Posts Tagged ‘Capital markets’

Addressing Known Risks to Better Protect Investors

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Friday February 28, 2014 at 9:00 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the 2014 “SEC Speaks” Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am honored to be here today [February 21, 2014]. This is the sixth time that I have spoken at “SEC Speaks” as a Commissioner. Much has changed since my first “SEC Speaks” in February 2009. At that time, we were in the midst of the worst financial crisis since the Great Depression. Among other things, Lehman Brothers had recently filed for Chapter 11 bankruptcy, The Reserve Primary Money Market Fund had “broken the buck,” and the U.S. Government had just bailed out insurance giant AIG. In addition, the Bernard Madoff Ponzi scheme had come to light just a few months earlier, further shaking investor confidence in the capital markets.

These and other events made it clear that the SEC had much to do to become a more effective regulator and to enhance its protection of investors. It was also clear that the agency itself had to undergo significant change. As a result, in my 2009 remarks at “SEC Speaks,” I highlighted a number of steps that Congress and the SEC should take to close regulatory loopholes. These regulatory gaps included a lack of appropriate regulation in the areas of over-the-counter derivatives, hedge funds, and municipal securities—areas that Congress subsequently addressed in the Dodd-Frank Act.

…continue reading: Addressing Known Risks to Better Protect Investors

The Governance Structure of Shadow Banking

Posted by Steven L. Schwarcz, Duke University, on Thursday February 6, 2014 at 9:16 am
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Editor’s Note: Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

In prior articles (see, e.g., Regulating Shadows: Financial Regulation and Responsibility Failure, 70 Wash. & Lee L. Rev. 1781 (2013)), I have argued that shadow banking is so radically transforming finance that regulatory scholars need to rethink certain of their basic assumptions. In a forthcoming new article, The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability, I argue that the governance structure of shadow banking should be redesigned to make certain investors financially responsible, by reason of their ownership interests, for their firm’s liabilities beyond the capital they have invested. This argument challenges the longstanding assumption of the optimality of limited liability.

…continue reading: The Governance Structure of Shadow Banking

Focusing on Fundamentals: The Path to Address Equity Market Structure

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Wednesday October 16, 2013 at 9:15 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Security Traders Association 80th Annual Market Structure Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As market professionals, you obviously live the U.S. equity markets first hand, day in and day out. As an association, you have used your voice to focus attention on the value of our equity markets—an all-important engine for capital formation, job creation, and economic growth.

Like you, I believe that we must constantly strive to ensure that the U.S. equity markets continue to serve the interests of all investors. That mutual challenge must come fully of age and address today’s, not yesterday’s, markets. And today, I will speak about the path forward.

…continue reading: Focusing on Fundamentals: The Path to Address Equity Market Structure

Blockholder Heterogeneity and Financial Reporting Quality

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 10, 2013 at 9:35 am
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Editor’s Note: The following post comes to us from Yiwei Dou of the Department of Accounting, Taxation & Business Law at New York University; Ole-Kristian Hope, Professor of Accounting at the University of Toronto; Wayne Thomas, Professor of Accounting at the University of Oklahoma; and Youli Zou of the Accounting Area at the University of Toronto.

An issue of considerable interest to accounting researchers is the association between shareholders and firms’ financial reporting quality (FRQ). In our paper, Blockholder Heterogeneity and Financial Reporting Quality, which was recently made publicly available on SSRN, we examine a specific type of shareholder, blockholders, because (1) they offer a sample of shareholders that are expected to have a significant impact on firms’ financial reporting decisions and (2) we are able to track individual blockholders and their association with FRQ. As discussed in more detail below, these two sample design features allow us to provide a test of the extent to which (large) shareholders influence FRQ. Blockholders also provide an interesting and economically important sample because of their large presence in U.S. capital markets in recent years.

…continue reading: Blockholder Heterogeneity and Financial Reporting Quality

Short-Termism of Institutional Investors and the Double Agency Problem

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday May 9, 2013 at 9:26 am
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Editor’s Note: The following post comes to us from Paul Frentrop and Daniëlle Melis, a Professor and an Associate Professor, respectively, at Nyenrode Business Universiteit. The following post is based on an inaugural lecture by Professor Frentrop.

Complaints that investors only look for short-term gains are nothing new. As early as 1990 an Economist article proclaimed: “The old bugbear of businessmen — that fund managers are too obsessed with the short term, and unwilling to buy shares in companies with ambitious research projects — is back on the prowl.”

Recently, the turnover of shares in listed companies has grown to numbers far exceeding those of 1990. Does this change in investor behavior influence the behavior of managers in listed firms?

The institutional innovation of freely tradable shares, traceable to Holland in the 17th century, made it possible for companies such as the Dutch East India Company to have longer investment horizons than individual investors. Listing shares ensured that an investor could recoup his money from other investors and that, as a result, companies didn’t have to repay individual investors. Seen in this light, one might assume that investor short-termism would have little influence on board decisions at listed companies and much more influence on board decisions at privately held companies. General opinion, however, disagrees.

…continue reading: Short-Termism of Institutional Investors and the Double Agency Problem

Challenges Facing the Audit Profession and PCAOB Initiatives

Posted by James R. Doty, Chairman, Public Company Accounting Oversight Board, on Thursday May 2, 2013 at 9:40 am
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Editor’s Note: James R. Doty is chairman of the Public Company Accounting Oversight Board. This post is based on Chairman Doty’s keynote address at the Rice University Director-to-Director Exchange; the full text, including footnotes, is available here. The views expressed in the post are those of Chairman Doty and should not be attributed to the PCAOB as a whole or any other members or staff.

As you know, over the past couple of years, together with the board members and staff of the Public Company Accounting Oversight Board, I have been working to enhance the reliability of the external audit function and its usefulness to U.S. capital markets.

I will start off with an overview of some of the more significant issues confronting the audit profession. And then I’d like to open a more interactive discussion.

I. Corporate Governance Has Evolved to Suit the Needs of Capital Markets.

I have known many of you for years. I have watched and admired how you have navigated the many changes we have seen in both the energy industry and corporate governance.

Many of us have gained significantly more experience than we expected in identifying, addressing and preventing future threats to corporate success, such as differences in cultural expectations and business practices around the world and at home. Enron had a profound effect on Houston.

As this morning’s discussion demonstrated, you recognize that your work is never done. There is no perfect governance regime for all time.

…continue reading: Challenges Facing the Audit Profession and PCAOB Initiatives

Resource Allocation within Firms and Financial Market Dislocation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday May 1, 2013 at 9:12 am
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Editor’s Note: The following post comes to us from Gregor Matvos and Amit Seru, both of the Booth School of Business at the University of Chicago.

Do firm boundaries mediate the effect of shocks to the financial intermediation sector? When the functioning of the intermediation sector is impaired – as was the case in the recent financial crisis – shocks can be transmitted to the broader economy since funds may not flow to highest value use without incurring significant cost. This issue has been extensively explored in the credit channel literature (e.g., Kashyap and Stein [2000]; Bernanke and Blinder [1988; 1992], and Bernanke and Gertler [1995]). However, unlike what is assumed in this literature, firms may be able to reallocate resources internally – for instance, between divisions in different industries – to ameliorate the effect of financial shocks. If so, external credit market conditions will impact the nature of resource allocation inside firms and between industries differently than they would in an economy with no internal capital markets. Diversified firms constitute a large part of economies around the world; therefore, resource allocation within firms can be of significant importance. In this paper we propose that firms shift resources between industries in response to shocks to the financial sector. We estimate a structural model to quantify the forces driving this reallocation decision, and show that these forces dampen shocks to the financial sector in economically significant ways.

…continue reading: Resource Allocation within Firms and Financial Market Dislocation

Emerging Challenges for Regulating Global Capital Markets

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on Wednesday March 27, 2013 at 3:00 pm
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Editor’s Note: Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Gallagher’s keynote address at the Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the United States. The full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

We in America have been blessed with a wonderful combination of geography, natural resources, and free market principles. These and other factors have allowed our economy and our financial system, including our capital markets, to thrive in the post-World War II era.

Although the United States has suffered its share of financial crises, most recently the one that erupted in 2008, our free market economy and robust capital markets have conferred an enviable prosperity on our people over a period of many years, and few in America can remember a time when the United States did not have strong and competitive capital markets.

However, the very strength and resilience of our capital markets could lead us to fall into the trap of believing that we are somehow entitled to such prosperity. Indeed, such a sense of complacency may well have taken root in our government and may threaten to jeopardize that prosperity. The reality is that we live in a world in which we must be constantly vigilant — sometimes taking affirmative action, but more often choosing not to act — in order to preserve the vitality of our markets.

An important part of my job, and that of my colleagues on the Commission, is to ensure that America’s capital markets remain strong, vibrant, and competitive. That’s not just good for U.S. investors, but also for other investors around the world. And, conversely, the rise of robust capital markets in other parts of the world has the potential to benefit the United States and the American people as well.

…continue reading: Emerging Challenges for Regulating Global Capital Markets

Complexities of Capital Markets Regulation

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on Thursday March 7, 2013 at 10:04 am
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Editor’s Note: Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Gallagher’s keynote speech at the 7th Gulf Cooperation Council Regulators’ Summit in Doha, Qatar; the full speech, including footnotes, is available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

We in America often remark that we are blessed by our geography. And there is no doubt that Qataris feel the same about this incredibly unique and beautiful country. In the United States during the post World War II era, our geographical position and natural resources helped our economy develop while others experienced severe disruptions, particularly in Europe. That promoted the development of our capital markets to the great benefit of our citizens, as well as investors foreign and domestic and our partners-in-trade around the world.

It is certainly true that we have suffered our share of economic and financial crises, most recently the crisis that erupted in 2008. Even so, our free market economy and robust capital markets have conferred an enviable prosperity on our people over many years. Indeed, notwithstanding financial crises large and small, it is fair to point out that few in America can remember a time when the United States did not have strong and competitive capital markets.

The risk, however, is that the very resilience of our capital markets has, over time, fostered a latent complacency — a tendency to think strong and competitive markets are, somehow, ours by right — that we are entitled to them when, in reality, we must constantly act — and sometimes decide not to act — in order to preserve the vitality of our markets.

An important part of my job, and that of my colleagues on the Commission, is to ensure that America’s capital markets remain strong and competitive. That’s not just good for U.S. investors, I submit, but equally good for others — for all of you. And, of course, rising global markets are good for the United States.

…continue reading: Complexities of Capital Markets Regulation

Comparability, Capital Market Benefits, and the Voluntary Adoption of IFRS

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 6, 2013 at 9:23 am
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Editor’s Note: The following post comes to us from Mary Barth, Professor of Accounting at Stanford University; Wayne Landsman, Professor of Accounting at the University of North Carolina; Mark Lang, Professor of Accounting at the University of North Carolina; and Christopher Williams of the Department of Accounting at the University of Michigan.

In our paper, Effects on Comparability and Capital Market Benefits of Voluntary Adoption of IFRS by US Firms: Insights from Voluntary Adoption of IFRS by Non-US Firms, which was recently made publicly available on SSRN, we examine whether voluntary adoption of IFRS is associated with an increase in comparability of accounting amounts and capital market benefits after the firms adopt IFRS. Our evidence is based on samples of non-US firms that voluntarily adopt IFRS matched with firms of similar size in their country and industry that either adopted IFRS before them or do not adopt IFRS.

We find that after firms voluntarily adopt IFRS, their accounting amounts become more comparable to those of firms that adopted IFRS before them and less comparable to those of firms that do not adopt IFRS. We also find that adopting firms generally exhibit an increase in capital market benefits—liquidity, share turnover, and firm-specific information—relative to both adopted and non-adopting firms. However, there is little evidence of capital market consequences for adopted firms and little evidence that non-adopting firms suffer a decrease in capital market benefits.

…continue reading: Comparability, Capital Market Benefits, and the Voluntary Adoption of IFRS

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