Wednesday, June 11, 2014

NEW YORK, NY, June 12, 2014 – Two academic research papers that promise to spark new scrutiny of corporate actions such as mergers and acquisitions have won the prestigious Investor Responsibility Research Center Institute (IRRCi) annual investor research competition that focuses on the interaction of the real economy with investment theory. One research paper documents that informed trading of equity options prior to takeover announcements is more pervasive than would be expected, while the other examines managers’ incentives to “play it safe” with actions such as buying “cash cow” companies in diversifying industries.

“Both research papers have the potential to change how we look at key aspects of corporate transactions such as mergers and acquisitions,” said IRRCi executive director Jon Lukomnik. “One paper indicates that we may have a significant and systemic insider trading problem. The other winning research paper provides empirical evidence that managers often destroy value through diversifying acquisitions to insulate themselves from difficult financial situations,” he explained.

Lukomnik is set to recognize the following winners at the Columbia Law School 2014 Millstein Governance Forum, The State of Corporate Governance, at the Gala Dinner scheduled for June 12, 2014, in New York City. The winning research teams will be presented with a $10,000 award for each paper.

  • Informed Options Trading prior to M&A Announcements: Insider Trading? by Patrick Augustin, Assistant Professor of Finance, McGill University; Menachem Brenner, Research Professor of Finance at New York University Stern School of Business; and Marti G. Subrahmanyam, Charles E. Merrill Professor of Finance, Economics and International Business, New York University Stern School of Business. Download the research here.
  • Playing it Safe? Managerial Preferences, Risk, and Agency Conflicts by Todd A. Gormley, Assistant Professor of Finance at The Wharton School at the University of Pennsylvania; and David Matsa, Associate Professor of Finance at the Kellogg School of Management at Northwestern University. Download the research here.

“We became intrigued by reports of a number of illegal insider trading cases in options ahead of takeover announcements, in particular the leveraged buyout of Heinz by Warren Buffet and 3G Capital,” said award winner Patrick Augustin. “Hence, we set out to investigate whether instances of informed trading in options occur systematically or whether they were just random bets. The statistical evidence we present is consistent with informed trading strategies, and is too strong to be dismissed as just random speculation. Our findings likely will be highly useful to regulators, firms and investors in understanding where and how informed investors trade,” Augustin added.

Award winner David Matsa said, “Our research finds that all too often, corporate executives of struggling firms shy away from taking the risks necessary to maximize shareholders’ return. When not disciplined by the threat of a hostile takeover, distressed firms are more likely to hoard cash and acquire firms in unrelated industries. In these situations, the traditional solutions to managerial agency conflicts are counterproductive because high corporate debt levels and large managerial equity stakes only exacerbate managers’ tendency to play it safe.”

“The Millstein Center is very pleased to be affiliated with and to host the announcement of the IRRC Institute Annual Investor Research Award. The type of deep, provocative research that the IRRCi supports through these awards is critical to the fields of corporate governance, economics, and finance,” said Ira Millstein, co-chair of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.

The IRRCi Investor Research Award fills a vacuum by fostering critical research that integrates investment theory and the real world economy. Along with previous winning research, this year’s winning academic papers will be valuable tools for investors, policymakers, academia, and other stakeholders in terms of rethinking assumptions, testing conventional wisdom and helping to improve the investment landscape.

The following panel of renowned judges reviewed the submissions and selected the two winning papers:

  • Mark Anson Chief Investment Officer, Acadia Investment Management
  • Collette Chilton Chief Investment Officer, Williams College
  • James Hawley Professor and Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College
  • Robert J. Jackson, Jr. Faculty Co-Director, Ira M. Millstein Center for Global Markets and Corporate Governance and Associate Professor of Law and Milton Handler Fellow at Columbia Law School
  • Erika Karp Founder and Chief Executive Officer, Cornerstone Capital Inc.
  • Bill Miller Chairman, Chief Investment Officer & Portfolio Manager, Legg Mason Capital Management
  • Nell Minow Co-founder and Board Member, GMI Ratings

To learn more about the award, see:

About The IRRC Institute
The IRRC Institute is a not-for-profit organization that provides thought leadership at the intersection of corporate responsibility and the informational needs of investors. More information is available at the IRRCi Website.

IRRC Award Contact:
Jon Lukomnik
+1.212.344.2424 |

IRRC Media Contact:
Kelly Kenneally
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