Informed Options Trading Before FDA Approves Drugs May Be Growing Problem

The Food and Drug Administration (FDA) appoints drug experts to drug advisory committees (ACs) that make approval or rejection recommendations for about half of all new drugs (usually the unique ones, such as Covid vaccines). The experts receive nonpublic technical reports from drug firms and FDA staff a month or so before ACs meet. Our recent study is the first to examine potentially informed options trading around the report creation dates (not publicly known), as well as the AC meeting dates (publicly known).

The study is important because there could be relatively large amounts of informed trading months before the … Read more

Can Institutional Investors Help the Market Evaluate Complex Legal Disputes?

Do institutional investors have the ability to mitigate information asymmetries around complex corporate events? Securities class actions (SCA) are suitable for testing any informational advantage for institutional investors: The number of SCAs brought against U.S. firms has increased markedly in the last two decades, as has their heterogeneity. SCA filings ranged from 83 to 135 per year in the late 1990s. Of these, between 62 percent and 70 percent were settled out of court. However, by the late 2010s, the number of SCA filings increased to between 164 to 411 per year, of which 1.4 percent to 51 percent were … Read more

Do Boards Have Style? Evidence from Director Style Divergence and Board Turnover

A board of directors performs essential strategic and oversight roles that maximize the value of the shareholders’ residual claim. However, despite careful selection of board members, too often boards neither reach their full potential nor perform their necessary governance obligations. The role of structural characteristics such as firm size and composition have been thoroughly explored. However, evidence tying traditional board variables to board and firm performance remains contradictory or incomplete. As a result, there has been an increasing interest in the role of behavioral and cognitive traits to explain how organizations work. Beginning with the seminal work of Bertrand and … Read more

How Institutional Investor Objectives Affect Firm Valuation and Governance

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

The Role of the Chief Legal Officer in Corporate Governance

Corporate governance mitigates agency costs by protecting outside investors from exploitation from insiders, as well as aligning the financial and other incentives of insiders with those of the principal. The literature remains underdeveloped, however, on those tasked with shaping and enforcing internal corporate governance. These executives, known as gatekeepers, serve as reputational intermediaries who verify and certify information to the market. The most prominent gatekeeper in the firm is the Chief Legal Officer (CLO). The CLO is responsible for monitoring for firm misconduct, supervising internal and external legal resources, and advising the CEO and the board of directors on matters … Read more

Do Managers Seek Control and Entrenchment?

Do managers seek control of the firm, or the level of ownership consistent with entrenchment? Entrenched managers own shares within a range which is high enough to give them control, but sufficiently low to make other shareholders bear the brunt of their non-value maximizing actions. There is a large literature on how entrenched managers can benefit themselves by extracting wealth from other shareholders, but conclusive evidence that managers seek entrenchment is currently lacking.

One way to proceed is to try to infer the optimal ownership structure from the managers’ perspective from revealed preferences in existing ownership structure. Prior literature finds … Read more