Archive for the ‘Academic Research’ Category

Human Capital, Management Quality, and Firm Performance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 31, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Thomas Chemmanur and Lei Kong, both of the Department of Finance at Boston College, and Karthik Krishnan of the Finance Group at Northeastern University.

The quality of the top management team of a firm is an important determinant of its performance. This is an obvious statement to many. Yet, there is little evidence that relates top management team quality to firm performance in a causal manner. Part of the challenge in doing so stems from assigning a measure to the quality of the top management team. There are, after all, various aspects of top managers that contribute to their performance, including their education, their connections and prior experience. Another reason that relating management quality to firm performance is hard is that one can argue that the best managers can simply select into the best firms to work in. This makes making causal statements extremely hard in this context. As a result, while one can point toward anecdotal evidence relating good managers to good performance (e.g., Steve Jobs of Apple), systematic evidence is lacking in the academic literature on this issue. The relation between management quality and firm performance is important in more than just an academic context. For instance, analysts frequently cite top management quality as a reason to invest in a stock. Thus, one needs to ask what they mean by “quality,” and does it really impact the future performance of the firm.

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Do Banks Always Protect Their Reputation?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from John Griffin and Richard Lowery, both of the Department of Finance at the University of Texas at Austin, and Alessio Saretto of the Finance Area at the University of Texas at Dallas.

A firm’s reputation is a valuable asset. Arguably, conventional wisdom suggests that a reputable firm will always act in the best interest of their clients to preserve the firm’s reputation. For example, in his testimony/defense of Goldman Sachs before Congress, the Chairman and CEO Lloyd Blankfein states, “We have been a client-centered firm for 140 years and if our clients believe that we don’t deserve their trust, we cannot survive.” In our forthcoming Review of Financial Studies article entitled Complex Securities and Underwriter Reputation: Do Reputable Underwriters Produce Better Securities?, we examine the extent to which this conventional wisdom holds with complex securities.

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The Peril of an Expectations Gap in Proxy Advisory Firm Regulation

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 29, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Asaf Eckstein of Tel Aviv University-Buchmann Faculty of Law.

Over the last few years, Congress and Securities and Exchange Commission (SEC) were put under pressure to seriously consider regulating proxy advisory firms. Financial industry and government leaders have voiced concern that proxy advisory firms exert too much power over corporate governance to operate unregulated. The SEC as well as the Congress have investigated and debated the merits of proxy advisory regulation. The U.S. House of Representatives held a hearing on the matter in June of 2013, and the SEC followed this hearing with a roundtable discussion in December of 2013. On June 30, 2014, the Investment Management and Corporate Finance Divisions of the SEC issued a bulletin outlining the responsibilities of proxy advisors and institutional investors when casting proxy votes. As of yet, no binding regulation has been promulgated, despite repeated calls for it.

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Wachtell Keeps Running Away from the Evidence

Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. This post responds to a Wachtell Lipton memorandum by Martin Lipton and Steven A. Rosenblum, Do Activist Hedge Funds Really Create Long Term Value?, available on the Forum here. This memorandum criticizes a recently-issued empirical study by Lucian Bebchuk, Alon Brav, and Wei Jiang on the long-term effects of hedge fund activism. The empirical study is available here, and is discussed on the Forum here. Additional posts discussing the study, including critiques by Wachtell Lipton and responses by Professors Bebchuk, Brav, and Jiang, are available on the Forum here.

In a memorandum issued by the law firm of Wachtell, Lipton, Rosen & Katz (Wachtell) last week, Do Activist Hedge Funds Really Create Long Term Value?, the firm’s founding partner Martin Lipton and another senior partner of the law firm criticize again my empirical study with Alon Brav and Wei Jiang, The Long-Term Effects of Hedge Fund Activism. The memorandum announces triumphantly that Wachtell is not alone in its opposition to our study and that two staff members from the Institute for Governance of Private and Public Organizations (IGOPP) in Montreal issued a white paper (available here) criticizing our study. Wachtell asserts that the IGOPP paper provides a “refutation” of our findings that is “academically rigorous.” An examination of this paper, however, indicates that it is anything but academically rigorous, and that the Wachtell memo is yet another attempt by the law firm to run away from empirical evidence that is inconsistent with its long-standing claims.

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Embracing Sponsor Support in Money Market Fund Reform

Editor’s Note: Jill E. Fisch is Perry Golkin Professor of Law and Co-Director of the Institute for Law & Economics at the University of Pennsylvania Law School.

Money market funds (MMFs) have, since the 2008 financial crisis, been deemed part of the nefarious shadow banking industry and targeted for regulatory reform. In my paper, The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform, I critically evaluate the logic behind current reform proposals, demonstrating that none of the proposals is likely to be effective in addressing the primary source of MMF stability—redemption demands in times of economic resources that impose pressure on MMF liquidity. In addition, inherent limitations in the mechanisms for calculating the fair value of MMF assets present a practical limitation on the utility of a floating NAV. I then offer an unprecedented alternative approach—mandatory sponsor support. My proposal would require MMF sponsors to commit to supporting their funds as a condition of offering a fund with a fixed $1 NAV.

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Delaware Public Benefit Corporations 90 Days Out: Who’s Opting In?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 23, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Alicia E. Plerhoples at Georgetown University Law Center. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On August 1, 2013, amendments to the Delaware General Corporation Law (DGCL) became effective, allowing entities to incorporate as a public benefit corporation, a new corporate form that requires managers to produce a public benefit and balance shareholders’ financial interests with the best interests of stakeholders materially affected by the corporation’s conduct.

In my paper, Delaware Public Benefit Corporations 90 Days Out: Who’s Opting in?, I present empirical research on the companies that adopted the Delaware public benefit corporation form within the first three months of the effective date of the amended DGCL.

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Monitoring the Monitors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 22, 2014 at 9:05 am
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Editor’s Note: The following post comes to us from Jodi Short, Professor of Law at the University of California Hastings College of the Law; Michael Toffel of the Technology and Operations Management Unit at Harvard Business School; and Andrea Hugill of the Strategy Unit at Harvard Business School.

Drawing on insights from the literatures on street-level bureaucracy and on regulatory and audit design, our paper, Monitoring the Monitors: How Social Factors Influence Supply Chain Auditors, which was recently made publicly available on SSRN, theorizes and tests the factors that shape the practices of private supply chain auditors. We find that audits are conducted most stringently by auditors who are experienced and highly trained, and by audit teams that include female auditors. By contrast, auditors that have ongoing relationships with audited factories, and all-male audit teams conduct more lax audits, identifying and citing fewer violations. These findings make five key contributions and suggest strategies for designing audit regimes to more effectively detect and prevent corporate wrongdoing.

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Banks: Parallel Disclosure Universes and Divergent Regulatory Quests

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday July 21, 2014 at 9:10 am
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Editor’s Note: The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

Legal and economic issues involving mandatory public disclosure have centered on the appropriateness of either Securities and Exchange Commission (SEC) rules or the D.C. Circuit review of SEC rule-making. In this longstanding disclosure universe, the focus has been on the ends of investor protection and market efficiency, and implementation by means of annual reports and other SEC-prescribed documents.

In 2013, these common understandings became obsolete when a new system for public disclosure became effective, the first since the SEC’s creation in 1934. Today, major banks must make disclosures mandated not only by the SEC, but also by a new system developed by the Federal Reserve and other bank regulators in the shadow of the Basel Committee on Banking Supervision and the Dodd-Frank Act. This independent, bank regulator-developed system has ends and means that diverge from the SEC system. The bank regulator system is directed not at the ends of investor protection and market efficiency, but instead at the well-being of the bank entities themselves and the minimization of systemic risk. This new system, which stemmed in significant part from a belief that disclosures on the complex risks flowing from modern financial innovation were manifestly inadequate, already dwarfs the SEC system in sophistication on the quantitative aspects of market risk and the impact of economic stress.

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Shift from Voluntary to Mandatory Disclosure of Risk Factors

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 17, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Karen K. Nelson, the Harmon Whittington Professor at Accounting at Rice University, Jones Graduate School of Business, and Adam C. Pritchard, the Frances and George Skestos Professor of Law at University of Michigan Law School.

In our paper, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, we investigate public companies’ disclosure of risk factors that are meant to inform investors about risks and uncertainties. We compare risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act, adopted in 1995, and the SEC’s subsequent disclosure mandate, adopted in 2005.

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Empirical Asset Pricing: Eugene Fama, Lars Peter Hansen, and Robert Shiller

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 16, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from John Campbell, Professor of Economics at Harvard University.

In my paper, Empirical Asset Pricing: Eugene Fama, Lars Peter Hansen, and Robert Shiller, which was recently made publicly available on SSRN and which was commissioned by the Scandinavian Journal of Economics, I explain the reasons why the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Fama, Hansen, and Shiller for empirical analysis of asset prices.

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