Posts Tagged ‘Stock performance’

Equity Overvaluation and Short Selling

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday April 18, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Messod Daniel Beneish, Professor of Accounting at Indiana University, Bloomington; Charles M. Lee, Professor of Accounting at Stanford University; and Craig Nichols, Assistant Professor of Accounting at Syracuse University.

In our paper, In Short Supply: Equity Overvaluation and Short Selling, which was recently made publicly available on SSRN, we use detailed equity lending data to examine the role of constraints on equity prices. We find that constrained stocks underperform, the short interest ratio (SIR) has a nonlinear association with constraints, constrained stocks have negative returns regardless of short interest ratio, high short interest yet unconstrained stocks do not underperform, yet low short interest unconstrained stocks outperform. Moreover, we show that limited supply is a key feature distinguishing constrained and unconstrained stocks, and that among constrained stocks, those with the lowest supply have the strongest negative returns. Our findings confirm that supply varies across firms (in contrast to SIR, which assumes supply is 100 percent of outstanding shares for all stocks) and short supply in the equity lending market has implications for the informational efficiency of equity prices.

…continue reading: Equity Overvaluation and Short Selling

Performance Metrics and Their Link to Value

Posted by Michael McCauley, Florida State Board of Administration, on Wednesday February 20, 2013 at 9:18 am
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Editor’s Note: Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on a Farient Advisors study, titled “Performance Metrics and Their Link to Value,” which was sponsored by the Florida SBA. The full study is available here.

The State Board of Administration (SBA) sponsored an executive compensation research study by Farient Advisors LLC, covering 1,800 companies, 24 Industry groups, and fourteen years of data (from 1998-2011). The research project identifies the primary metrics used in executive compensation plans, overall and by industry, company size, and valuation premiums, and then tests these metrics to determine whether the metrics being used have the highest impact on total stock returns.

The study provides the most definitive answer to date on a critical question—are companies choosing their long-term incentive metrics wisely for the most sustainable benefit to shareowners?

…continue reading: Performance Metrics and Their Link to Value

Corporate Short-Termism in the Fiscal Cliff’s Shadow

Posted by Mark Roe, Harvard Law School, on Thursday December 20, 2012 at 9:12 am
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is Professor Roe’s most recent op-ed written for the international association of newspapers Project Syndicate, which can be found here.

Economic trends are sometimes more closely related to one another than news reports make them seem. For example, one regularly encounters reports of governments’ financial troubles, like the “fiscal cliff” in the United States and the debt crisis in Europe. And much attention has been devoted, often in nearby opinion pieces, to the view that hyperactive equities markets, particularly in the US and the United Kingdom, push large corporations to focus disproportionately on short-term financial results at the expense of long-term investments in their countries’ economies.

The two are not unconnected. And examining that connection provides a good opportunity to assess the weaknesses and ambiguities of the longstanding argument that a furiously high-volume stock-market trading shortens corporate time horizons.

…continue reading: Corporate Short-Termism in the Fiscal Cliff’s Shadow

UK Equity Markets and Long-term Decision Making

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 3, 2012 at 9:09 am
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Editor’s Note: The following post comes to us from John Kay, a visiting Professor of Economics at the London School of Economics and a Fellow of St John’s College, Oxford.

In June 2011, the Secretary of State for Business, Innovation and Skills asked me to review activity in UK equity markets and its impact on the long-term performance and governance of UK quoted companies. The Review’s principal concern has been to ask how well equity markets are achieving their core purposes: to enhance the performance of UK companies and to enable savers to benefit from the activity of these businesses through returns to direct and indirect ownership of shares in UK companies. More detail on the background to the Review, including its terms of reference and the Interim Report, can be found at www.bis.gov.uk/kayreview.

This final report details the findings of the Review. Overall we conclude that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain. These themes of trust and incentives are central to this report. We set out principles that are designed to provide a foundation for a long-term perspective in UK equity markets and describe the directions in which regulatory policy and market practice should move. These high level statements are supported by specific recommendations that are aimed at providing the first steps towards the re-establishment of equity markets that work well for their users.

…continue reading: UK Equity Markets and Long-term Decision Making

European Court Tightens Disclosure Rules

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on Wednesday August 1, 2012 at 9:24 am
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Editor’s Note: John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert by Philip Martinius.

On June 28, 2012, the European Court of Justice (“ECJ”) issued an important judgment that will have a significant impact on the disclosure of non-public, price-sensitive information (so-called “inside information”) by public companies listed on stock exchanges in the European Union (“EU”). The decision clarifies the definition of inside information in cases where the circumstances relevant to the disclosure develop over time, potentially involving several intermediate steps. The ruling is the latest in a string of court decisions concerning the spectacular departure of Daimler’s CEO in summer 2005 and the company’s allegedly late disclosure of this event.

The issue before the ECJ was whether Daimler had met its obligation to timely disclose inside information. Under EU and German law, each issuer of securities is obliged to disclose inside information if (i) the information is sufficiently precise, (ii) relates to circumstances which are not publicly known, (iii) relates to one or more issuers of securities (or the securities themselves) and (iv) the information would likely have a significant effect on the price of the securities if it became publicly known. Future circumstances may also constitute inside information if they are sufficiently likely to occur. Issuers can temporarily delay disclosure if certain conditions are met.

…continue reading: European Court Tightens Disclosure Rules

The Increasing Importance of Loss Causation Analysis

Posted by John Gould, Cornerstone Research, on Thursday December 8, 2011 at 10:04 am
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Editor’s Note: John Gould is Senior Vice President at Cornerstone Research. This post is based on a Cornerstone Research article by David Marcus, Greg Eastman, and Marina Martynova, which was first published by Law360. Cornerstone Research was retained by Hoguet Newman Regal & Kenney, counsel for William Tennant in United States v. Anthony Cuti and William Tennant.

The recent court decisions in United States v. Anthony Cuti et al. and United States v. Ferguson et al. highlight the increasing importance of correctly analyzing loss causation in criminal cases. In United States v. Cuti, a New York federal judge applied considerably shorter prison sentences than were recommended by prosecutors for two former executives of Duane Reade Inc. convicted of securities fraud. [1]

In United States v. Ferguson, the U.S. Court of Appeals for the Second Circuit overturned criminal convictions of four former General Re Corporation (Gen Re) executives and a former American International Group Inc. (AIG) executive. [2] Both court decisions were driven by conclusions that prosecutors failed to properly connect the alleged fraud to any actual losses.

…continue reading: The Increasing Importance of Loss Causation Analysis

The Influence of Governance on Investment

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 9, 2011 at 9:24 am
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Editor’s Note: The following post comes to us from Matthew T. Billett, Professor of Finance at Indiana University; Jon A. Garfinkel, Associate Professor of Finance at the University of Iowa; and Yi Jiang, Assistant Professor of Finance at California State University.

The governance structure of a firm can influence any number of its policies and actions, sometimes to the benefit and sometimes to the detriment of shareholders. Among the many studies of these relationships, numerous ones investigate the link between firm governance and corporate investment; however, the findings are inconclusive. Some studies report results suggesting poor governance associates with excessive investment (over-investment or empire-building), while others suggest the opposite (poorly governed managers may prefer the “quiet life”).

In our paper, The Influence of Governance on Investment: Evidence from a Hazard Model, forthcoming in the Journal of Financial Economics, we revisit the question of how governance affects corporate investment behavior in an attempt to reconcile these conflicting findings. Unlike prior studies we use a hazard framework, wherein we study how governance influences the time between large investment expenditures. This empirical approach helps alleviate some of the concerns with the methods of prior studies and also provides an unexplored perspective. In this framework, we find that governance does influence the time between major investments (investment spikes). Poor governance associates with shorter periods between spikes than that for firms with stronger governance. We further show that this relation is due to poorly governed firms over-investing, rather than stronger governance firms under-investing.

…continue reading: The Influence of Governance on Investment

Capital Market Consequences of Managers’ Voluntary Disclosure Styles

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 21, 2011 at 9:21 am
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Editor’s Note: The following post comes to us from Holly Yang of the Department of Accounting at the University of Pennsylvania.

In the paper, Capital Market Consequences of Managers’ Voluntary Disclosure Styles, which is forthcoming in the Journal of Accounting and Economics, I examine the capital market consequences of managers establishing an individual disclosure style. While both neoclassical economic and agency theories suggest that managers’ individual preferences should not have an effect on corporate outcomes, several recent academic studies find that managers have styles of their own that they carry from one firm to the other. Anecdotal evidence also suggests that manager credibility matters to financial analysts, who penalize CEOs and CFOs that fail to effectively manage expectations. To the extent that these manager-specific “styles” affect investors’ perceptions of the manager’s overall reputation and credibility, investors should take this into consideration when responding to managers’ disclosure decisions.

…continue reading: Capital Market Consequences of Managers’ Voluntary Disclosure Styles

CFOs versus CEOs: Equity Incentives and Crashes

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 2, 2011 at 9:25 am
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Editor’s Note: The following post comes to us from Jeong-Bon Kim, Professor of Accountancy at City University of Hong Kong; Yinghua Li of the Accounting Department at Purdue University; and Liandong Zhang of the Department of Accountancy at City University of Hong Kong.

In the study, CFOs versus CEOs: Equity Incentives and Crashes, forthcoming in the Journal of Financial Economics, we examine the impact of executive equity incentives on a firm’s stock price crash risk. Based on a recent theoretical study by Benmelech, Kandel, and Veronesi (2010), we argue that equity incentives motivate managers to conceal bad news about growth opportunities and to choose sub-optimal investment policies to support the pretense. The accumulation of bad news within a firm leads to a severe overvaluation and a subsequent crash in the stock price.

…continue reading: CFOs versus CEOs: Equity Incentives and Crashes

Regulatory Sanctions and Reputational Damage in Financial Markets

Posted by John Armour, University of Oxford, on Wednesday October 27, 2010 at 9:15 am
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Editor’s Note: John Armour is the Lovells Professor of Law and Finance at the University of Oxford.

In the paper Regulatory Sanctions and Reputational Damage in Financial Markets, recently made publicly available on SSRN, my co-authors (Colin Mayer and Andrea Polo, both at the Said Business School in Oxford) and I study the impact of the announcement of enforcement of financial and securities regulation by the UK’s Financial Services Authority and London Stock Exchange on the market price of penalized firms. A primary function of regulation of financial markets is to uncover and discipline misconduct. In the absence of effective monitoring and enforcement of rules of conduct, financial markets are particularly prone to abuse. The imposition of penalties on firms is an important part of the armoury available to regulators and, following the financial crisis, regulatory authorities have shown a greater willingness to employ them. Our paper reveals that they are only one—and a surprisingly small—component of the overall sanctions available to regulators. We show that reputational sanctions are, for some categories of misconduct, far more potent than direct penalties.

…continue reading: Regulatory Sanctions and Reputational Damage in Financial Markets

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