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01 November 2014  

Shareholder Power
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See the latest research from the ECGI published in the ECGI Finance Working Paper series
Thu, 09 Oct 2014 23:40 GMT  
ECGI Finance Working Paper 441/2014

Juyoung Cheong, Korea Advanced Institute of Science and Technology Woochan Kim, Korea University and ECGI

Submitted by
Woochan Kim
executive compensation, family firms, business groups, chaebols, dividend

According to the prior literature, family executives of family-controlled firms receive lower compensation than non-family executives. One of the key driving forces behind this is the existence of family members who are not involved in management, but own significant fraction of shares and closely monitor and/or discipline those involved in management. In this paper, we show that this assumption falls apart if family-controlled firm is part of a large business group, where most of the family members take managerial positions but own little equity stakes in member firms. Using 2014 compensation data of 564 executives in 368 family-controlled firms in Korea, we find three key results consistent with our prediction First, family executives are paid more than non-family executives (by 27% more, on average) and this family premium is pronounced in larger business group firms even after controlling for potential selection bias problems. Second, pay to family-executives falls with the influence of outside family members (their aggregate ownership in the firm minus the ownership held by the family executive in the same firm). Third, family premium in large business group firms rises with group size, but falls with family’s cash flow rights. It also rises for group chairs, but falls with the number of board seats the family-executive holds within the group.

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
Fri, 10 Oct 2014 00:19 GMT  
ECGI Law Working Paper 266/2014

John Coffee, Columbia University and ECGI Darius Palia, Rutgers Business School

Submitted by
John Coffee
hedge fund, institutional investor, Schedule 13D, shareholder activism, Williams Act, wolf pack

Hedge fund activism has increased almost hyperbolically. Some view this optimistically as a means for bridging the separation of ownership and control; others are more pessimistic, seeing mainly wealth transfers from bondholders or speculative expectations of a takeover as fueling the spike. Equivalent division exists over the impact of this increased activism, with optimists seeing real gains that do not erode over time and improvements in operating performance, and pessimists predicting shortened investment horizons, increased leverage, and reduced investment in research and development. Our perspective is analytic. We begin by surveying the regulatory and institutional developments that have reduced the costs and increased the expected payoff from activism for hedge funds. Here, we focus particularly on the formation of “wolf packs”—namely, loose knit associations of hedge funds that are formed prior to, or contemporaneously with, the filing of a Schedule 13D. We then look at other new institutional structures that are appearing, as typified by the alliance between Pershing Square Capital Management and Valeant Pharmaceuticals in their bid for Allergan. Then, we survey the empirical evidence on the impact of activism, looking successively at (1) who are the targets of activism?; (2) does hedge fund activism create real value?; (3) what are the sources of gains from activism?; and (4) do the targets of activism experience post-intervention changes in real variables? Although confident claims have been made by some researchers, we find the evidence decidedly mixed on most questions (other than the short term stock price impact). In particular, we find the conclusions about improvements in target operating performance that have been expressed by some to be overextended beyond their actual data and premature. Finally, we examine the policy levers that could encourage or chill hedge fund activism and consider the feasibility of reforms. The gains from hedge fund activism may be high both because such activity is relatively low risk (if asymmetric information can be exploited that is acquired before the filing of a Schedule 13D) and short-term (with the median hedge fund activist holding for approximately nine months). Still, we predict that the impact of most regulatory changes are likely to be marginal. Conversely, we believe that private ordering (through techniques such as a “window-closing” poison pill) could achieve at least as much as regulatory changes.

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