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27 February 2015  

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See the latest research from the ECGI published in the ECGI Finance Working Paper series
Sat, 10 Jan 2015 00:50 GMT  
ECGI Finance Working Paper 445/2015

Viral Acharya, New York University, CEPR, NBER and ECGI
Anjan Thakor, Washington University in St. Louis and ECGI

Submitted by
Viral Acharya
micro-prudential regulation, macro-prudential regulation, market discipline, contagion, lender of last resort, bailout, capital requirements

We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex ante bank liquidity, whereas greater use of debt leads to a higher probability of inefficient bank liquidation. The bank’s privately-optimal capital structure trades off these two costs. With uncertainty about aggregate risk, bank creditors learn from other banks’ liquidation decisions. Such inference can lead to contagious liquidations, some of which are inefficient; this is a negative externality that is ignored in privately-optimal bank capital structures. Thus, under plausible conditions, banks choose excessive leverage relative to the socially optimal level, providing a rationale for bank capital regulation. While a blanket regulatory forbearance policy can eliminate contagion, it also eliminates all market discipline. However, a regulator generating its own information about aggregate risk, rather than relying on market signals, can restore efficiency by intervening selectively.

to view details and download this Working Paper from the SSRN website

All ECGI Working Papers in the Law and Finance series are available on the ECGI website at www.ecgi.org/wp
See the latest research from the ECGI published in the ECGI Law Working Paper series
Sun, 15 Feb 2015 16:04 GMT  
ECGI Law Working Paper 280/2015

Paul Davies, University of Oxford and ECGI

Submitted by
Paul Davies

This paper, a version of which will appear in Research Handbook on Shareholder Power (Randall Thomas & Jennifer Hill eds, forthcoming 2015) analyses the extent of shareholder power in the United Kingdom. In part, it confirms the generally held view of institutional dominance of the share registers of listed companies and the consequent capacity of institutional shareholders to influence the ‘rules of the game’ as they relate to shareholder influence over management. This is especially true for rules set by subordinate rulemakers (ie not by the legislature directly) or self-regulatory bodies. However, institutional shareholder influence has always been more extensive in relation to rule setting than with regard to interventions to alter managerial policy at portfolio company level, a disparity which is attributed mainly to free-rider problems and conflicts of interest. However, the paper argues that the standard account of institutional shareholder influence in the UK is likely to be significantly affected for the future by four developments. First, the proportion of the overall market for listed shares held by UK institutions, especially insurance companies and pension funds, has declined this century to the point where it is little or no higher than it was in the 1960s. Second, their place has been taken foreign investors, predominantly US or continental European institutional investors. Third, government is no longer content to leave the level of portfolio company intervention to be decided by the institutions in their own interests but, through the imprecise notion of ‘stewardship’, generates some pressure on institutional shareholders to intervene, to combat ‘short-termism’. Fourth, hedge fund activism, although less developed than in the US, is a distinct feature of the current market. The combined result of these factors for institutional activism, at both ‘rules of the game’ and portfolio company level, is uncertain. UK institutions may have a lesser capacity to intervene in view of their lower overall holdings, whilst foreign institutions may be less motivated to do so. The coordination costs of both types of investor may increase. This does not bode well for the stewardship policy. On the other hand, the crucial matter for intervention, at least in the medium-term, may not be the concentration of share ownership but the concentration of share management. There is some evidence that investment in the UK market continues to be concentrated in the hands of UK-based managers, even whilst institutional shareholding has become less concentrated. Finally, the coordination costs of institutional shareholders, domestic and foreign, may be reduced by hedge fund activism.

to view details and download this Working Paper from the SSRN website

All ECGI Working Papers in the Law and Finance series are available on the ECGI website at www.ecgi.org/wp