In our paper, The JOBS Act and Information Uncertainty in IPO Firms, which was recently made publicly available on SSRN, we examine whether the Jumpstart Our Business Startups Act (JOBS Act) increases information uncertainty in firms with initial public offerings (IPOs). The JOBS Act, which was signed into law in April 2012, creates a new category of issuer, the Emerging Growth Company (EGC), and eases regulations for EGCs to encourage initial public offerings of their shares. Specifically, the Act includes provisions that allow firms with EGC status to reduce the scope of mandatory disclosure of financial statement and executive compensation information, to file draft registration statements confidentially with the Securities and Exchange Commission (SEC), to delay application of new or revised accounting standards, and to delay compliance with Section 404(b) of the Sarbanes-Oxley Act (SOX), which relates to auditor attestation on internal controls. We find evidence consistent with the easing of these regulations increasing information uncertainty in the IPO market.
Archive for the ‘Empirical Research’ Category
Recent events in Europe have illustrated how government defaults can jeopardize domestic bank stability. Growing concerns of public insolvency since 2010 caused great stress in the European banking sector, which was loaded with Euro-area debt (Andritzky (2012)). Problems were particularly severe for banks in troubled countries, which entered the crisis holding a sizable share of their assets in their governments’ bonds: roughly 5% in Portugal and Spain, 7% in Italy and 16% in Greece (2010 EU Stress Test). As sovereign spreads rose, moreover, these banks greatly increased their exposure to the bonds of their financially distressed governments (2011 EU Stress Test), leading to even greater fragility. As The Economist put it, “Europe’s troubled banks and broke governments are in a dangerous embrace.” These events are not unique to Europe: a similar relationship between sovereign defaults and the banking system has been at play also in earlier sovereign crises (IMF (2002)).
Despite the fact that corporations and interest groups spent about $30 billion lobbying policy makers over the last decade (Center for Responsive Politics, 2012), there is a lack of robust empirical evidence on whether firms’ lobbying expenditures create value for their shareholders. Moreover, while the public perception of the lobbying process is that it involves unethical behavior that may bias rather than inform politicians, this is difficult to show since unethical practices are not typically observable. In our recent ECGI working paper, The Corporate Value of (Corrupt) Lobbying, we identify events that exogenously affect the ability of firms to lobby, and find that firms that lobby more experience a significant decrease in market value around these events. Investigating the channels by which lobbying may add value, we find evidence suggesting that the value partly arises from potentially unethical arrangements between firms and politicians.
The desirability of corporations engaging in “socially responsible” behavior has long been hotly debated among economists, lawyers, and business experts. Two general views on corporate social responsibility (CSR) prevail in the literature. The CSR “value-enhancing view” argues that socially responsible firms, such as firms that promote efforts to help protect the environment, promote social equality, improve community relationships, can and often do adhere to value-maximizing corporate governance practices. Indeed, well-governed firms are more likely to be socially responsible. In short, CSR can be consistent with shareholder wealth maximization as well as achieving broader societal goals. The opposite view on CSR begins with Milton Friedman’s (1970) well-known claim that “the only social responsibility of corporations is to make money”. Extending this view, several researchers argue that CSR is often simply a manifestation of managerial agency problems inside the firm (Benabou and Tirole, 2010; Cheng, Hong, and Shue, 2013; Masulis and Reza, 2014) and hence problematic (“agency view”). That is to say, socially responsible firms tend to suffer from agency problems which enable managers to engage in CSR that benefits themselves at the expense of shareholders (Krueger, 2013). Furthermore, managers engaged in time-consuming CSR activities may lose focus on their core managerial responsibilities (Jensen, 2001). Overall, according to the agency view, CSR is generally not in the interests of shareholders.
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.
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.
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.
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.
There is no doubt that innovation is a critical driver of a nation’s long-term economic growth and competitive advantage. The question lies, however, in identifying the optimal organizational form for nurturing innovation. While corporate research laboratories account for two-thirds of all U.S. research, it is not obvious that these innovation incubators are more efficient than independent investors such as venture capitalists. In our paper, Corporate Venture Capital, Value Creation, and Innovation, forthcoming in the Review of Financial Studies, we explore this question by comparing the innovation productivity of entrepreneurial firms backed by corporate venture capitalists (CVCs) and independent venture capitalists (IVCs).
During the recent financial crisis, there was a dramatic spike in “idiosyncratic volatility”—the volatility of individual firm share prices after adjustment for movements in the market as a whole. The average firm’s increase was a remarkable five-fold as measured by variance. This dramatic spike is not peculiar to the most recent crisis. Rather, it has occurred with each major downturn in the economy since the 1920s, as our paper shows for the first time. These spikes present a puzzle in terms of existing economic theory. They also have important implications for several areas of corporate and securities law where the capacity of securities prices to reflect available information is particularly important. Examples include the presumption of reliance, loss causation and materiality in fraud-on-the-market suits, materiality in insider trading cases, and the corporate law regulation of defenses undertaken by targets of hostile takeover attempts. The continuing centrality of these issues is underscored by this week’s decision in Halliburton Co v. Erica P. John Fund, where the Supreme Court ruled that a defendant can defeat a fraud-on-the-market case class certification by showing that the alleged misstatement had no impact on price.