Posts Tagged ‘Jesse Fried’

Poll Ranks Harvard First in Strength of Business Law Faculty

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday December 12, 2013 at 9:18 am
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A new poll, conducted by Brian Leitter of the University of Chicago Law School, and published here, identifies the top business law faculties. Harvard Law School was ranked first, coming ahead of second-place Columbia Law School by a large margin. The poll ranks faculties in terms of their strength in the business law areas, including antitrust, bankruptcy, commercial law, contracts, corporate law and finance, and securities regulation.

The HLS business law faculty listed by the poll’s conductors are Lucian Bebchuk, Robert C. Clark, John Coates, Einer Elhauge, Allen Ferrell, Jesse Fried, Louis Kaplow, Reinier Kraakmann, J. Mark Ramseyer, Mark J. Roe, Holger Spamann, Kathryn Spier, and Guhan Subramanian.

…continue reading: Poll Ranks Harvard First in Strength of Business Law Faculty

The Uneasy Case for Favoring Long-term Shareholders

Posted by Jesse Fried, Harvard Law School, on Thursday March 28, 2013 at 9:24 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School.

The power of short-term shareholders in widely-held public firms is widely blamed for “short-termism”: directors and executives feel pressured to boost the short-term stock price at the expense of creating long-term economic value. The recent financial crisis, which many attribute to the influence of short-term shareholders, has renewed and intensified these concerns.

To reduce short-termism, reformers have sought to strengthen the number and power of long-term shareholders in public corporations. For example, the Aspen Institute has recommended imposing a fee on securities transactions and making favorable long-term capital gains rates available only to investors that own shares for much longer than a year. Underlying these proposals is a long-standing and largely uncontested belief: that long-term shareholders, unlike short-term shareholders, will want managers to maximize the economic pie created by the firm.

I recently posted a paper on SSRN explaining why this rosy view of long-term shareholders is wrong. In my paper, The Uneasy Case for Favoring Long-term Shareholders, I demonstrate that long-term shareholder interests do not align with maximizing the economic pie created by the firm – even when shareholders are the only residual claimants on the firm’s value. In fact, long-term shareholder interests might be less well aligned with maximizing the economic pie than short-term shareholder interests. In short, we can’t count on long-term shareholders to be better stewards of the firm simply because they hold their shares for a longer period of time.

…continue reading: The Uneasy Case for Favoring Long-term Shareholders

Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Posted by Jesse Fried, Harvard Law School, on Wednesday February 27, 2013 at 9:23 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School, and Brian Broughman is an Associate Professor of Law at the Maurer School of Law at Indiana University, Bloomington.

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure requirements under the securities laws, making data on IPO exits easily accessible to researchers.

But trade sales are actually much more common than IPOs and, in aggregate, are more financially important to VCs. Unlike IPOs, however, trade sales do not trigger the intense public-disclosure requirements of the securities laws; they take place in the shadows. Thus, although trade sales play a critical role in the venture capital cycle, relatively little is known about them.

In our paper, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups recently made public on SSRN, Brian Broughman and I seek to shine more light on intra-firm dynamics around trade sales. In particular, we investigate how VCs induce the “entrepreneurial team” – the founder, other executives, and common shareholders – to go along with a trade sale that they might have an incentive to resist.

…continue reading: Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

Posted by Jesse Fried, Harvard Law School, on Tuesday January 8, 2013 at 8:57 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School. 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.

Delaware dominates the corporate chartering market in the U.S—it is the only state that attracts a significant number of out-of-state incorporations. As a result, incorporation decisions are “bimodal,” with public and private firms typically choosing between home-state and Delaware incorporation.

Much ink has been spilled in the debate over whether Delaware’s dominance arose because it offers high-quality or low-quality corporate law. Under the “race-to-the-top” view, Delaware has prevailed because its law maximizes firm value. Under the “race-to-the-bottom” view, Delaware has won by offering corporate law that favors insiders at other parties’ expense.

But a firm today may choose Delaware law not solely because of its inherent features but rather because, after decades of Delaware’s dominance, business parties—including investors and their lawyers—are now simply more familiar with Delaware law than the laws of other states. Indeed, the bimodal pattern of domiciling is itself strong evidence that business parties are familiar only with their home states’ corporate law and Delaware’s.

In our paper, Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, recently made public on SSRN, Brian Broughman, Darian Ibrahim, and I show, for the first time, that familiarity does in fact affect firms’ decisions to domicile in Delaware rather in their home states.

…continue reading: Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

Insider Trading via the Corporation

Posted by Jesse Fried, Harvard Law School, on Friday August 24, 2012 at 9:21 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School.

My paper, Insider Trading via the Corporation, recently posted on SSRN, critically examines the regulations applicable to U.S. firms trading in their own shares and puts forward a proposal for reform.

Publicly-traded U.S. firms buy and sell a staggering amount of their own shares in the open market each year. Open-market repurchases (“OMRs”) alone total hundreds of billions of dollars per year; in 2007, they reached $1 trillion. Firms are also increasingly selling shares in the open market through so-called “at-the-market” issuances (“ATMs”).

When a U.S. firm trades in its own shares, its trade-disclosure requirements are minimal. The firm must report only aggregate trading activity, and not until well into the following quarter. Thus, the firm can secretly buy and sell its own shares in the open market for several months, and never disclose the exact details of its trades to shareholders and regulators. The lack of detailed disclosure, I explain, makes it difficult to detect illegal trading on material inside information; the lack of timely disclosure makes it difficult for investors to determine when the firm is trading on valuable but sub-material information.

…continue reading: Insider Trading via the Corporation

Do VCs Use Inside Rounds to Dilute Founders?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday July 8, 2011 at 9:22 am
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Editor’s Note: The following post comes to us from Brian Broughman of the Maurer School of Law at Indiana University, Bloomington, and Jesse Fried, Professor of Law at Harvard Law School.

In our paper, Do VCs Use Inside Rounds to Dilute Founders? Some Evidence from Silicon Valley, recently made publicly available on SSRN, Brian Broughman and I examine the role of inside financing rounds in VC-backed firms.

VCs typically invest through several rounds of financing. Each round is separately negotiated and priced. A subsequent (“follow-on”) round of financing could be provided by either (a) the firm’s existing VC investors exclusively (an inside round) or (b) a group led by a VC fund that did not invest in the startup’s earlier rounds (an outside round). Historically, most follow-on financings were structured as outside rounds, in part to mitigate conflict between the entrepreneur and existing VCs over the value of the firm. In recent years, however, more than half of follow-on rounds have been structured as inside rounds.

…continue reading: Do VCs Use Inside Rounds to Dilute Founders?

Excess-Pay Clawbacks

Posted by Jesse Fried, Harvard Law School, on Monday April 11, 2011 at 9:04 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School.

In the paper, Excess-Pay Clawbacks, which was recently made publicly available on SSRN, Nitzan Shilon and I identify substantial deficiencies in the clawback arrangements of public companies. We also explain why the Dodd-Frank Act’s clawback requirement is likely to improve these arrangements, but does not go far enough.

The paper begins by highlighting the problem of “excess pay” – excessively high payouts to executives arising from errors in earnings and other compensation-related metrics. Such excess pay, we explain, can impose substantial costs on shareholders even if there is no manipulation or other misconduct. Unfortunately, directors frequently use their discretion to let current and departed executives keep excess pay. Thus, an optimal clawback policy would require directors to recover excess pay from either current or departed executives.

…continue reading: Excess-Pay Clawbacks

Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay

Posted by Jesse Fried, Harvard Law School, on Friday April 1, 2011 at 9:02 am
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Editor’s Note: Jesse Fried is a Professor of Law at Harvard Law School.

Academics, regulators, and investors have been urging firms to tie executive pay to the long-term stock price. In the paper, Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, which was recently made publicly available on SSRN, I explain why tying executive pay to the future value of the firm’s stock—even the stock’s long-term value—can sometimes perversely reward executives for taking steps that reduce the value flowing from the firm to its public investors over time.

The paper describes and analyzes two distortions caused by tying an executive’s payoff to a stock’s future value. The first is “costly contraction:” when the stock’s current price is below its actual value, the executive may have an incentive to divert cash from productive projects in the firm to fund bargain-price share repurchases. If the stock trades for a low enough price, a bargain-price repurchase can boost the value of the executive’s shares even if the repurchase forces the firm to cut back on profitable investments.

…continue reading: Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay

Principles for Tying Equity Compensation to Long-Term Performance

Posted by Lucian Bebchuk and Jesse Fried, Harvard Law School, on Tuesday May 4, 2010 at 9:29 am
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Editor’s Note: Lucian Bebchuk is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance at Harvard Law School. Jesse Fried is a Professor of Law at Harvard Law School. This post builds on their discussion paper Paying for Long-Term Performance, issued by the Harvard Law School Program on Corporate Governance, which is available here.

In our recent study, Paying for Long-Term Performance, we provide a detailed blueprint for how equity-based compensation should be designed to tie executive payoffs to long-term results and to avoid excessive risk-taking incentives. Our conclusions can be distilled into the following eight “principles:”

Paying for Long-Term Performance

Posted by Lucian Bebchuk and Jesse Fried, Harvard Law School, on Tuesday April 27, 2010 at 10:03 am
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Editor’s Note: Lucian Bebchuk is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance at Harvard Law School. Jesse Fried is a Professor of Law at Harvard Law School.

How should equity-based plans be designed to tie executive payoffs to long-term performance? This question has been receiving much attention from firms, investors, and regulators. We seek to answer this question in a study, Paying for Long-Term Performance, which is available here.

In our 2004 book Pay without Performance, we warned that standard executive pay arrangements were leading executives to focus excessively on the short term, creating perverse incentives to boost short-term results at the expense of long-term value. Following the financial crisis, there is now widespread agreement about that importance of avoiding such persevere incentives and of tying compensation to long-term results. There is much less agreement, however, on how this should be done. Building on ideas put forward in Pay without Performance, our study provides a detailed blueprint for structuring equity based compensation, the primary component of modern executive pay schemes, to tighten the link between pay and long-term results.

…continue reading: Paying for Long-Term Performance

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