Short-Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher-Order Beliefs

Discussions on the role of higher-order beliefs (investor beliefs about the beliefs of other investors) in financial markets can be traced back to Keynes’ (1936) comparison of the stock market to a beauty contest. Investors “are concerned,” he famously said, “not with what an investment is really worth to a man who buys it for keeps, but with what the market will value it at [. . .] three months or a year hence.” Interest in higher-order beliefs models continues today. An anecdotal example of the role of higher-order beliefs is the downgrade of Citigroup by analyst Meredith Whitney in … Read more

Executive Compensation: Is It Corrupted?

There is a general view that executive compensation in corporate America is inefficient and corrupted. Discontent with executive pay is not a recent trend; rather, “scrutinizing, criticizing, and regulating high levels of executive pay has been an American pastime for nearly a century.”[1] Since the early 2000s, however, this trend has found a systematic theoretical framework in the “managerial power theory” of executive compensation, espoused most prominently by Harvard law professors Lucian A. Bebchuk and Jesse M. Fried.[2]  In a recently published article, we challenge this view from both a theoretical and empirical perspective.

Managerial power theory … Read more

How Investor Activism Affects Corporate Social Responsibility

Prominent activist investors such as hedge funds, pension funds, and influential individual shareholders and families increasingly aim to reshape corporate policies and strategy. In our paper “Shareholder Engagement on Environmental, Social, and Governance Performance”, we use a proprietary dataset covering 660 companies globally over 2005-2014 to study investor activism promoting environmental, social, and governance (ESG).

In the past two decades, socially responsible investing (SRI) has grown from niche to mainstream. The 2015 report of the UN Principles for Responsible Investing indicates that a large number of institutions (managing about $59 trillion) have endorsed these investing principles, thereby declaring … Read more

Board Declassification Activism: Why Run From the Evidence?

In a recently released study, we examined the value implications of board declassifications promoted by the Harvard Law School Shareholder Rights Project (“SRP study”). In a May 2017 note, Lucian Bebchuk and Alma Cohen “contest” the results in our study. In our reply, “Board Declassification Activism: Why Run Away from the Evidence?” we show that the Bebchuk-Cohen critique is not only unwarranted, but also fails to engage with our study’s central finding: that the declassification activism of the Shareholder Rights Project (“SRP”) was followed by substantial declines in firm value of from $90 billion to $149 billion.

For … Read more

What Matters in Governance?

In the past 20 years, many corporate law scholars have come to the view that governance arrangements protecting incumbents from removal are what really matter for firm value, arguing that such arrangements help entrench managers and harm shareholders. A major factor supporting this view has been the rise of empirical studies using corporate governance indices to measure a firm’s governance quality. Providing seemingly objective evidence that protecting incumbents from removal reduces firm value, these studies have encouraged the idea that good corporate governance is equivalent to stronger shareholder rights.

In our recent article, we challenge this idea, presenting new empirical … Read more

Staggered Boards and Long-Term Firm Value, Revisited

For a long time, the academic literature has largely supported the view that staggered boards — which require challengers to win at least two election cycles to gain a board majority — entrench directors and managers to the detriment of shareholders.[1] Empirically, this view was based on the finding of a negative association between having a staggered board and firm value. In our new article, “Staggered Boards and Long-Term Firm Value, Revisited,” forthcoming in the Journal of Financial Economics, we reconsider the staggered board debate using a comprehensive sample period (1978–2015) and document evidence that suggests the … Read more