Stock Market Indices: Inside the Black Box

The news that a whistleblower contacted U.S. regulators last month about alleged manipulation of the Chicago Board Options Exchange Volatility Index, or VIX, highlights near universal reliance on information that stock market indices provide. While the VIX is not itself a stock market index – it is constructed from the implied volatility of S&P 500 index options – the fact that it is designed to track the expected volatility of another index only reinforces the centrality of indices in the modern economy. Other uses of stock market indices abound: Investors rely on them to evaluate the returns on their investment … Read more

Enhancing Governance in Dual-Class Share Firms

In a typical public company, shareholders can elect the board, appoint the auditors, and approve fundamental changes.  In other words, they can participate in the governance of the firm. Firms with dual class shares (DCS) alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the firm without providing them with the corresponding power to elect the board and exercise other voting rights. I argue that this misalignment of rights and risks should be subject to three modest reforms in order to enhance governance in DCS firms.

The rationale underlying DCS is that they … Read more

Offloading the Burden of Being Public: An Analysis of Multiple Voting Share Structures

Many large firms – Google, Alibaba and Fitbit to name a few — have multiple voting share structures (MVS) in which the firm issues two or more classes of shares, one to the public and the other to insiders (typically founders, promoters, management, private investors or board members). The shares that are issued publicly have limited voting rights while the class issued to insiders carries more voting rights, allowing them to control the company. The one-to-one ratio of votes per share prevalent in non-MVS firms does not exist.

MVS undermine corporate governance standards because outside shareholders carry a disproportionate share … Read more

Equity Crowdfunding: More Benefits Than Costs

Since the passage of the Jumpstart Our Business Startups (JOBS) Act,[1] and its endorsement of equity crowdfunding (ECF), capital markets observers have had another issue to debate. Investor protection advocates claim that investors in the capital markets will be hit with fraudsters trying to make a quick buck[2] while would-be capital raisers seek an efficient way to access funds for their businesses. [3] The costs and benefits of ECF bear analysis.

Generally, “crowdfunding” or “rewards crowdfunding” is a means of selling any product or service over the Internet to a broad group of consumers.[4] In an ECF … Read more