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21 December 2014  

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See the latest research from the ECGI published in the ECGI Finance Working Paper series
Tue, 14 Oct 2014 15:28 GMT  
ECGI Finance Working Paper 443/2014

by
Daniel Ferreira, London School of Economics, CEPR and ECGI, Miguel Ferreira, Nova School of Business and Economics and ECGI, Beatriz Mariano, London School of Economics

Submitted by
Daniel Ferreira
Keywords:
Corporate boards, Corporate governance, Covenant violations, Creditor intervention

We develop and test a theory of the relation between capital structure and the composition of the board of directors. Our model shows that board composition should become more management-unfriendly when a firm is close to financial distress. Empirical tests of this prediction indicate that the number of independent directors increases by roughly 30% following a loan covenant violation. The evidence suggests that board composition is an important channel through which creditors monitor borrowers.


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
Wed, 03 Dec 2014 04:33 GMT  
ECGI Law Working Paper 275/2014

by
Jill Fisch, University of Pennsylvania and ECGI

Submitted by
Jill Fisch
Keywords:
regulation of financial markets, banking regulation, securities law and regulation, money market funds, mutual funds, MMFs, SEC, securities, net asset value, financial crisis, shadow banking, systemic risk, financial crisis

Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis because widespread redemption demands during the days following the Lehman bankruptcy contributed to a freeze in the credit markets. In response, MMFs were deemed a component of the nefarious shadow banking industry and targeted for regulatory reform. The Securities and Exchange Commission’s (SEC) misguided 2014 reforms responded by potentially exacerbating MMF fragility while potentially crippling large segments of the MMF industry. Determining the appropriate approach to MMF reform has been difficult. Banks regulators supported requiring MMFs to trade at a floating net asset value (NAV) rather than a stable $1 share price. By definition, a floating NAV prevents MMFs from breaking the buck but is unlikely to eliminate the risk of large redemptions in a time of crisis. Other reform proposals have similar shortcomings. More fundamentally, the SEC’s reforms may substantially reduce the utility of MMFs for many investors, which could, in turn, affect the availability of short term credit. The shape of MMF reform has been influenced by a turf war among regulators as the SEC has battled with bank regulators both about the need for additional reforms and about the structure and timing of those reforms. Bank regulators have been influential in shaping the terms of the debate by using banking rhetoric to frame the narrative of MMF fragility. This rhetoric masks a critical difference between banks and MMFs – asset segregation. Unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. This difference has caused the SEC to mistake sponsor support as a weakness rather than a key stability-enhancing feature. As a result, the SEC mistakenly adopted reforms that burden sponsor support instead of encouraging it. As this article explains, required sponsor support offers a novel and simple regulatory solution to MMF fragility. Accordingly this article proposes that the SEC require MMF sponsors explicitly to guarantee the $1 share price. Taking sponsor support out of the shadows embraces rather than ignores the advantage that MMFs offer over banks through asset partitioning. At the same time, sponsor support harnesses market discipline as a constraint against MMF risktaking and moral hazard.


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