DSpace Collection: NYU Pollack Center for Law & Business Working Papers

You Can't Take It With You: Sunset Provisions for Equity Compensation When Managers Retire, Resign, or Die

Tue, 29 Aug 2006 22:58:59 GMT

Title: You Can't Take It With You: Sunset Provisions for Equity CompensationWhen Managers Retire, Resign, or Die

Dahiyaa, Sandeep; Yermack, David

Abstract: Company stock option plans have diverse “sunset” policiesfor modifying terms of options held by managers who exit the firm. Inour S&P 500 sample, these forfeiture, vesting, and expirationprovisions are less generous in companies characterized by fast growth,dependence on skilled human capital, and high strategic interaction withcompetitors. We show that these features of firms’ option plansdirectly impact management turnover, early exercise of stock options,and the availability of data about early exercises. For CEOs over age60, companies’ sunset rules generally imply large discounts tooption award values and estimates of total compensation. The authorsappreciate helpful comments from Manuel Ammann, Patrick Bolton, JenniferCarpenter, Don Chance, Stephen Choi, John Core, Joan Heminway, TracieWoidtke, and seminar participants at Georgetown University, MannheimUniversity, University of St.Gallen, University of Tennessee, and theGerzensee European Summer Symposium in Financial Markets.

Why Has CEO Pay Increased So Much?

Thu, 20 Jul 2006 22:58:59 GMT

Title: Why Has CEO Pay Increased So Much?

Gabaix, Xavier; Landier, Augustin

Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs havedifferent talents and are matched to firms in a competitive assignmentmodel. In market equilib-rium, a CEO’s pay changes one for onewith aggregate firm size, while changing much less with the size of hisown firm. The model determines the level of CEO pay across firms andover time, offering a benchmark for calibratable corporate finance. Thesix- fold increase of CEO pay between 1980 and 2003 can be fullyattributed to the six-fold increase in market capitalization of large UScompanies during that period. We find a very small dispersion in CEOtalent, which nonetheless justifies large pay differences. The databroadly support the model. The size of large firms explains many of thepat-terns in CEO pay, across firms, over time, and between countries.(JEL D2, D3, G34, J3).

What Do Independent Directors Know? Evidence from Their Trading

Tue, 28 Nov 2006 22:58:59 GMT

Title: What Do Independent Directors Know? Evidence from Their Trading

Ravina, Enrichetta; Sapienza, Paola

Abstract: We compare the trading performance of independent directors and otherofficers of the firm. We find that independent directors earn positiveand substantial abnormal returns when they purchase their company stock,and that the difference with the same firm’s officers isrelatively small at most horizons. The results are robust to controllingfor firm fixed effects and to using a variety of alternativespecifications. Executive officers and independent directors makehigher returns in firms with weaker governance and the gap between thesetwo groups widens in such firms. Independent directors who sit in auditcommittees earn higher return than other indepen- dent directors at thesame firm. Finally, independent directors earn significantly higherreturns than the market when they sell the company stock in a windowbefore bad news and around arestatement announcement.

Understanding the Relationship between Founder-CEOs and Firm Performance

Thu, 08 Sep 2005 22:58:59 GMT

Title: Understanding the Relationship between Founder-CEOs and Firm Performance

Adams, Renee B; Almeida, Heitor; Ferreira, Daniel

Abstract: While previous empirical literature has examined the effect offounder-CEOs on firm performance, it has largely ignored the effect offirm performance on founder-CEO status. In this paper, we useinstrumental variables methods to better understand the relationshipbetween founder-CEOs and performance. Using the proportion of thefirm’s founders that are dead and the number of people who foundedthe company as instruments for founder-CEO status, we find strongevidence that founder-CEO status is endogenous in performanceregressions. After instrumenting for founder-CEO status, we identify apositive causal effect of founder-CEOs on firm performance which isquantitatively larger than the effect estimated through standard OLSregressions. Contrary to the common perception that founder-CEOs willretain their titles following good performance, we show that performanceis negatively related to the likelihood that founders retain the CEOtitle. This result appears to be driven primarily by founder departuresafter periods of good performance, rather than by an entrenchment effectthat allows founders to remain as CEOs following poor performance. Weprovide several potential explanations for this new finding.

Trust Law, Corporate Law, and Capital Market Efficiency

Tue, 31 Dec 2002 22:58:59 GMT

Title: Trust Law, Corporate Law, and Capital Market Efficiency

Sitkoff, Robert H

Abstract: In both the publicly-traded corporation and the private donative trust acrucial task is to minimize the agency costs that arise from theseparation of risk-bearing and manage-ment. But where the law ofcorporate governance evolved in the shadow of capital- market checks onagency costs, trust governance did not. Thus, even more than that ofclose corporations, the law and study of private trusts offers anilluminating counterfac-tual—a control, as it were—for aplayful thought experiment about the importance of capital marketefficiency to the law and study of public corporations. The animatingidea for this essay is that many of the differences on the agency costsfrontier between the public corporation and the private donative trustcan be roughly attributed to their relative positions in modern capitalmarkets and the related disparity in their residual claimants’ease of exit. Among other things, this approach reveals a correlationbetween the trust law model and the views of corporate law scholars whodoubt the ECMH and its implica-tions for corporate governance. The essayalso discusses the use of market data for as- sessing breach and damagesin corporate and trust litigation and for empirical evaluation oftheoretical scholarly analysis in both fields. More generally,comparison of the gov-ernance of the public corporation and the privatedonative trust brings into view the im-portance of relative priceefficiency for the modern approach to corporate governance.

Trust as "Uncorporation": A Research Agenda

Fri, 29 Oct 2004 22:58:59 GMT

Title: Trust as "Uncorporation": A Research Agenda

Sitkoff, Robert H

Abstract: Trust has long been a competitor of corporation as a form of businessorganization. Though corporation today dominates trust for operatingenterprises, trust dominates corporation in certain specialized niches.The market value of these niches measures in the trillions of dollars.Yet the modern business trust has only recently begun to be subjected toscholarly inquiry. Accordingly, this essay outlines a research agendafor the study of the trust in particular, the modern statutory businesstrust— as a form of business organization. Put into the parlanceof the conference on which this symposium issue is based, this essay isa call for re-search on the business trust as “uncorporation.”

Trading incentives to meet the analyst forecast

Sat, 29 Oct 2005 22:58:59 GMT

Title: Trading incentives to meet the analyst forecast

McVay, Sarah; Nagar, Venky; Wei Tang, Vicki

Abstract: We examine stock sales as a managerial incentive to help explain thediscontinuity around the analyst forecast benchmark. We find that thelikelihood of just meeting versus just missing the analyst forecast isstrongly associated with subsequent managerial stock sales. Moreover, weprovide evidence that managers manage earnings prior to just meeting thethreshold and selling their shares. Finally, the relation between justmeeting and subsequently selling shares does not hold for non-managerinsiders, who arguably cannot affect the earnings outcome, and is weakerin the presence of an independent board, suggesting that good corporategovernance mitigates this strategic behavior.

The Political Economy of Corporate Fraud: A Theory and Empirical Tests.

Sun, 29 Aug 2004 22:58:59 GMT

Title: The Political Economy of Corporate Fraud: A Theory and Empirical Tests.

de Mesquita, Bruce Bueno; Smith, Alastair

Abstract: Guided by a theory governance known as slectrorate theory (Bueno deMesquita et al,2003), we examine how governance structures withinpublicly traded companies affects corporate performance, the ease withwhich corporate executives lose their jobs for poor performance, and theincentives of executives to misstate corporate performance to protecttheir jobs. Firms are classified according to number of individuals whohave a say in who should lead them (the slectorate) and the size of thegroup of supporters and leaders needs to gain or maintain control (thewinning coalition). Using publicly available data, we develop measuresof these concepts within the corporate setting and show that thesegovernance structures influence corporate performance and compensationpackages used to reward management and stockholders. We comparecompensation packages and reported performance with those expected givengovernance structures. Deviations from expectations provide predictorsof fraudulent reporting that allow for discrimination between firms thatsubsequently commit fraud (within two years) and those that do not.

The Good, the Bad and the Lucky: CEO Pay and Skill

Fri, 29 Jul 2005 22:58:59 GMT

Title: The Good, the Bad and the Lucky: CEO Pay and Skill

Daines, Robert; Nair, Vinay B; Kornhauser, Lewis

Abstract: CEO compensation varies widely, even within industries. In this paper,we investigate whether differences in skill explain these differences inCEO pay. Using the idea that skilled CEOs should be more likely tocontinue prior good performance and more likely to reverse priorpoor performance, we develop a new methodology to detect whether skillis related to pay. We find that highly paid CEOs are more skilled thantheir less well paid peers when pay is performancebased and when thereis a large shareholder. This detected link between pay and skill isstrong even when we examine industry-wide declines: highly paid CEOs aremore likely to reverse the firm’s fortunes. We also examineCEO turnovers and show that the firm’s post-turnoverperformance is related to differences between the two CEO’s paylevels. These results highlight conditions where pay and skill arelinked, and hence identify firms where high pay appears to have no justification.

The Family Behind the Family Firm: Evidence from Successions in Danish Firms

Sat, 29 Jan 2005 22:58:59 GMT

Title: The Family Behind the Family Firm: Evidence from Successions in Danish Firms

Bennedsen, Morten; Nielsen, Kasper; Wolfenzon, Daniel

Abstract: This paper uses a unique dataset from Denmark to examine the impact ofowners’ family characteristics (size, gender composition, divorce,etc) on the decision to appoint internal (family) or external chiefexecutive officers (CEOs). In contrast to common perceptions, we findthat conditional on observing family CEO transitions, within cohort(spouse, siblings) successions are at least as prevalent as subsequentgeneration transitions. When assessing the impact of familycharacteristics on subsequent generation CEO appointments, we find thatthe probability of observing a family succession increases with thenumber of children, decreases with the ratio of female children, anddecreases with divorce, particularly when it is accompanied with a newmarriage and a new family. To show that these results are not spurious,we use instrumental variables. Overall, we find that family dynamicsplay a significant role in firm decision-making even when families arenot the sole owner of these firms.

The Economics of Fraudulent Accounting

Tue, 29 Aug 2006 22:58:59 GMT

Title: The Economics of Fraudulent Accounting

Kedia, Simi; Philippon, Thomas

Abstract: We argue that earnings management and fraudulent accounting haveimportant eco- nomic consequences. In a model where the costs ofearnings management are endoge- nous, we show that in equilibrium, lowproductivity firms hire and invest too much in order to pool with highproductivity firms. This behavior distorts the allocation of economicresources in the economy. We test the predictions of the model usingfirm- level data. We show that during periods of suspicious accounting,firms hire and invest excessively, while managers exercise options. Whenthe misreporting is detected, firms shed labor and capital andproductivity improves. Our firm-level results hold both be-fore andafter the market crash of 2000. In the aggregate, our model provides anovel explanation for periods of jobless and investment-less growth.

The Economic Incentives for Sharing Security Information

Sun, 29 May 2005 22:58:59 GMT

Title: The Economic Incentives for Sharing Security Information

Gal-Or, Esther; Ghose, Anindya

Street Earnings and Board Independence

Mon, 28 Jun 2004 22:58:59 GMT

Title: Street Earnings and Board Independence

Frankel, Richard; McVay, Sarah; Soliman, Mark

Abstract: We examine the characteristics of Street Earnings and board independenceto understand how board structure shapes disclosure. We find thatwhen boards contain fewer independent directors, exclusions fromStreet Earnings (1) have more predictive ability for future earnings,suggesting that the excluded expenses are less transitory, (2) areincreasingly likely to occur in quarters when Street Earnings exceedanalyst expectations but GAAP earnings do not, indicating that managersare more likely to use Street Earnings to meet the analyst forecast, (3)have a significantly stronger association with subsequent returns,indicating that the excluded expenses are less transparent as investorsare slow to price their future earnings implications, and (4) are morestrongly related to the intensity of insider trading activity. We obtainthese results despite tests demonstrating that analysts reverse moremanagement exclusions as boards become less independent. Overall, ourresults suggest that board independence is associated with the qualityof voluntary earnings-related disclosure.

Simple “Market Value” Bargaining Model for Weighted Voting Games: Characterization and Limit Theorems

Sun, 29 Oct 2006 22:58:59 GMT

Title: Simple “Market Value” Bargaining Model for Weighted VotingGames: Characterization and Limit Theorems

Owen, Guillermo; Lindner, Ines; Feld, Scott L

Abstract: Feld, Grofman and Ray (2003) offer a bargaining model for weightedvoting games that is a close relative of the nucleolus and the kernel.They look for a set of weights that preserves winning coalitions thathas the property of minimizing the difference between the weight of thesmallest and the weight of the largest Minimum Winning Coalition. Theyclaim that such a set of weights provides an a priori measure of aweighted voter’s bribeworthiness or market value. Here, afterreviewing the basic elements of their model, we provide acharacterization result for this model and show its links to otherbargaining model approaches in the literature. Then we offer some limitresults showing that, with certain reasonable conditions on thedistributions of weights, as the size of the voting body increases, thevalues of bribeworthiness we calculate will approach both the weightsthemselves and the Banzhaf scores for the weighted voting game. We alsoshow that, even for relatively small groups using weighted voting, suchas the membership of the European Council of Ministers (and itsprecedessors) 1958-2003, similarities among the usual a priori powerscores, bribeworthiness/market value, and the weights themselves, willbe quite strong.

Restoring Trust in American Business

Sat, 29 Oct 2005 22:58:59 GMT

Title: Restoring Trust in American Business

Lorsch, Jay W; Berlowitz, Leslie; Zelleke, Andy

Perpetuities or Taxes? Explaining the Rise of the Perpetual Trust

Sat, 29 Oct 2005 22:58:59 GMT

Title: Perpetuities or Taxes? Explaining the Rise of the Perpetual Trust

Schanzenbach, Max M; Sitkoff, Robert H

Abstract: By abolishing the Rule Against Perpetuities, twenty-one states havevalidated perpetual trusts. The prevailing view among scholars is thatenactment of the generation skipping transfer (GST) tax in 1986prompted the movement to abolish the Rule by conferring a salient taxadvantage on long-term trusts. However, an alternate view holds thatdemand for perpetual trusts stems from donors’ preference forcontrol independent of tax considerations. Proponents of both viewshave adduced supporting anecdotal evidence. Using state-level panel dataon trust assets prior to the adoption of the GST tax, we examine whethera state’s abolition of the Rule gave the state an advantage in thejurisdictional competition for trust funds. We find that, prior to theGST tax, a state’s abolition of the Rule did not increase thestate’s trust business. By contrast, in a prior study we foundthat, between the enactment of the GST tax and 2003, states thatabolished the Rule experienced a substantial increase in trust business.Accordingly, we conclude that the enactment of the GST tax prompted therise of the perpetual trust. These findings bear on the debate overproposals to liberalize the law of trust termination and modificationand to amend the GST tax. Our findings also contribute to the literatureon the bequest motive.

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Sun, 15 May 2005 22:58:59 GMT

Title: Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Sundaram, Rangarajan K.; Yermack, David L.

Abstract: Inside debt, such as pensions and deferred compensation, constitutes awidely-used form of executive compensation, yet the the valuation andincentive effects of these instruments have been almost entirelyoverlooked by prior work. Our paper initiates this line of research.Among our findings are that pensions constitute a significant componentof overall compensation; that CEO compensation in most firms exhibits abalance between debtand equity-based incentives, with the balanceshifting systematically away from equity and toward debt as CEOs growolder; that CEOs with high debt-based incentives manage their firmsconservatively to reduce default risk; and that pension plancompensation strongly influences patterns of CEO turnover and CEO cash compensation.

Optimal Dissent in Organizations

Tue, 01 Nov 2005 22:58:59 GMT

Title: Optimal Dissent in Organizations

Landier, Augustin; Sraer, David; Thesmar, David

Abstract: This paper is a theoretical exploration on the costs and benefits of“pas-sive resistance” in the chain of command. In ourmodel, the organization consists of two employees: an informed decisionmaker (she) in charge of selecting a project, and an uninformedimplementer (he) in charge of its execution. Both employees haveintrinsic and possibly differing preferences over projects. Overallsuccess depends on both project selection and its implementation. Wefind that a certain level of disagreement in the chain of command may beuseful to (1) prevent bad decisions from being taken and (2) givecredibility to the accuracy of the decision maker’s orders.Hence, there is an optimal level of dissent in organizations, which islarger when the extent of the decision maker’s private informationis higher. We apply our analysis to two questions: (1) the politicalindependence of government agencies and (2) the current debate oncorporate governance.

Legal Institutions, Sectoral Heterogeneity, and Economic Development

Wed, 20 Sep 2006 22:58:59 GMT

Title: Legal Institutions, Sectoral Heterogeneity, and Economic Development

Castro, Rui; Clementi, Gian Luca; MacDonald, Glenn

Abstract: A large body of evidence suggests that poor countries tend to investless (have lower PPP-adjusted investment rates) and to face higherrelative prices of in- vestment goods. It has been suggested that thishappens either because these countries have lower TFP in theinvestment-good producing sectors, or because they are subject togreater investment distortions. What is still to be understood, however,is what are the causes of these shortcomings. In this paper we addressthis question by providing a micro-foundation for the cross-countrydispersion in investment distortions. Our analysis rests on twopremises: 1) countries differ with respect to the rights enjoyed byoutside investors (such as bondholders and minority shareholders) and 2)firms producing capital goods face a higher level of idiosyncratic riskthan their counterparts producing consumption goods. In a model ofcapital accumulation where the protection of investors’ rights isincom-plete, this difference in risk induces a wedge between the returnson investment in the two sectors. The wedge is bigger, the lower theinvestor protection. In turn, this implies that countries endowed withweaker institutions are poorer, face higher relative prices ofinvestment goods, and invest a lower fraction of their income. Ouranalysis also suggests that the mechanism we study may be quantitatively important.

Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes

Sat, 29 Oct 2005 22:58:59 GMT

Title: Jurisdictional Competition for Trust Funds: An Empirical Analysis ofPerpetuities and Taxes

Sitkoff, Robert H; Schanzenbach, Max

Abstract: abstract . This Article presents the first empirical study of thedomestic jurisdictional competition for trust funds. To allow donors toexploit a loophole in the federal estate tax, since 1986 a host ofstates have abolished the Rule Against Perpetuities as applied tointerests in trust. To allow individuals to shield assets fromcreditors, since 1997 a handful of states have validated self-settledasset protection trusts. Based on reports to federal bankingauthorities, we find that, on average, through 2003 a state’sabolition of the Rule increased its reported trust assets by $6 billion(a 20% increase) and increased its average trust account size by$200,000. By contrast, our examination of validating self-settled assetprotection trusts yielded indeterminate results. Our perpetuitiesfindings imply that roughly $100 billion in trust funds have moved totake advantage of the abolition of the Rule. Interestingly, states thatlevied an income tax on trust funds attracted from out of stateexperienced no observable increase in trust business after abolishingthe Rule. Because this finding implies that abolishing the Rule does notdirectly increase a state’s tax revenue, it bears on the study ofjurisdictional competition. In spite of the lack of direct tax revenuefrom attracting trust business, the jurisdictional competition for trustfunds is patently real and intense. Our findings also speak tounresolved issues of policy concerning state property law and federaltax law.

Institutions, Markets and Growth: A Theory of Comparative Corporate Governance

Sun, 29 Oct 2006 22:58:59 GMT

Title: Institutions, Markets and Growth: A Theory of Comparative Corporate Governance

John, Kose; Kedia, Simi

Abstract: Two different financial systems with some opposing features have evolvedin the advanced economies, namely the insider system and the outsidersystem. In this paper, we provide a theoretical framework where thefeatures of the optimal governance system are derived as a function ofeconomy-wide parameters, such as the degree of development of marketsand the quality of the institutions, and firm-specific parameters, suchas the productivity of its technology. Our results include thefollowing: (1) For a degree of relative development of markets below athreshold, internal governance systems dominate for all firms in theeconomy independent of productivity, (2) When the development of marketsin an economy is above that threshold, either system may emerge asoptimal depending on the productivity of the technology. There aremarked differences in the residual agency costs under the two systemswhen the scale of investment is large. It is shown that insider systemsconstitute the optimal governance system for technologies that areoptimally implemented at a small scale while outsider systems dominatefor technologies that are optimally implemented at large scales. Theseresults provide a new argument for the potential convergence towardsoutsider systems based on technological growth.

Information Disclosure and Regulatory Compliance: Economic Issues and Research Directions

Wed, 28 Jun 2006 22:58:59 GMT

Title: Information Disclosure and Regulatory Compliance: Economic Issues andResearch Directions

Ghose, Anindya

Abstract: The Sarbanes Oxley Act (SOA) introduced significant changes to financialpractice and corporate governance regulation, including stringent newrules designed to protect investors by improving the accuracy andreliability of corporate disclosures. Briefly speaking, it requiresmanagement to submit a report containing an assessment of theeffectiveness of the internal control structure, a description ofmaterial weaknesses in such internal controls and of any materialnoncompliance. Such mandatory regulations can have some broaderramifications on firm profitability, market structure and socialwelfare, many of which were unintended when policy makers firstformulated this Act. Moreover, the tight coupling between complianceactivities, information disclosure and IT investments can haveimplications for IT governance because of its potential to changerelationships between technology investments and business. This articleaims to provide some intuitive insights into the trade-offs involved forfirms in disclosure of such information, and gives an overview of someresearch questions that would be of interest to academics, industryexecutives and policy makers alike.

Incentive Features in CEO Compensation: The Role of Regulation and Monitored Debt

Thu, 28 Sep 2006 22:58:59 GMT

Title: Incentive Features in CEO Compensation: The Role of Regulation andMonitored Debt

John, Kose; Mehran, Hamid; Qian, Yiming

Abstract: We study CEO compensation in the banking industry by taking into accountbanks’ unique claim structure in the presence of two types ofagency problems: the standard managerial agency problem as well asthe risk-shifting problem between shareholders and debtholders. Weempirically test two hypotheses derived from this framework:(1) the pay-for-performance sensitivity of bank CEO compensationdecreases with the total leverage ratio; and (2) the pay-for-performance sensitivity of bank CEO compensation increases with theintensity of monitoring provided by regulators and nondepository(subordinated) debtholders. We construct an index of the intensity ofoutsider monitoring based on four variables: subordinated debt ratio,subordinated debt rating, non performing loan ratio and BOPEC ratingassigned by regulators. We find supporting evidence for both hypotheses.Our results hold after controlling for the endogeneity amongcompensation, leverage and monitoring. They are robust to variousregression specifications and sample criteria.

Hedge Funds in Corporate Governance and Corporate Control.

Wed, 28 Jun 2006 22:58:59 GMT

Title: Hedge Funds in Corporate Governance and Corporate Control.

Kahan, Marcel; Rock, Edward B

Abstract: Hedge funds have become critical players in both corporate governanceand corporate control. In this article, we document and examine thenature of hedge fund activism, how and why it differs from activism bytraditional institutional investors, and its implications for corporategovernance and regulatory reform. We argue that hedge fund activismdiffers from activism by traditional institutions in several ways: it isdirected at significant changes in individual companies (rather thansmall, systemic changes), it entails higher costs, and it is strategicand ex ante (rather than intermittent and ex post). The reasons forthese differences may lie in the incentive structures of hedge fundmanagers as well as in the fact that traditional institutions faceregulatory barriers, political constraints, or conflicts of interestthat make activism less profitable than it is for hedge funds. But thedifferences may also be due to the fact that traditional institutionspursue a diversification strategy that is difficult to combine withstrategic activism. Although hedge funds hold great promise as activeshareholders, their intense involvement in corporate governance andcontrol also potentially raises two kinds of problems: The interests ofhedge funds sometimes diverge from those of their fellow shareholders;and the intensity of hedge fund activism imposes substantial stress thatthe regulatory system may not be able to withstand. The resultingproblems, however, are relatively isolated and narrow, do not broadlyundermine the value of hedge fund activism as a whole, and do notwarrant major additional regulatory interventions. The sharpestaccusation leveled against activist funds is that activism is designedto achieve a short-term payoff at the expense of long-termprofitability. Although we consider this a potentially serious problemthat arguably pervades hedge fund activism, we conclude that asufficient case for legal intervention has not been made. Thisconclusion results from the uncertainties about whether short-termism isin fact a real problem and how much hedge fund activism is driven byexcessive short-termism. But, most importantly, it stems from our viewthat market forces and adaptive devices taken by companies individuallyare better designed than regulation to deal with the potential negativeeffects of hedge fund short-termism while preserving the positiveeffects of hedge-fund activism.

Hedge Fund Activism

Thu, 28 Sep 2006 22:58:59 GMT

Title: Hedge Fund Activism

Klein, April; Zur, Emanuel

Abstract: This paper examines the causes and consequences of hedge fund activism.Hedge funds target profitable and healthy firms, with above-average cashholdings. The target firms earn significantly higher abnormal stockreturns around the initial 13D filing date than a sample of controlfirm. However, they do not show improvements in accountingperformances in the year after the initial purchase. Instead, hedgefunds extract cash from the firm through increases in the target’sdebt capacity and higher dividends. Examination of proxy fights andthreats accompanying the activist campaign suggests that hedge fundmanagers achieve their goals by posing a credible threat of engaging thetarget in a costly proxy solicitation contest.

Governance Problems in Close Corporations

Sun, 11 May 2008 10:40:43 GMT

Title: Governance Problems in Close Corporations

Nagar, Venky; Petroni, Kathy; Wolfenzon, Daniel

Abstract: More than 90 percent of all US firms are close corporations, and thesefirms account for 51 percent of the private sector output and 52 percentof all private employment. Understanding governance issues and agencyproblems facing these firms is therefore of considerable importance. Thelegal and finance literature argues that the main governance problem inclose corporations is not so much between the management and theshareholders as between the majority and the minority shareholders. As asolution, this literature recommends that the main shareholder in closefirms surrender some control to minority shareholders at the outset.With shared control rights, no shareholder can take unilateral actionsfor her own benefit at the expense of the firm and other shareholders.We test this hypothesis using two independent novel datasets of closecorporations. We find that shared ownership firms report substantiallylarger return on assets (up to 14 percentage points) and lowerexpense-to-sales ratios and these findings persist after we control forthe endogeneity of ownership structure. We thus provide one of the firstevidence on the presence of governance problems among shareholders inclose corporations as well as the effectiveness of shared ownership as a solution.

From Club to Market: The Evolving Role of Business Lawyers

Fri, 29 Oct 2004 22:58:59 GMT

Title: From Club to Market: The Evolving Role of Business Lawyers

Miller, Geoffrey

Family Firms, Paternalism, and Labor Relations

Sun, 29 Oct 2006 22:58:59 GMT

Title: Family Firms, Paternalism, and Labor Relations

Mueller, Holger M; Philippon, Thomas

Abstract: Using firm-, industry-, and country-level data, we document a linkbetween family own- ership and labor relations. Across countries, wefind that family ownership is relatively more prevalent in countries inwhich labor relations are difficult, consistent with firm-level evidencesuggesting that family firms are particularly effective at coping withdifficult la-bor relations. Our cross-country results are robust tocontrolling for minority shareholder protection and other potentialdeterminants of family ownership. Our results also hold if we use strikedata from the 1960s to predict cross-country variation in familyownership thirty years later. We address causality in two ways. First,we instrument our measure of the quality of labor relations using‘Labor Origin’, a variable describing the extent to whichthe emerging European liberal states in the 18th and 19th centuriesconfronted guilds and labor organizations. Second, making use ofwithin-country variation at the industry level, we show that-controllingfor industry and country fixed effects-industries that are more labordependent have relatively more family ownership in countries with worselabor relations.

Destruction of Value in the New Era of Chapter 11

Mon, 23 Oct 2006 22:58:59 GMT

Title: Destruction of Value in the New Era of Chapter 11

Adler, Barry E; Capkun, Vedran; Weiss, Lawrence A

Abstract: The Bankruptcy Reform Act of 1978 placed corporate managers in controlof corporate debtors in bankruptcy and of the bankruptcy process.Although the act remains law, between 2000 and 2001 it became common forcreditors to control financially distressed firms and the bankruptcyprocess. This study tests whether the change from manager to creditorcontrol created or exacerbated managerial incentive to delay filing forbankruptcy or gave secured creditors an opportunity to delay suchfiling. We observe a significant and prolonged deterioration in thefinancial condition of firms that filed for bankruptcy after 2001 ascompared to firms that filed before 2000. We also observe patterns ofoperating losses and liquidations that suggest adverse economicconsequences from such delay.

DESIGN OF CORPORATE GOVERNANCE: Role of Ownership Structure, Takeovers, and Bank Debt

Tue, 28 Nov 2006 22:58:59 GMT

Title: DESIGN OF CORPORATE GOVERNANCE: Role of Ownership Structure, Takeovers,and Bank Debt

John, Kose; Kedia, Simi

Abstract: We examine how different economies would design an optimal corporategovernance system structured from three of the main mechanisms ofcorporate governance (managerial ownership, monitoring by banks, anddisciplining by the takeover market). We allow for interactions amongthe mechanisms. The first set of results characterizes the combinationof governance mechanisms that can appear in any optimally designedstructure: 1) when monitored debt appears in an optimal system it isaccompanied by concentrated ownership, and 2) when takeovers appear inan optimal system they are accompanied by diffuse ownership. We showthat out of the numerous governance structures that could arise fromcombinations of the governance mechanisms, only three are candidates foran optimal system. These three endogenously derived governancestructures match the prevalent systems (family based, bank based andmarket based) in the world. The optimal system for a given economy ischaracterized as a function of the degrees of development of itsfinancial institutions and markets. Our analysis yields several testable implications.

Curb Your Innovation: On the Relationship Between Innovation and Governance Structure

Tue, 29 Oct 0003 22:58:59 GMT

Title: Curb Your Innovation: On the Relationship Between Innovation andGovernance Structure

Baccara, Mariagiovanna; Razin, Ronny

Abstract: In this paper, we analyze the relationship between innovation andfirms’ governance structure. We present and analyze a simple modelin which the firm’s governance struc- ture influences the behaviorof innovative employees and, in turn, innovation brings about changes tothe firm’s governance structure. Central to our analysis is thenotion that power and rent sharing are reassessed when new ideas areimplemented. The new rent allocation is determined by the ex-postbargaining power of all players involved in the new project. Wehighlight two problems that the owners of firms face in thesesituations. First, the tendency of owners to expropriate the rents ofinnovators often leads innovators to leave firms before revealing theirideas internally. Second, the fear of intra-firm rent redistributionbrought about by innovation often results in conserva-tive attitudesamong the firm owners. After illustrating how our model captures thesetwo problems, we disscuss how alternative decision-making protocols,such as delegat-ing authority to a CEO or decentralizing thedecision-making process of the firm, can help to mitigate them. Theseresults are consistent with patterns of innovation and governanceobserved in the high-tech industry.

CEO Compensation and Private Information: An Optimal Contracting Perspective

Tue, 28 Nov 2006 22:58:59 GMT

Title: CEO Compensation and Private Information: An Optimal Contracting Perspective

Inderst, Roman; Mueller, Holger M

Abstract: We consider the joint optimal design of CEOs’ severance pay andon-the-job pay in a model in which the CEO has interim privateinformation about the likely success of his strategy. The board faces atradeoff between reducing the likelihood that the firm forgoes anefficient strategy change and limiting the CEO’s informationalrents. The optimal truthtelling mech-anism takes a simple form: itconsists of fixed severance pay and high-powered, non-linear on-the-jobpay, such as a bonus scheme or option grant. Our model makes testablepredic-tions linking CEOs’ severance pay and on-the-job pay toeach other as well as to the firm’s external business environment,firm size, and corporate governance.

Bottom-Up Corporate Governance

Wed, 19 Oct 2005 22:58:59 GMT

Title: Bottom-Up Corporate Governance

Landier, Augustin; Sraer, David; Thesmar, David

Abstract: In many instances, “independently-minded” top-rankingexecu-tives can impose strong discipline on their CEO, even though theyare formally under his authority. This paper argues that the use ofsuch a disciplining mechanism is a key feature of good corporategov-ernance. We provide robust empirical evidence consistent with thefact that firms with high internal governance are more efficiently run.We em-pirically label as “independent from the CEO” a topexecutive who joined the firm before the current CEO was appointed. In avery robust way, firms with a smaller fraction of independent executivesexhibit (1) a lower level of profitability and (2) lower shareholderreturns after large acquisitions. These results are unaffected when wecontrol for traditional governance measures such as board independenceor other well-studied shareholder-friendly provisions.

An Agency Costs Theory of Trust Law

Wed, 29 Oct 2003 22:58:59 GMT

Title: An Agency Costs Theory of Trust Law

Sitkoff, Robert H

Abstract: This Article develops an agency costs theory of the law of privatetrusts, focusing chiefly on donative trusts. The agency costs approachoffers fresh insights into recurring problems in trust law including,among others, modi-fication and termination, settlor standing, fiduciarylitigation, trust-invest-ment law and the duty of impartiality, trusteeremoval, the role of so-called trust protectors, and spendthrift trusts.The normative claim is that the law should minimize the agency costsinherent in locating managerial authority with the trustee and theresidual claim with the beneficiaries, but only to the extent that doingso is consistent with the ex ante instructions of the settlor.Accordingly, the use of the private trust triggers a temporal agencyproblem (whether the trustee will remain loyal to the settlor’soriginal wishes) in addi-tion to the usual agency problem that ariseswhen risk-bearing and manage-ment are separated (whether thetrustee/manager will act in the best interests of thebeneficiaries/residual claimants). The positive claim is that, at leastwith respect to traditional doctrines, the law conforms to the suggestednor- mative approach. This Article draws on the economics of theprincipal-agent problem and the theory of the firm, and it engages theongoing debate about whether trust law is closer to property law orcontract law. Although the analysis focuses on donative trusts, itshould be amenable to extension in future work to commercial andcharitable trusts.

A Powerful Coalition: Workers and Owners vs Managers

Wed, 21 Jun 2006 22:58:59 GMT

Title: A Powerful Coalition: Workers and Owners vs Managers

Biggs, John H