Center News
David Matsa, Todd A. Gormley – Thursday, June 12, 2014
This paper examines risk-averse managers’ incentive to “play it safe” by taking value-destroying actions that reduce their firms’ risk of distress. We find that, after managers are insulated by the passage of an antitakeover law, firms increase diversifying acquisitions by about a third relative to firms that operate in the same state and industry but are not affected by the law. These acquisitions target “cash cows,” are funded largely with equity, and are concentrated among firms with a greater risk of distress. Consistent with a reduction firm-level risk, we also find that affected firms’ stock volatility decreases and their cash holdings increase. Our findings suggest that shareholders face governance challenges beyond motivating managerial effort.
Center News
Marti G. Subrahmanyam, Menachem Brenner, Patrick Augustin – Thursday, June 12, 2014
We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash off ers for large target firms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial – about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.
Center News
IRRC Institute, Si2 – Tuesday, April 22, 2014
Board oversight has long been viewed as an effective mechanism to direct and monitor corporate management. For example, in the wake of accounting scandals last decade, the Sarbanes- Oxley Act of 2002 requires all publicly traded companies in the United States to have an audit committee comprised of independent directors, charged with establishing complaints regarding accounting or auditing matters and for the confidential submission by employees procedures for handling.
Center News
IRRC Institute, ISS – Thursday, April 10, 2014
A new study finds that the level of engagement between investors and publicly traded U.S. corporations is at an all time high. Both investors and corporate officials surveyed believe the increased level of engagement is successful.
Center News
IRRC Institute – Tuesday, June 25, 2013
Associety increasingly faces governance challenges at all levels, there is a growing recognition of the need to take a longer term and more systemic view of fiduciary obligations. We begin this article with a summary discussion of how fiduciary duties have developed and been applied in the pension fund context. We then review the ef orts of the Supreme Court of Canada to develop a broader conceptual framework forfiduciary duties and considerstepsthatmight be taken to address and mitigate liability in respect of these dutiesin the context of pension fund administration. We conclude by considering the trajectory of the lawand how it appears to be positioning fiduciaries with public responsibilities and, in doing so, could alterlegal and governance precepts.
Center News
IRRC Institute – Tuesday, June 25, 2013
During the period 1991-1999, stock returns were correlated with the G-Index based on twenty-four governance provisions (Gompers, Ishii, and Metrick (2003)) and the E-Index based on the six provisions that matter most (Bebchuk, Cohen, and Ferrell (2009)). This correlation, however, did not persist during the subsequent period 2000-2008. We provide evidence that both the identified correlation and its subsequent disappearance were due to market participants’ gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices.
