Archive for the ‘Academic Research’ Category

Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP

Posted by Jonathan R. Macey, Yale Law School, on Sunday December 21, 2014 at 2:01 pm
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Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post provides a detailed response to a post by Professor Joseph A. Grundfest, titled A Response to Professor Macey, and available on the Forum here. Professor Grundfest’s post responded to an earlier post by Professor Macey, titled SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud and available on the Forum here, which offered a critique of a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Grundfest (available on the Forum here).

In a recent post, “SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud” (available on the Forum here), I analyzed the claims that SEC Commissioner Gallagher and Professor Joseph Grundfest made in a recent paper (hereinafter “the Paper,” described on the Forum here). In their paper, Gallagher /Grundfest allege that the SRP proposals submitted by investors working with the Shareholder Rights Project (SRP) violated the securities laws by citing only one study opposing annual elections. My analysis showed that Grundfest/Gallagher’s allegations were inconsistent with the law and with the current policy and practice of SEC staff, and I concluded that the authors had wrongfully accused the SRP.

In a subsequent post titled “A Response to Professor Macey” (hereinafter “the Reply,” available on the Forum here), Professor Grundfest attempts to offer a “point by point” detailed response to my analysis. As I explain below, the Reply reverses field and drastically modifies and weakens the authors’ allegations. Furthermore, in conceding some key points that I made and in failing to address some others, the Reply itself demonstrates that Gallagher/Grundfest wrongfully accused the SRP and should withdraw their allegations.

There are many flaws in the Reply. I will discuss certain of them to show that the Gallagher/Grundfest’s accusations are spurious and no longer tenable:

(1) In a major retreat, Gallagher/Grundfest dramatically modify their allegations by:

(a) Dropping their allegations against the overwhelming majority of SRP proposals, reducing the number of challenged proposals from 129 to seven,
(b) Completely relinquishing the claim that companies can use the alleged deficiencies to invalidate declassifications that took place in approximately 100 companies, and
(c) Conceding that even the seven challenged proposals were not deficient when submitted and could at most be allegedly faulted for not being withdrawn prior to the vote;
(2) The Reply admits that Gallagher/Grundfest’s real quarrel is with the SEC, not with the SRP proposals, and that the SRP proposals would have not been viewed by SEC staff as “false and misleading” under the SEC’s current, long-held policy;
(3) The Reply concedes that the type of enforcement action or private suit the authors urge against the SRP is without a single past precedent;
(4) The Reply conspicuously fails to explain why not a single company raised a claim of material omission against SRP proposals;
(5) The Reply inconsistently endorses the non-inclusion of references to contrary studies by issuers such as Netflix while simultaneously claiming that it is impermissible for shareholders to do so; and
(6) The Reply wrongly states that I share the Paper’s “undisputed” view of the current state of the empirical evidence.

…continue reading: Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP

A Response to Professor Macey

Posted by Joseph Grundfest, Stanford Law School, on Saturday December 20, 2014 at 11:53 am
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Editor’s Note: Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School. This post responds to a post, titled SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud, by Yale Law School Professor Jonathan R. Macey (available on the Forum here). The post by Professor Macey offered a critique of a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Joseph Grundfest (available on the Forum here).

In a December 15, 2014, post to this Harvard Corporate Governance blog, (here) Professor Jonathan R. Macey suggests that the article I co-authored with Dan Gallagher, “Did Harvard Violate Federal Securities Laws? The Campaign Against Classified Boards of Directors,” (here) wrongfully accuses Harvard’s Shareholder Rights Project of fraud. Professor Macey’s post presents a detailed critique, and I greatly appreciate Harvard’s courtesy in providing this opportunity for response.

…continue reading: A Response to Professor Macey

Capital Allocation and Delegation of Decision-Making Authority within Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday December 18, 2014 at 9:11 am
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Editor’s Note: The following post comes to us from John GrahamCampbell Harvey, and Manju Puri, all of the Finance Area at Duke University.

In our paper, Capital Allocation and Delegation of Decision-Making Authority within Firms, forthcoming in the Journal of Financial Economics, we use a unique data set that contains information on more than 1,000 Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) around the world to investigate the degree to which executives delegate financial decisions and the circumstances that drive variation in delegation. Our results can be grouped into four themes.

…continue reading: Capital Allocation and Delegation of Decision-Making Authority within Firms

When Are Powerful CEOs Beneficial?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 17, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Minwen Li and Yao Lu, both of the Department of Finance at Tsinghua University, and Gordon Phillips, Professor of Finance at the University of Southern California.

In our paper, CEOs and the Product Market: When Are Powerful CEOs Beneficial?, which was recently made publicly available on SSRN, we explore what the central factors are that influence when and how powerful CEOs may add value and how the benefits and costs of CEO power vary with industry conditions. In an ideal world, shareholders would grant an optimal level of power, weighing various costs and benefits specific to the firm’s characteristics and the business conditions in which it operates. We hypothesize that the optimal amount of power changes based on product market conditions.

Most recent research has shown that CEO power is negatively associated with firm value and is associated with negative outcomes for the firm. Articles have suggested that powerful CEOs may be bad news for shareholders (e.g., Bebchuk, Cremers, and Peyer 2011; Landier, Sauvagnat, Sraer, and Thesmar 2013). Morse, Nanda, and Seru (2011) provide evidence that powerful CEOs may have more favorable incentive contracts. Khanna, Kim, and Lu (forthcoming) show that CEO power arising from personal decisions can increase the likelihood of fraud within corporations.

…continue reading: When Are Powerful CEOs Beneficial?

SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud

Posted by Jonathan R. Macey, Yale Law School, on Monday December 15, 2014 at 4:17 pm
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Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post analyzes the arguments in a paper by SEC Commissioner Daniel M. Gallagher and Stanford law School Professor Joseph A. Grundfest, described in a post by Professor Joseph Grundfest (available on the Forum here) and a post by Wachtell Lipton (available on the Forum here).

Here is something that one does not see every day. In their recent paper “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors” posted on December 10, 2014, a sitting Commissioner of the Securities and Exchange Commission and a former SEC Commissioner accuse the Shareholder Rights Project at Harvard Law School (SRP) of violating the anti-fraud provisions of the securities laws. The alleged fraud occurred when institutional investors represented by the SRP proposed shareholder resolutions encouraging shareholders in U.S. public companies to vote to de-stagger their companies’ boards.

In this submission I present my analysis of this paper, concluding that the SRP proposals were not fraudulent or misleading and that the aggressive application of the anti-fraud provisions of the securities laws advanced by the authors of the “Did Harvard Violate Federal Securities Law?” would be inconsistent with the law and, by the authors’ own admission, inconsistent with the current policy and practice of the staff of the Securities and Exchange Commission.

…continue reading: SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud

Did Harvard Violate Federal Securities Law?

Posted by Joseph Grundfest, Stanford Law School, on Monday December 15, 2014 at 9:19 am
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Editor’s Note: Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School.

SEC Commissioner Daniel Gallagher and I just posted on SSRN a new paper, titled Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors. The abstract of the paper summarizes it as follows:

The Harvard Shareholder Rights Project (“Harvard SRP”) has, on more than 120 occasions, invoked SEC Rule 14a-8 to propose precatory shareholder resolutions calling for the de-staggering of corporate boards of directors (the “Harvard Proposal”), and claims to have contributed to de-staggering at approximately 100 of America’s largest publicly traded corporations. The Harvard Proposal relies on a summary of academic research that portrays staggered boards as categorically detrimental to shareholder interests, and cites only one study reaching a contrary conclusion, while dismissing that study’s analysis.

…continue reading: Did Harvard Violate Federal Securities Law?

Do Long-Term Investors Improve Corporate Decision Making?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 10, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Jarrad Harford, Professor of Finance at the University of Washington; Ambrus Kecskés of the Schulich School of Business at York University; and Sattar Mansi, Professor of Finance at Virginia Polytechnic Institute & State University.

It is well established that managers of publicly traded firms, left to their own devices, tend to maximize their private benefits of control rather than the value of their shareholders’ stake in the firm. At the same time, imperfectly informed market participants can lead managers to make myopic investment decisions. One of the most important mechanisms that have been proposed to counter this mismanagement problem is longer investor horizons. By spreading both the costs and benefits of ownership over a long period of time, long-term investors can be very effective at monitoring corporate managers.

We explore this subject in our paper entitled Do Long-Term Investors Improve Corporate Decision Making? which was recently made publicly available on SSRN. We ask two questions. First, do long-term investors in publicly traded firms improve corporate behavior? Second, does their influence on managerial decision making improve returns to shareholders of the firm? To answer these questions, we study a wide swath of corporate behaviors.

…continue reading: Do Long-Term Investors Improve Corporate Decision Making?

The Law and Finance of Anti-Takeover Statutes

Posted by Marcel Kahan, NYU School of Law, on Tuesday December 9, 2014 at 9:15 am
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Editor’s Note: Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law. This post is based on a paper co-authored by Professor Kahan and Emiliano M. Catan at the New York University School of Law.

Over the last 15 years, numerous economics articles, many published in top finance journals, have examined the effect of takeover law on performance, leverage, managerial stock ownership, worker wages, patenting, acquisitions, and other firm actions. These studies have concluded, among other things, that anti-takeover laws are associated with a decline in managerial stock ownership, and increase in wages, and a decline in dividend payout ratios.

From a legal perspective, however, the varying methods that financial economists use to measure the takeover protection afforded by state law make little sense. Economists generally look either at whether (and when) a state adopted a business combination statute; at when a state adopted the first of a set of statutes (typically, business combination statutes, control share acquisition statutes, and fair price statutes); or at how many different types of statutes a state has adopted.

…continue reading: The Law and Finance of Anti-Takeover Statutes

A Crisis of Banks as Liquidity Providers

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 8, 2014 at 9:01 am
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Editor’s Note: The following post comes to us from Nada Mora, Senior Economist at the Federal Reserve Bank of Kansas City, and Viral Acharya, Professor of Finance at NYU.

In our paper, A Crisis of Banks as Liquidity Providers, forthcoming in the Journal of Finance, we investigate whether the onset of the 2007-09 crisis was, in effect, a crisis of banks as liquidity providers, which may have led to reductions in credit and increased the fragility of the financial system. The starting point of our analysis is the widely accepted notion that banks have a natural advantage in providing liquidity to businesses through credit lines and other commitments established during normal times. By combining deposit taking and commitment lending, banks conserve on liquid asset buffers to meet both liquidity demands, provided deposit withdrawals and commitment drawdowns are not too highly correlated. Evidence from previous crises supports this view. In fact, banks experienced plenty of deposit inflows to meet the higher and synchronized drawdowns that occurred during episodes of market stress (Gatev and Strahan (2006)). The reason is that depositors sought a safe haven due to deposit insurance as well as due to the regular occurrence of crises outside the banking system (e.g., the fall of 1998 following the Russian default and LTCM hedge fund failure; the 2001 Enron accounting crisis).

…continue reading: A Crisis of Banks as Liquidity Providers

Three Pathways to Global Standards: Private, Regulator, and Ministry Networks

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday December 4, 2014 at 9:14 am
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Editor’s Note: The following post comes to us from Stavros Gadinis of University of California, Berkeley Law School.

Scores of governments around the world have chosen to introduce international standards as domestic law, even though they were not legally obliged to do so. The drafters of these standards are not sovereigns or international organizations, but transnational regulatory networks: informal meetings of experts from various countries, some with government affiliations, and others without. Networks have puzzled scholars for years. Fascinated by the institutional novelty of the network phenomenon, some theorists praised their speed, informality, and lack of hierarchy. Others were not so enthralled. They were concerned about the influence of interest groups or the weight of big countries. This debate has examined both the inputs to the network phenomenon—preferences—and the outputs—global coordination—but has not discussed the mechanism: how do we get from preferences to standards? How do these networks come together, what is their strategy for their success? My new study, Three Pathways to Global Standards: Private, Regulator, and Ministry Networks, seeks to open up the black box of network standard setting and analyze these mechanisms. It proposes a new theoretical framework that distinguishes among private, regulator, and ministry networks, and presents empirical evidence that illustrates why these three network types appeal to different countries for different reasons.

…continue reading: Three Pathways to Global Standards: Private, Regulator, and Ministry Networks

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