raising $25.6 billion before it appeared on the Saudi Stock Exchange (Tadawul) on December 11, 2019.
This investment opportunity enters the market at a time when investors are moving away from traditional energy stocks and focusing on investments with a reduced … Read more
Dual class capital structures have spread exponentially in recent years across much of the corporate world, as has previously been reported on this blog. Dual class listed companies today account for around $4 trillion of US total stock market value including 9 percent of the S&P 100, and the dual class stock (“DCS”) phenomenon has become one of the most significant issues in global corporate governance today.
A dual class capital structure is one that gives certain inside investors voting rights disproportionate to their economic interest in a company. This enables them to prevail over less privileged outside investors on … Read more
In 2017, shareholders of Tesla Motors sued Tesla’s CEO, Elon Musk, and its directors, claiming that the company, at Musk’s urging and under his influence, engaged in a conflict of interest transaction when it purchased SolarCity, a corporation owned by Musk and his family. That litigation reflected the substantial concerns that shareholders have when their corporations undertake business transactions directly with their directors, officers, or principal shareholders or with companies that management personnel own or control.
Conflict of interest transactions occur frequently in both small and large corporations. They can range from somewhat innocent transactions such as loans to corporations … Read more
M&A activity in the U.S. and worldwide continued to be mixed in November. The number of deals fell by 13.5% in the U.S., to 721, and by 7.7% globally, to 2,710. However, total deal value rose by 48.3% in the U.S., to $150.98 billion, and by 8.7% globally, to $326.37 billion. Average deal value also increased by 71.6% in the U.S., to $209.4 million, and by 17.7% globally, to $120.43 million. Figure 1.
Strategic vs. Sponsor Activity
Strategic deals outperformed sponsor deals last month, with the former showing more mixed results while the latter declined across all metrics. … Read more
In a new paper, I add to the debate over hedge fund regulation by introducing empirical evidence that hedge fund registration requirements reduce misreporting. Using three alternating changes in hedge fund regulation, my study finds consistent evidence that registration reduces hedge funds’ misreporting — and provides evidence on why this regulatory regime is effective. In particular, my analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their financial performance more accurately.
It was initially unclear whether regulation would … Read more
On December 10, 2019, the Second Circuit, in Gamm v. Sanderson Farms, held that when a securities fraud complaint alleges that statements were rendered false or misleading through the non-disclosure of illegal activity, the facts of the underlying wrongdoing must be pleaded with particularity in accordance with Federal Rule of Civil Procedure (“FRCP”) 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). The decision places a high bar on Section 10(b) claims based on undisclosed wrongdoing, requiring that the details not only of the misstatement or omission be pleaded with particularity, but also those of the underlying misconduct. … Read more
Blockchain-based information storage, retrieval, and tracking have the potential to be more immediate, transparent, and credible means of business recordkeeping than alternatives involving a centralized point of control. As a result it should be unsurprising that corporations have begun to adopt blockchain-based recordkeeping. The adoption of blockchain-based information-tracking by corporations is forecasted to grow rapidly and constitute a far greater and more permanent disruption to daily realities than other applications of blockchain have brought about to date. This practice has the potential to significantly alter aspects of corporate governance – specifically, those involving data-tracking or communication.
Our recent article, … Read more
Following the SEC’s rejection last week of its proposed rule change on direct listings, the NYSE filed a revised rule change proposal with the SEC yesterday. The new rule change proposal is substantially similar to the proposal the NYSE filed in November, except that issuers can meet the NYSE’s market value requirement by selling $100 million of shares (rather than $250 million under the initial proposal). Consistent with the initial proposal, the revised rule change proposal would provide the same flexibility for an issuer to sell newly issued primary shares into the opening auction in a direct listing, and would … Read more
Shareholder activism is an investment strategy that investors such as hedge funds (HFs) use to increase the value of their investment by intervening in the management of a targeted firm. Activists can nudge management to take shareholder-friendly actions such as increasing dividends or share buybacks, doing spinoffs, or being acquired. Prior studies (reviewed by Brav, Jiang and Kim, 2009, 2015b) find that HF activism is quite successful in increasing shareholder wealth of targeted firms. However, there are two opposing views about how that happens. In the first view, activism increases the value of the target firm by enhancing firm productivity … Read more
In hindsight, 2019 may come to be viewed as a watershed year in the evolution of corporate governance. After years of growing alarm about endemic short-termism, the sustainability and competitiveness of businesses over a long-term horizon, and the role of corporate policies in contributing to socioeconomic inequality, there has been an emerging consensus that the prevailing corporate governance system is broken. Initially, in the aftermath of the financial crisis of 2008, this critique was focused on short-termism as a root cause of systemic destabilization and decay. In subsequent years, the concept of sustainability gained traction, and ESG (environmental, social and … Read more