http://www.ecgi.org/rss/wp.xml RSS feed of the European Corporate Governance Institute (ECGI) Thu, 17 Apr 2008, 16:34 GMT en-us http://www.ecgi.org/assets/logos/ECGI fonts only.gif http://www.ecgi.org/wp/index.php We study the determinants of private benefits of control in negotiated block transactions. We estimate the block pricing model in Burkart, Gromb, and Panunzi (2000) explicitly dealing with the existence of both block premia and block discounts in the data. We find evidence that the occurrence of block premia and block discounts depends on the controlling block holder's ability to fight a potential tender offer for the target's stock. Private benefits represent 3% of the target firm's stock market value. Private benefits increase with the target's cash holdings and decrease with its short term debt providing evidence in favor of Jensen's free cash flow hypothesis. A counterfactual policy evaluation of the Mandatory Bid Rule suggests that it fails to add value to shareholders because it fails to prevent welfare decreasing transactions and, by forcing inefficient tender offers, it deters welfare increasing transactions. http://www.ecgi.org/wp/wp_id.php?id=302 Thu, 17 Apr 2008, 16:34 GMT Finance series We investigate whether the diffusion of information sharing among banks has affected credit market performance in the transition countries of Eastern Europe and the former Soviet Union, using a large sample of firm-level data. Our estimates show that information sharing is associated with improved availability and lower cost of credit to firms, and that this correlation is stronger for opaque firms than transparent firms. In cross-sectional estimates, we control for variation in country-level aggregate variables that may affect credit, by examining the differential impact of information sharing across firm types. In panel estimates, we also control for the presence of unobserved heterogeneity at the firm level and for changes in selected macroeconomic variables. http://www.ecgi.org/wp/wp_id.php?id=301 Thu, 17 Apr 2008, 16:32 GMT Finance series liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters. We find that market liquidity and equity valuations increase around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed. Partitioning our sample, we find that the capital-market benefits exist only in countries with strict enforcement regimes and institutional environments that provide strong reporting incentives. Furthermore, the effects are weaker when local GAAP are closer to IFRS, in countries with an IFRS convergence strategy, and in industries with higher voluntary adoption rates. In terms of magnitude, the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again when IFRS becomes mandatory. While the first result likely reflects selection effects, the latter result, together with our evidence for the sample partitions, cautions us to attribute the capital-market effects for first-time adopters solely to the adoption of IFRS. Many countries have made concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Overall, the results are consistent with the view that reporting quality is shaped by many factors in countries' institutional environments, pointing in particular to the importance of firms' reporting incentives and countries' enforcement regimes. http://www.ecgi.org/wp/wp_id.php?id=300 Thu, 17 Apr 2008, 16:30 GMT Finance series The Russian language version of this report is available at http://ssrn.com/abstract=1001991. This Report was prepared, with support by the World Bank, for the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market (FSFM). We discuss the liability under company law of members of the board of directors, senior managers, and controlling shareholders of public companies in Canada, France, Germany, Korea, the United Kingdom, and the United States (plus a more limited look at Austria, the European Union, Italy, Japan, and Latvia), and apply this comparative analysis to the Russian context. We recommend amendments to the Russian Law on Joint Stock Companies and related legislation. We propose measures to enhance the effectiveness of derivative suits; define the concepts of good faith and conflict of interest; establish duties of disclosure and confidentiality; extend duties under company law to controlling shareholders and de facto directors for conflict of interest transactions; protect directors against liability for business decisions adopted without a conflict of interest. We do not recommend the creation of significant administrative or criminal liability, nor expanded duties of directors for a company in financial distress. This document includes a separate Overview of the Report by Professor Black which provides an overview of Russia's progress in creating a modern company law. The Overview and Chapters 1 and 3 will be published separately as Legal Liability of Directors and Company Officials Part 1: Substantive Grounds for Liability (Report to the Russian Securities Agency), 2007 Columbia Business Law Review 614-799, available at http://ssrn.com/abstract=1010306. Chapters 8-9 and 11-13 will be published separately as Legal Liability of Directors and Company Officials Part 2: Court Procedures, Indemnification and Insurance, and Administrative and Criminal Liability (Report to the Russian Securities Agency), 2008 Columbia Business Law Review (forthcoming), available at http://ssrn.com/abstract=1010307. http://www.ecgi.org/wp/wp_id.php?id=299 Wed, 02 Apr 2008, 11:54 GMT Law series The paper describes the European Model Company Law Project. Last year, a commission was formed on the initiative of the authors with the goal of drafting a European Model Company Law Act (EMCLA). This project aims neither to force a mandatory harmonization of national company law nor to create a further, European corporate form. The goal is rather to draft model rules for a corporation that national legislatures would be free to adopt in whole or in part. Thus, the project is thought as an alternative and supplement to the existing EU instruments for the convergence of company law. The present EU instruments, their prerequisites and limits are being discussed in the paper. Furthermore, the paper describes the US experience with such model acts in the area of company law. It concludes by discussing several topics concerning the content of an EMCLA, introducing the members of the EMCLA Working Group, and explaining the Group's preliminary working plan. http://www.ecgi.org/wp/wp_id.php?id=298 Wed, 02 Apr 2008, 11:52 GMT Law series We apply the paradigm of the firm as a nexus of contracts to the debate on regulatory competition vs. unification of law as an alternative way of regulating the business corporation. This approach views the business corporation as a set of coordinated contracts among different parties. Agency problems and related agency costs are the result of this interaction. The economic analysis of corporate law, securities regulation and bankruptcy law identifies law as a means to minimize such agency costs. In this paper we develop a model where companies are heterogeneous in their preferences about the legal regulation of contractual relationships. We then compare a regime of regulatory competition to a regime of single supply of regulation and we analyse their relatives costs and benefits. http://www.ecgi.org/wp/wp_id.php?id=297 Tue, 25 Mar 2008, 15:53 GMT Law series In this paper, we examine the impact of the PSLRA and more particularly the impact the type of lead plaintiff on the size of settlements in securities fraud class actions. We thus provide insight into whether the type of plaintiff that heads the class action impacts the overall outcome of the case. Furthermore, we explore possible indicia that may explain why some suits settle for extremely small sums – small relative to the “provable losses” suffered by the class, small relative to the asset size of the defendant-company, and small relative to other settlements in our sample. This evidence bears heavily on the debate over “strike suits.” Part I of this paper sets forth the contemporary debate surrounding the need for further reforms of securities class actions. In this section, we set forth the insights advanced in three prominent reports focused on the competitiveness of U.S. capital markets. In Part II we first provide descriptive statistics of our extensive data set, and then use multivariate regression analysis to explore the underlying relationships. In Part III, we closely examine small settlements for clues to whether they reflect evidence of strike suits. We conclude in Part IV with a set of policy recommendations based on our analysis of the data. http://www.ecgi.org/wp/wp_id.php?id=296 Fri, 21 Mar 2008, 22:59 GMT Law series This paper examines the UK's system for public oversight of financial and corporate governance disclosures by issuers and of auditors, taking account of the framework of European law and institutional arrangements within which that system operates. The paper examines the role of the public bodies that are responsible for oversight and how they relate to the Financial Services Authority (FSA). By presenting a detailed picture of this part of the UK's supervisory infrastructure, the paper demonstrates that there is a more complex allocation of institutional power than the impression that may be created by the emphasis on the FSA as the UK's single financial regulator. The paper also considers strategies that the various bodies employ to promote compliance so as to explain why analysis based exclusively on formal enforcement data is liable to be misleadingly incomplete. By seeking to improve the quality of the basic data about the UK and drawing out features of the system that may not be easy to capture in objective measurements, the paper contributes to the task of addressing the crucial question: what substitutes for the very heavy reliance on public enforcement in the form of penalties and other punitive measures that is associated with the United States in other credible and effective systems of regulation and supervision? http://www.ecgi.org/wp/wp_id.php?id=295 Thu, 20 Mar 2008, 22:48 GMT Law series Activist hedge funds have transformed how bondholders respond to violations of their contractual rights. Insurance companies and mutual funds, the traditional investors in bonds, often slept on their rights and turned active only little and late. Hedge funds, by contrast, seek out opportunities for activism in order to make profits. In the wake of their activism, hedge funds have not only benefitted themselves, but their fellow bondholders as well. Alas, the remedy scheme for violations of bondholders rights - in particular, the centrality of the acceleration remedy - introduces its own set of imperfections. When treasury interest rates have increased or the stock price of a company that has issued convertible bonds has declined, acceleration generates a windfall: bondholders receive compensation in excess of the harm associated with the violation. In these cases, activists will spend excessive resources in detecting and pursuing potential claims and companies have excessive incentives to stave off potential violations. When treasury rates have declined, the tables are turned, and bondholder rights are underenforced. Whether this selective enforcement has generated aggregate benefits for bondholders and companies in the short term is unclear. Over the long term, however, the market will adjust to hedge fund activism by changing other terms in corporate bond indentures. In particular, we suggest that the contractual remedy scheme be revised by giving companies an expanded defeasance option and offering bondholders a make-whole premium upon acceleration, which would reduce, respectively, the incentives for overenforcement and underenforcement. http://www.ecgi.org/wp/wp_id.php?id=294 Thu, 20 Mar 2008, 22:46 GMT Law series Hedge fund activism is a new form of arbitrage. Using a large hand-collected data set from 2001 to 2006 we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in two-thirds of the cases. The abnormal stock return upon announcement of activism is approximately seven percent, with no reversal during the subsequent year. Target firms experience increases in payout, operating performance, and higher CEO turnover after activism. We also find large positive abnormal return to the self-reported hedge fund activists during our sample period. The abnormal return significantly exceeds the returns to all hedge funds, the returns to equity-oriented hedge funds and is robust to alternative risk adjustments and selection biases. http://www.ecgi.org/wp/wp_id.php?id=293 Thu, 20 Mar 2008, 22:44 GMT Law series Sovereign wealth funds (SWFs) have increased dramatically in size as a result of increased commodity prices and the increase in the foreign currency reserves of Asian trading countries. SWF assets now roughly equal those in hedge and private equity funds combined. This growth, and the shift of SWF investment strategy toward equities and increasingly high profile investments like capital infusions into U.S. financial institutions following the subprime mortgage problem, have generated calls for domestic and international regulation. The U.S. and other western economies already regulate the foreign acquisition of control of domestic corporations. However, acquisitions of significant but non-controlling positions are not regulated. The danger is that new regulation will compromise the beneficial recycling of trade surpluses accomplished by SWF investments. In this paper, we situate the controversy over SWF investments in the increasing global trend toward direct governmental involvement in corporate activity, a phenomenon we label the New Merchantilism. We explain why increased transparency of SWF investment portfolios and strategy, the most commonly advanced policy recommendation, does not respond to the chief concern that SWF investments have engendered. We offer a regulatory minimalist response to fears that SWFs will make portfolio investments for strategic rather than economic reasons. Under our proposal, voting rights of SWF equity investments in U.S. corporations would be suspended but reinstated on sale. Thus, SWFs would buy and sell fully voting rights, thereby assuring that the incentives to make non-strategic investments would be unaffected, while the capacity to exercise influence for strategic motives would be constrained. The paper concludes by assessing the extent to which even a regulatory minimalist response remains both over and under inclusive; however, the limited imprecision does not undermine the effectiveness of the response. http://www.ecgi.org/wp/wp_id.php?id=292 Wed, 19 Mar 2008, 22:41 GMT Law series Most comparative corporate governance scholarship is preoccupied with the protection of shareholders against illicit self-dealing by managers and controlling shareholders, and the problem of agency cost. Differences in the role of stakeholders such as employees are acknowledged in the literature, but usually not explained in functional terms. At the same time, US legal scholars are increasingly debating the strong insulation of the board of directors from shareholders in the United States, and are seeking to find an explanation for it. Proponents of a stakeholder view of corporate law have argued that the insulation of the board of directors in the United States from shareholders mitigates the risk of holdup of members of nonshareholder constituencies by shareholders, thus encouraging specific investment by these groups. The most hotly debated type of specific investment is the human capital of employees. However, US corporate law is unusual in the large degree of autonomy enjoyed by managers vis-à-vis shareholders. Since holdup of stakeholders typically takes place within what is considered legitimate managerial business judgment, but shareholders are the primary financial beneficiary of this type of ex-post opportunism, comparative corporate governance needs to take into account the degree to which managers are shielded against shareholder influence, an issue that is quite unrelated to shareholder protection. I argue that concentrated ownership, as it is typical for Continental Europe, is conducive to holdup problems because it implies strong shareholder influence on management decision-making. Given their costs, laws aiming at the protection of stakeholders (such as codetermination or restrictive employment law) are therefore normatively more desirable in the presence of stronger shareholder influence, particularly under concentrated ownership. Without postulating that each corporate governance system of the Wealthy West has an optimal level of such laws, the theory is corroborated by the observation that they tend to be more strongly developed in corporate governance systems with stronger shareholder infl uence. Thus, I provide a new explanation for institutional complementarities in different corporate governance systems. The United Kingdom, which (in spite of dispersed ownership) has both stronger shareholder influence than the US and stronger employment law, is classified as an intermediate case. http://www.ecgi.org/wp/wp_id.php?id=291 Thu, 13 Mar 2008, 23:13 GMT Law series The Sai-Fondiaria case is Italy's most significant action in concert case. In this case public enforcement was unable to prevent the concerting parties from reaching their target. Minority shareholders therefore sued, even though Italian mandatory bid rules (MBRs) do not contain any specific rule concerning minority shareholders' entitlement to damages. At stake is private enforcement of MBRs. Courts and scholars are called to establish whether the law contains an implied right of action in favour of minority shareholders. The problem has also arisen in other European countries, where it is the object of much current debate. The Milan Tribunal thinks that minority shareholders have a right to damages, whereas the view of the Court of Appeal is diametrically opposed. Needless to say, both positions have considerable support amongst legal writers. Since deterrence arguments are still taboo with regards to private remedies, traditional interpretive canons and concepts are being employed in the debate: on one side to disguise deterrence ideas underpinning the reasoning; on the other, to retort using radical formalism, with its built-in bias against legal change. In this paper I analyze the case, the decisions and the comments. I suggest how deterrence arguments can be appropriately adopted in the reasoning of civil law courts and propose how the case should be decided in favour of minority shareholders, with beneficial effects on private enforcement status. I also analyze the recent amendments to MBRs that implement the Takeover Directive and endanger the future of private enforcement in this area of law. http://www.ecgi.org/wp/wp_id.php?id=289 Fri, 7 Mar 2008, 19:20 GMT Law series We analyse 161 Italian IPOs on the Italian Stock Exchange in the period 1999-2007, focusing on the empirical praxis of share allocations by underwriters. In Italy, one offering (the public one) is reserved for retail investors and is conducted according to Italian regulation, while the second (the institutional one) is reserved for institutional investors and is usually implemented according to Regulation S and Rule 144A of the Securities Act. Effective allocation proportions between the two offerings are determined at a high level of syndicate discretion, setting aside the minimum amount for the public offering. Claw back clauses, a typical device of Italian IPOs, allow the syndicate to shift shares ex post from the retail to the institutional offering and vice versa in order to manage demand in a discretionary fashion. We document significant increases of the retail offering size ex post and show that this mostly happens at times of preceding negative market performance and in weaker IPOs marked by lower institutional demand, a higher proportion of the offering coming from selling shareholders and significantly lower levels of initial underpricing. As a result, retail investors end up buying more shares only in weaker and less profitable IPOs, raising inevitable questions as to the fairness of the use of the claw back clauses in Italian public offerings. http://www.ecgi.org/wp/wp_id.php?id=290 Fri, 7 Mar 2008, 19:18 GMT Finance series The current debate over shareholder access to the issuer's proxy for the purpose of making director nomination is both overstated in its importance and misses the serious issue in question. The Securities Exchange Commission's new e-proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via issuer proxy access and a freestanding proxy solicitation. The serious question relates to the appropriate disclosure required of a shareholder nominator no matter which avenue is used. Institutional investors and other shareholder activists should focus their energies on working through the mechanics of waging short-slate proxy contests using e-proxy solicitations. Activist institutions need to prepare the disclosure package required under the existing proxy rules. Such disclosure may be tested (and refined) through litigation, but a standardized package should emerge relatively quickly that the institution could use in proxy contests without a control motive. Institutional investors need to become facile with the e-proxy model (including coordinating a practice for opting-in to web-access) and should appreciate the extent to which proxy advisory services will do much of the actual solicitation work. If institutions are unwilling to make the relatively modest investment to master the mechanics of e-proxy contest, both in their initiation as well as voting in support of them, then their role in corporate governance will necessarily be limited. http://www.ecgi.org/wp/wp_id.php?id=288 Wed, 5 Mar 2008, 14:58 GMT Law series Current arguments to increase shareholder power in the large public U.S. corporation need to take account of the well-established historical practice of extensive delegation by shareholders of business decision-making and agenda-control to management and the board, what might be characterized as an absolute delegation rule. This practice sharply limits the power of shareholders to put either business or governance proposals to the shareholders for dispositive resolution. The paper, originally published in 1991 but newly relevant, argues that the rule is based on potential pathologies in shareholder voting rather than the inherent information asymmetry between shareholders and managers. Rational shareholders who know of this asymmetry (and know that others know) would simply vote against most shareholder proposals. But shareholder voting gives rise to potential cycling problems, as shifting shareholder majorities vie for preferred policies, and potential opportunism, as shareholders engage in side deals with management and other shareholders to extract rents in corporate decision-making. Since shareholding patterns are in part a response to control rights, deviations from the absolute delegation rule will predictably lead to greater block ownership, for defensive and offensive reasons. These concerns need to be addressed in arguments for the expansion of shareholder power. http://www.ecgi.org/wp/wp_id.php?id=287 Thu, 28 Feb 2008, 16:18 GMT Law series We argue that the choice of corporate governance by a firm affects and is affected by the choice of governance by other firms. Firms with weaker governance give higher payoffs to their management to incentivize them. This forces firms with good governance to also pay their management more than they would otherwise, due to competition in the managerial labor market. This externality reduces the value to firms of investing in corporate governance and produces weaker overall governance in the economy. The effect is stronger the greater the competition for managers and the stronger the managerial bargaining power. While standards can help raise governance towards efficient levels, market-based mechanisms such as (i) the acquisition of large equity stakes by raiders and (ii) the need to raise external capital by firms can help too, and we characterize conditions under which this happens. http://www.ecgi.org/wp/wp_id.php?id=286 Wed, 27 Feb 2008, 15:34 GMT Finance series We analyze the role of bankers on the boards of German non-financial companies. We assemble a unique panel data set for 137 firms and 11 banks for the period from 1994 to 2005. We find that banks that are represented on a firm's board promote their investment banking services and increase their lending to firms in the same industry. We also find evidence that the presence of bankers on the board causes a decline in the valuations of non-financial firms. We do not find convincing evidence for standard explanations that bankers use board seats to monitor their equity interests or their interests as lenders, or that bankers are capital market experts and help firms to overcome financial constraints. We conclude that board representation in non-financial firms is in the interest of banks, but not in the interest of the non-bank shareholders in these firms. http://www.ecgi.org/wp/wp_id.php?id=285 Tue, 19 Feb 2008, 10:43 GMT Finance series In cross-border acquisitions, the differences between the bidder and target corporate governance have an important impact on the takeover returns. Our country-level corporate governance indices capture the changes in the quality of the national corporate governance regulations over the past 15 years. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target. We do find support for this bootstrapping effect. http://www.ecgi.org/wp/wp_id.php?id=284 Thu, 24 Jan 2008, 08:07 GMT Finance series This paper examines the impact of increased corporate mobility on corporate lawmaking in the European Union (EU). More specifically, we seek an answer to a simple question: Has the increased mobility which arose from the implementation of the Societas Europaea (SE) and the path-breaking decisions of the European Court of Justice (ECJ) led to an outbreak of regulatory competition and the emergence of a Delaware-like member state in Europe? Two types of corporate mobility are distinguished: (1) the incorporation mobility of start up firms and (2) the reincorporation mobility of established firms. As to incorporation mobility, the Centros triad of cases makes it possible for start-up firms to incorporate in a foreign jurisdiction. Many entrepreneurs have taken advantage of this new freedom of establishment. However, recent data from Germany and The Netherlands indicate declining numbers of such foreign incorporations over time. Moreover, Centros-based incorporation mobility is a rather trivial phenomenon, economically speaking. The actors in question seek only to minimize costs of incorporation. National lawmakers have been responding, amending their statutes to lower these costs. But, because out of pocket cost minimization at the organization stage operates as only a secondary motivation of 'choice-of-business-form' decisions, there arise no competitive pressures that cause national legislatures to engage in thorough-going reform addressed to corporate governance more generally. As to reincorporation mobility, which concerns the migration of the statutory seat of a firm incorporated in one member state to another member state, the SE has opened the door, but not widely enough to serve as a catalyst for company law arbitrage. Reincorporation mobility is still far from generally available in the EU. As a result, competitive pressures do not yet motivate changes in the fundamental governance provisions of national corporate law regimes. http://www.ecgi.org/wp/wp_id.php?id=283 Thu, 24 Jan 2008, 08:03 GMT Law series Unlike the US, the European Union has a tradition of national securities laws significantly differing from each other. Regulatory idiosyncrasies largely remain today despite recent efforts aiming at more comprehensive harmonization. In addition, in important respects, the current conflict of laws rules contained in European Community securities laws bundle the choice of applicable securities laws with the issuer's registered office, while leaving some regulatory aspects to the law of the market where the issuer's securities are admitted to trading. Hence, to the extent that EU companies can choose their state of incorporation and trading location, they can also choose the applicable securities law among those in place in the 27 EU countries. This paper scrutinizes the policy implications of the confl ict of laws rules EC securities regulation has chosen in two scenarios: the present one, in which obstacles to companies mobility across the EU still make regulatory arbitrage in practice unavailable, and a prospective one in which these obstacles are removed. We consider the bundling of securities laws with the issuer's registered office for conflict of laws purposes overall detrimental when corporate law arbitrage is unavailable. On the other hand, we argue that the impact of such rules is beneficial if companies can transfer their registered office without facing severe obstacles. Yet, we qualify our optimistic assessment by showing that bundling securities regulation and corporate law for conflict of laws purposes may have a negative impact on the dynamics of the market for corporate charters. For the regulatory aspects that are governed by the law of the affected market (and specifically for securities law aspects of takeover regulation), we argue that already today issuer choice offers a broad variety of options and a separating equilibrium represents the likely outcome. http://www.ecgi.org/wp/wp_id.php?id=282 Fri, 30 Nov 2007, 12:07 GMT Law series This paper analyzes optimal executive compensation contracts when managers are loss averse. We establish the general optimal contract analytically and calibrate the model to the observed contracts of 595 CEOs. We find that the Loss Aversion-model explains the observed structure of executive compensation contracts significantly better than the Risk Aversion-model. This holds especially for the mix of stock and options. The Loss Aversion-model predicts convex contracts with substantial option holdings that provide a stronger upside (carrots). By contrast, the optimal contract is concave for the standard Risk Aversion-model where it provides a significant downside (sticks). Our results suggest that loss aversion is a better paradigm for analyzing design features of stock options and for developing preference-based valuation models than the conventional model used in the literature. http://www.ecgi.org/wp/wp_id.php?id=281 Thu, 22 Nov 2007, 15:54 GMT Finance series In this paper I analyze the competitiveness of the U.S. equity markets by studying the recent trend in the share of global IPOs they are able to attract. I find that the U.S. equity market share has dropped dramatically from 2000 to 2005. This drop cannot be explained by changes in the geographical or the sectoral composition of IPOs. The most likely cause is a combination of an improvement in the competitors (mostly European equity markets) and an increase in the compliance costs for publicly traded companies. http://www.ecgi.org/wp/wp_id.php?id=280 Fri, 12 Nov 2007, 16:39 GMT Finance series The centrality of the CEO is reflected in the empirical literature linking CEO turnover to poor firm performance. However, less is known about the institutional and personal correlates of CEO turnover. In this study, we find two CEO characteristics interact with turnover: tenure and ownership. We interpret our results as indicating that CEOs of S&P 500 firms divide into two groups with different tenure patterns - “owners” (who have large personal shareholdings) and “managers” (who have smaller holdings). The tenure of manager-CEOs (as opposed to owner-CEOs) exhibits a term structure loosely similar to the one produced by the tenure process at academic institutions. Turnover of all kinds is low during a CEO's first four years on the job. In contrast, once a CEO reaches his fifth year, retirements begin a multi-year increase and exits via merger exhibit a large one-year spike. These term effects are strongest for relatively young CEOs, and appear to be independent of such factors as firm performance or retirement norms. We also find that deals and retirements are partially related, but partially distinct, modes of CEO turnover in other respects, which are similar along some dimensions but sharply different along others. http://www.ecgi.org/wp/wp_id.php?id=279 Fri, 12 Nov 2007, 16:40 GMT Finance series We consider the advantages and disadvantages of stakeholder-oriented firms that are concerned with employees and suppliers as well as shareholders compared to shareholder-oriented firms. Societies with stakeholder-oriented firms have higher prices, lower output, and can have greater firm value than shareholder-oriented societies. In some circumstances, firms may voluntarily choose to be stakeholder-oriented because this increases their value. Consumers that prefer to buy from stakeholder firms can also enforce a stakeholder society. Competition between stakeholder and shareholder firms in the context of globalization is relatively more attractive for shareholder firms than for stakeholder firms. http://www.ecgi.org/wp/wp_id.php?id=278 Fri, 12 Nov 2007, 16:39 GMT Finance series Financial economists and commercial providers of governance services have in recent years created measures of the quality of firms' corporate governance which collapse into a single number (a governance index or rating) the multiple dimensions of a company's governance. The aim of this paper is twofold, to analyze the performance of corporate governance indices in predicting corporate performance, and to consider the implications for public policy that follow from that assessment. We highlight methodological shortcomings of the extant papers that claim a relation between particular governance measures and corporate performance. Our core conclusion is that there is no consistent relation between governance indices and measures of corporate performance. Namely, there is no one “best” measure of corporate governance: the most effective governance institution appears to depend on context, and on firms' specific circumstances. It would therefore be difficult for an index, or any one variable, to capture critical nuances for making informed decisions. As a consequence, we conclude that governance indices are highly imperfect instruments for determining how to vote corporate proxies, let alone for portfolio investment decisions, and that investors and policymakers should exercise caution in attempting to draw inferences regarding a firm's quality or future stock market performance from its ranking on any particular corporate governance measure. Most important, the implication of our analysis is that corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable, because there is considerable variation in the relation between the indices and measures of corporate performance. http://www.ecgi.org/wp/wp_id.php?id=277 Fri, 12 Nov 2007, 16:38 GMT Law series All jurisdictions supply corporations with legal tools to prevent or punish asset diversion by those, whether managers or dominant shareholders, who are in control. As previous research has shown, these rules, doctrines and remedies are far from uniform across jurisdictions, possibly leading to significant differences in the degree of investor protection they provide. Comparative research in this field is wrought with difficulty. It is tempting to compare corporate laws by taking one benchmark jurisdiction, typically the US, and to assess the quality of other corporate law systems depending on how much they replicate some prominent features. We take a different perspective and describe how three major continental European countries (France, Germany, and Italy) regulate dominant shareholders' self-dealing by looking at all the possible rules, doctrines and remedies available there. While the doctrines and remedies reviewed in this article are familiar enough to corporate lawyers and legal scholars from the respective countries, this is less true for many participants in the international discussion, which remains dominated by Anglophone legal scholars and economists. We suggest that some of these doctrines and remedies, namely the German prohibition against concealed distributions, the role of minority shareholders in the prosecution of abus de biens sociaux in France, and nullification suits in all three countries and especially in Germany and Italy, have not received the attention they deserve. http://www.ecgi.org/wp/wp_id.php?id=276 Fri, 12 Nov 2007, 16:37 GMT Law series We analyze financial contracting in start-ups backed by corporate venture capitalists. CVCs strategic goals can economically hurt or benefit the start-ups, depending on product market relationships between start-ups and CVC parents. Empirically, startups prefer funding from CVCs with complementary products. Second, start-up insiders commonly limit the influence of competitive CVCs, awarding them lower board power, while retaining higher board representation for themselves. Third, lead CVCs receive lower board representation, indicating heightened concerns about their greater influence in start-ups early stages. Fourth, start-ups extract higher valuations from competitive CVCs, refl ecting greater moral hazard problems. Overall, CVC strategic objectives affect their inclusion in VC syndicates, their control rights and share pricing. http://www.ecgi.org/wp/wp_id.php?id=275 Thu, 8 Nov 2007, 10:36 GMT Finance series This paper uses a large-scale database to test the link between corporate governance regimes (specifically, the varieties of capitalism literature), investment in training and economic performance. The evidence presented here does not match with common assumptions that countries can be classified into Anglo-Saxon and other forms of capitalism, supporting a considerable body of the more empirically orientated literature on employment security and human resource development. We propose a new categorization of countries that links types of broad corporate governance regimes and associated sets of regulations with the relative propensity of firms to engage in specific types of investment towards a core stakeholder: employees. http://www.ecgi.org/wp/wp_id.php?id=274 Thu, 11 Oct 2007, 11:32 GMT Finance series This paper examines the effect of trust in a micro-economic environment, where trust is clearly exogenous. Using a hand-collected data on European venture capital, we show that the Eurobarometer measure of trust among nations significantly affects investment decisions. This holds even after controlling for investor and company fixed effects, geographic distance, information and transaction costs. The national identity of venture capital firms' partners is shown to matter for the effect of trust. We also considers the relationship between trust and sophisticated contracts involving contingent control rights. We find trust and sophisticated contracts to be complements, not substitutes. http://www.ecgi.org/wp/wp_id.php?id=273 Thu, 11 Oct 2007, 11:29 GMT Finance series Using firm, industry, and country-level data, we document a link between family ownership and labor relations. Across countries, we find that family ownership is relatively more prevalent in countries in which labor relations are difficult, consistent with firm-level evidence suggesting that family firms are particularly effective at coping with difficult labor relations. Our cross-country results are robust to controlling for minority shareholder protection and other potential determinants of family ownership. Our results also hold if we use strike data from the 1960s to predict cross-country variation in family ownership 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 which the emerging European liberal states in the 18th and 19th centuries confronted guilds and labor organizations. Second, making use of within-country variation at the industry level, we show that - controlling for industry and country fixed effects - industries that are more labor dependent have relatively more family ownership in countries with worse labor relations. http://www.ecgi.org/wp/wp_id.php?id=272 Thu, 11 Oct 2007, 11:24 GMT Finance series By reducing the fear of a hostile takeover, business combination (BC) laws weaken corporate governance and create more opportunity for managerial slack. Using the passage of BC laws as a source of identifying variation, we examine if such laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in noncompetitive industries experience a substantial drop in performance, firms in competitive industries experience virtually no effect. Though consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the stronger view expressed by A. Alchian, M. Friedman, and G. Stigler that managerial slack cannot survive in competitive industries. When we examine which agency problem competition mitigates, we find evidence consistent with a “quiet-life” hypothesis. While capital expenditures are unaffected by the passage of BC laws, input costs, wages, and overhead costs all increase, and only so in non-competitive industries. We also conduct event studies around the dates of the first newspaper reports about the BC laws. We find that while firms in non-competitive industries experience a significant decline in their stock prices, the stock price impact is small and insignificant in competitive industries. http://www.ecgi.org/wp/wp_id.php?id=271 Thu, 11 Oct 2007, 11:18 GMT Finance series Using an index which increases as a firm adopts more governance attributes, we find that 12.7% of foreign firms have a higher index than matching U.S. firms. The best predictor for whether a foreign firm adopts more governance attributes than a comparable U.S. firm is whether the firm comes from a common law country. We show that the value of foreign firms is negatively related to the difference between their governance index and the index of matching U.S. firms. This relation is robust to various approaches to control for the endogeneity of corporate governance and is consistent with the hypothesis that foreign firms are valued less because country characteristics make it suboptimal for them to invest as much in governance as comparable U.S. firms. Overall, our evidence suggests that firm-level governance attributes are complementary to rather than substitutes for country-level investor protection, so that better country level investor protection makes it optimal for firms to invest more in internal governance. Our evidence supports the view that minority shareholders of a typical foreign firm would benefit from an increase in investment in governance, but that the firm's controlling shareholder and possibly other stakeholders would not. http://www.ecgi.org/wp/wp_id.php?id=270 Thu, 11 Oct 2007, 11:13 GMT Finance series We suggest, on the basis of empirical research into the implementation of recent legal reforms, that Japan is not moving inexorably towards a 'global standard' in corporate governance, based on external monitoring and a market for corporate control. Japanese corporate governance is nevertheless changing: in part as an indirect response to legal initiatives, new structures and practices are emerging, aimed at providing greater flexibility in decision-making, while retaining the organisational core of the Japanese firm. The paradoxical effect of legal reforms aimed, in large part, at transplanting the global standard, may be to renew the distinctive Japanese model of the corporation. http://www.ecgi.org/wp/wp_id.php?id=267 Thu, 11 Oct 2007, 11:10 GMT Law series