Sanjai Bhagat - Profile on Academia.edu (original) (raw)
Papers by Sanjai Bhagat
doi:10.1017/S0022109013000045 Director Ownership, Governance, and Performance
We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance an... more We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance and company performance. We consider 5 measures of corporate governance during the period 1998–2007. We find a significant negative relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. Our most important contribution is a proposal of a governance measure, namely, dollar ownership of the board members, that is simple, intuitive, less prone to measurement error, and not subject to the problem of weighting a multitude of governance provisions in constructing a governance index. I.
Roberta.Romano@Yale.edu EVENT STUDIES AND THE LAW: Part I: Technique and Corporate Litigation
Event studies are among the most successful uses of econometrics in policy analysis. By providing... more Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plainti...
We examine the valuation of financial variables, growth opportunities, insider retention and inve... more We examine the valuation of financial variables, growth opportunities, insider retention and investment banker prestige for a sample of 1,655 IPOs from three time-periods: 1986-1990, January 1997 through March 2000 (designated as the boom period), and April 2000 through December 2001 (designated as the crash period). Once we control for IPO fundamentals (such as, income, sales, book equity, growth opportunities, insider retention, and investment banker prestige) and allow for different valuation of these fundamentals across different time-periods, average valuations of IPOs in the recent boom and crash periods were not statistically different from those of the late 1980s. We also document some shifts in the valuation of fundamentals across time-periods. Most interestingly, contrary to anecdotes in the financial press, income of IPO firms is weighted more when valuing IPOs in the boom period compared to the late eighties. With respect to inter-industry differences, we document that t...
The Journal of Accounting & Economics acknowledges the assistance of the following reviewers
Valuation Of IPOs
Oxford Handbooks Online, 2012
Using a sample of 178 publicly traded Bank Holding Companies (BHCs) between 1994 and 2014, this p... more Using a sample of 178 publicly traded Bank Holding Companies (BHCs) between 1994 and 2014, this paper provides evidence on the relation between a bank’s equity capital ratio and the cost of capital. To address endogeneity between a bank’s equity capital ratio and risk of balance sheet assets, we use an instrumental variable approach, as well as a triple differences approach. We find a 10 percentage point increase in the book equity capital ratio is associated with a 92 basis points increase in the bank’s cost of capital. We also find that a 10 percentage point increase in the market equity capital ratio is associated with a 59 basis points increase in the bank’s cost of capital. Restricting the analysis to large banks with book assets in excess of $50 billion, we find that a 10 percentage point increase in the book equity capital ratio is associated with a 23 basis points increase in the bank’s cost of capital. Even though an increase in the equity capital ratio is associated with a...
Social Science Research Network, 1996
An unresolved issue in empirical research on corporate control is the extent to which takeovers i... more An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, thi...
Part II: Empirical Studies of Corporate Law
Available online 4 April 2008 How is corporate governance measured? What is the relationship betw... more Available online 4 April 2008 How is corporate governance measured? What is the relationship between corporate governance and performance? This paper sheds light on these questions while taking into account the endogeneity of the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. We make three additional contributions to the literature: First, we find that better governance as measured by the Gompers, Ishii, and Metrick [Gompers, P.A., Ishii, J.L., and Metrick, A., 2003, Corporate governance and equity prices, Quarterly Journal of Economics 118(1), 107–155.] and Bebchuk, Cohen and Ferrell [Bebchuk, L., Cohen, A., and Ferrell, A., 2004, What matters in corporate governance?, Working paper, Harvard Law School] indices, stock ownership of boardmembers, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance. Second, contrary to claims in...
We develop a new measure of innovation using a textual analysis of analyst reports. Our text-base... more We develop a new measure of innovation using a textual analysis of analyst reports. Our text-based measure gives a useful description of innovation by mature firms with and without patenting and R&D. For non-patenting firms, the measure identifies firms that adopt novel technologies and innovative business practices (e.g., Walmart’s cross-geography logistics). For patenting firms, the text-based measure strongly correlates with valuable patents, which likely capture true innovation. The text-based measure robustly forecasts greater firm performance and growth opportunities for up to four years, and these value implications hold just as strongly for non-patenting firms. ⇤Previous versions of the paper were circulated under its former title, “A Text-Based Analysis of Corporate Innovation.” All authors are from University of Colorado’s Leeds School of Business. Cookson is the corresponding author. University of Colorado at Boulder, Leeds School of Business, Campus Box 419, Boulder, CO ...
Should the Modern Corporation Maximize Shareholder Value?
SSRN Electronic Journal
Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder... more Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder value remains controversial. We argue that under certain broad assumptions, the admonition remains a good place to start. To strengthen the prospects for success of long-term shareholder value maximization, we suggest steps to align shareholder wealth maximization with stakeholder interests. First, antitrust public policies should be vigorously enforced to maintain and enhance competition in product markets and labor markets. Second, management and board compensation should be reformed to focus on creating and sustaining long-term shareholder value. Finally, and more importantly, for many of society’s serious challenges, corporations do not represent the appropriate level of action. Climate change, for example, poses significant challenges for societies and businesses. But significant changes to combat climate change require public policy changes in the United States and abroad. Turning more to corporations because the political process seems broken will not do.
IPO Valuation: The International Evidence
SSRN Electronic Journal
We study the valuation of 6,199 IPOs during 1998-2015 for the following countries: Australia, Can... more We study the valuation of 6,199 IPOs during 1998-2015 for the following countries: Australia, Canada, China, Germany, India, Japan, U.K., and U.S. Net income is positively related to IPO valuation in each of the eight countries. The economic impact of net income is largest for Chinese IPOs and smallest for Australian IPOs. Book value is positively and significantly related to IPO valuation in only Canada, Germany, India, and U.S. Capital expenditure is significantly and positively related to IPO valuation in only Canada, Germany, India, U.K., and U.S. We find a positive and statistically significant relation between insider retention and IPO valuation only in China, Germany, U.K., and U.S.; positive but marginally significant relationship for India and Japan. Underwriter reputation has a positive and statistically significant relationship for IPOs only in China, Germany, India, U.K., and U.S. Net income is positively and statistically significantly related to IPO valuation during the years 1998-2015, and this relationship has strengthened over time. Capital expenditure is positively and significantly related to IPO value during 1998-2015, and this relation appears to be stable over time.
Journal of Corporate Finance
Director stock ownership is most consistently and positively related to future corporate performa... more Director stock ownership is most consistently and positively related to future corporate performance. Public policymakers and long-term investors should find this result especially relevant given their strong interest in long-term corporate performance. Equally important, corporate governance researchers should consider director stock ownership as a measure of corporate governance; this will also aid in the comparability of results across different studies. In our 2008 paper, Corporate governance and firm performance, we considered data through 2002. In this paper, we extend our sample period through 2016. These additional 14 years of data provide a powerful out-of-sample test of the specification and power of director stock ownership as a measure of corporate governance. Further, extending the period allows us to capture the dynamics of the financial crisis, the Great Recession, Sarbanes-Oxley (2002), and Dodd-Frank (2010). We find director stock ownership most consistently and positively related to future corporate performance in this out-of-sample period (2003-2016) across a battery of different specifications, estimation techniques, and for different subsamples. One particular sub-sample of considerable public interest is the 100 largest U.S. financial institutions around 2008. Bank director stock ownership is positively related to future bank performance, and bank director stock ownership is negatively related to future bank risk, both prior to and during the financial crisis-both results of considerable interest to senior bank regulators. 1. Introduction Corporate governance continues to be a focus of not just the financial media but the popular media, as well. The scandals at Wells Fargo and Equifax are just the most recent in the long line of scandals involving large well-known public U.S. corporations. Going back in time-the financial crisis of 2008 was triggered by the implosion of the big banks. Further back in time, at the turn of the new millennium, the scandals in Enron, WorldCom, Tyco, and Qwest led to their demise. After each set of these scandals, policymakers raised questions about the effectiveness of corporate governance mechanisms in these companies. This led to the inevitable call for more regulation and laws to constrain and regulate corporate behavior, to wit, the Sarbanes Oxley Act of 2002 and the Dodd-Frank Act of 2010. Have these two rather extensive set of laws addressed the governance concerns of corporate America? The recent Wells Fargo and Equifax episodes would suggest otherwise; these are particularly noteworthy because they are both in finance industries, which Dodd-Frank 2010 was explicitly designed to address. We think a more fruitful approach to addressing the corporate governance concerns is to focus on possible common themes underpinning the Enron, WorldCom, Tyco, Qwest, the big banks circa 2008, Wells Fargo, and Equifax scandals. We propose, on the basis of our more recent research, that misaligned CEO incentive compensation is a common theme underpinning the above corporate scandals. 1 In our 2008 paper, "Corporate governance and firm performance," we focused on the question: How is corporate governance
The Wealth Effects of Interfirm Lawsuits: An Empirical Investigation
Issue costs to existing shareholders in competitive and negotiated underwritten public utility equit
This Essay offers an executive compensation reform proposal that is especially addressed to firms... more This Essay offers an executive compensation reform proposal that is especially addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that allfirms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that executive incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold or the option cannot be exercised for a period of at least two to four years after the executive's resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives to manage corporations in investors' longer-term interest, and diminish their incentives to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management's incentive to take on unwarranted risk, our proposal should therefore also decrease the threat that public resources will be wasted when a firm receives government assistance or is deemed by public officials as "too big to fail.
The non-correlation between board independence and long-term firm performance
Journal of Corporation Law, 2002
ABSTRACT The boards of directors of American public companies are dominated by independent direct... more ABSTRACT The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom. We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board. Note: This paper is identical to the article as published in the Journal of Corporation Law. The published article is available, without the Stanford Law and Economics cover page, at http://papers.ssrn.com/abstract=313026
Handbook of Law and Economics, 2007
This chapter reviews the empirical literature, especially the event study literature, as it relat... more This chapter reviews the empirical literature, especially the event study literature, as it relates to corporate and securities law. Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This chapter begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then discusses one of the limitations of more conventional empirical work (crosssectional analysis), the problem presented by the fact that the characteristics of firms that are studied in relation to each other (such as ownership and mechanisms of corporate governance) or to firm performance are not exogeneous but self-selected by firms. Thereafter it reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation. Subsequently, we focus on the methodology's application to corporate law and corporate governance issues, supplemented with discussion of other relevant empirical work as well. Event studies are emphasized because they have played an important role in the making of corporate law and in applied corporate finance and corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. A further reason for emphasizing event study data is that they avoid the endogeneity concerns that can limit the results of other modes of empirical research in this area. Because the empirical literature related to corporate and securities law is vast, the chapter is necessarily selective and omits important topics and individual contributions in the field.
An unresolved issue in empirical research on corporate control is the extent to which takeovers i... more An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, thi...
Independent Directors
We review here the evidence, principally from the United States, on the relationship between boar... more We review here the evidence, principally from the United States, on the relationship between board independence and firm behavior and performance. Board composition affects board behavior on a number of discrete board tasks. However, there is no strong evidence that higher board independence predicts better firm performance. For a longer, somewhat updated survey of the evidence on board independence, see Sanjai Bhagat & Bernard Black, Is There a Relationship Between Board Composition and Firm Performance?, 54 Business Lawyer 921-963 (1999), available at http://ssrn.com/abstract=11417. For the published version of Bhagat and Black (working paper 1997), cited in this review, see Sanjai Bhagat & Bernard Black, The Non-Correlation Between Board Independence and Long-Term Firm Performance, 27 Journal of Corporation Law 231-274 (2002), available at http://ssrn.com/abstract=133808.
doi:10.1017/S0022109013000045 Director Ownership, Governance, and Performance
We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance an... more We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance and company performance. We consider 5 measures of corporate governance during the period 1998–2007. We find a significant negative relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. Our most important contribution is a proposal of a governance measure, namely, dollar ownership of the board members, that is simple, intuitive, less prone to measurement error, and not subject to the problem of weighting a multitude of governance provisions in constructing a governance index. I.
Roberta.Romano@Yale.edu EVENT STUDIES AND THE LAW: Part I: Technique and Corporate Litigation
Event studies are among the most successful uses of econometrics in policy analysis. By providing... more Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plainti...
We examine the valuation of financial variables, growth opportunities, insider retention and inve... more We examine the valuation of financial variables, growth opportunities, insider retention and investment banker prestige for a sample of 1,655 IPOs from three time-periods: 1986-1990, January 1997 through March 2000 (designated as the boom period), and April 2000 through December 2001 (designated as the crash period). Once we control for IPO fundamentals (such as, income, sales, book equity, growth opportunities, insider retention, and investment banker prestige) and allow for different valuation of these fundamentals across different time-periods, average valuations of IPOs in the recent boom and crash periods were not statistically different from those of the late 1980s. We also document some shifts in the valuation of fundamentals across time-periods. Most interestingly, contrary to anecdotes in the financial press, income of IPO firms is weighted more when valuing IPOs in the boom period compared to the late eighties. With respect to inter-industry differences, we document that t...
The Journal of Accounting & Economics acknowledges the assistance of the following reviewers
Valuation Of IPOs
Oxford Handbooks Online, 2012
Using a sample of 178 publicly traded Bank Holding Companies (BHCs) between 1994 and 2014, this p... more Using a sample of 178 publicly traded Bank Holding Companies (BHCs) between 1994 and 2014, this paper provides evidence on the relation between a bank’s equity capital ratio and the cost of capital. To address endogeneity between a bank’s equity capital ratio and risk of balance sheet assets, we use an instrumental variable approach, as well as a triple differences approach. We find a 10 percentage point increase in the book equity capital ratio is associated with a 92 basis points increase in the bank’s cost of capital. We also find that a 10 percentage point increase in the market equity capital ratio is associated with a 59 basis points increase in the bank’s cost of capital. Restricting the analysis to large banks with book assets in excess of $50 billion, we find that a 10 percentage point increase in the book equity capital ratio is associated with a 23 basis points increase in the bank’s cost of capital. Even though an increase in the equity capital ratio is associated with a...
Social Science Research Network, 1996
An unresolved issue in empirical research on corporate control is the extent to which takeovers i... more An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, thi...
Part II: Empirical Studies of Corporate Law
Available online 4 April 2008 How is corporate governance measured? What is the relationship betw... more Available online 4 April 2008 How is corporate governance measured? What is the relationship between corporate governance and performance? This paper sheds light on these questions while taking into account the endogeneity of the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. We make three additional contributions to the literature: First, we find that better governance as measured by the Gompers, Ishii, and Metrick [Gompers, P.A., Ishii, J.L., and Metrick, A., 2003, Corporate governance and equity prices, Quarterly Journal of Economics 118(1), 107–155.] and Bebchuk, Cohen and Ferrell [Bebchuk, L., Cohen, A., and Ferrell, A., 2004, What matters in corporate governance?, Working paper, Harvard Law School] indices, stock ownership of boardmembers, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance. Second, contrary to claims in...
We develop a new measure of innovation using a textual analysis of analyst reports. Our text-base... more We develop a new measure of innovation using a textual analysis of analyst reports. Our text-based measure gives a useful description of innovation by mature firms with and without patenting and R&D. For non-patenting firms, the measure identifies firms that adopt novel technologies and innovative business practices (e.g., Walmart’s cross-geography logistics). For patenting firms, the text-based measure strongly correlates with valuable patents, which likely capture true innovation. The text-based measure robustly forecasts greater firm performance and growth opportunities for up to four years, and these value implications hold just as strongly for non-patenting firms. ⇤Previous versions of the paper were circulated under its former title, “A Text-Based Analysis of Corporate Innovation.” All authors are from University of Colorado’s Leeds School of Business. Cookson is the corresponding author. University of Colorado at Boulder, Leeds School of Business, Campus Box 419, Boulder, CO ...
Should the Modern Corporation Maximize Shareholder Value?
SSRN Electronic Journal
Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder... more Milton Friedman’s admonition 50 years ago that the modern corporation should maximize shareholder value remains controversial. We argue that under certain broad assumptions, the admonition remains a good place to start. To strengthen the prospects for success of long-term shareholder value maximization, we suggest steps to align shareholder wealth maximization with stakeholder interests. First, antitrust public policies should be vigorously enforced to maintain and enhance competition in product markets and labor markets. Second, management and board compensation should be reformed to focus on creating and sustaining long-term shareholder value. Finally, and more importantly, for many of society’s serious challenges, corporations do not represent the appropriate level of action. Climate change, for example, poses significant challenges for societies and businesses. But significant changes to combat climate change require public policy changes in the United States and abroad. Turning more to corporations because the political process seems broken will not do.
IPO Valuation: The International Evidence
SSRN Electronic Journal
We study the valuation of 6,199 IPOs during 1998-2015 for the following countries: Australia, Can... more We study the valuation of 6,199 IPOs during 1998-2015 for the following countries: Australia, Canada, China, Germany, India, Japan, U.K., and U.S. Net income is positively related to IPO valuation in each of the eight countries. The economic impact of net income is largest for Chinese IPOs and smallest for Australian IPOs. Book value is positively and significantly related to IPO valuation in only Canada, Germany, India, and U.S. Capital expenditure is significantly and positively related to IPO valuation in only Canada, Germany, India, U.K., and U.S. We find a positive and statistically significant relation between insider retention and IPO valuation only in China, Germany, U.K., and U.S.; positive but marginally significant relationship for India and Japan. Underwriter reputation has a positive and statistically significant relationship for IPOs only in China, Germany, India, U.K., and U.S. Net income is positively and statistically significantly related to IPO valuation during the years 1998-2015, and this relationship has strengthened over time. Capital expenditure is positively and significantly related to IPO value during 1998-2015, and this relation appears to be stable over time.
Journal of Corporate Finance
Director stock ownership is most consistently and positively related to future corporate performa... more Director stock ownership is most consistently and positively related to future corporate performance. Public policymakers and long-term investors should find this result especially relevant given their strong interest in long-term corporate performance. Equally important, corporate governance researchers should consider director stock ownership as a measure of corporate governance; this will also aid in the comparability of results across different studies. In our 2008 paper, Corporate governance and firm performance, we considered data through 2002. In this paper, we extend our sample period through 2016. These additional 14 years of data provide a powerful out-of-sample test of the specification and power of director stock ownership as a measure of corporate governance. Further, extending the period allows us to capture the dynamics of the financial crisis, the Great Recession, Sarbanes-Oxley (2002), and Dodd-Frank (2010). We find director stock ownership most consistently and positively related to future corporate performance in this out-of-sample period (2003-2016) across a battery of different specifications, estimation techniques, and for different subsamples. One particular sub-sample of considerable public interest is the 100 largest U.S. financial institutions around 2008. Bank director stock ownership is positively related to future bank performance, and bank director stock ownership is negatively related to future bank risk, both prior to and during the financial crisis-both results of considerable interest to senior bank regulators. 1. Introduction Corporate governance continues to be a focus of not just the financial media but the popular media, as well. The scandals at Wells Fargo and Equifax are just the most recent in the long line of scandals involving large well-known public U.S. corporations. Going back in time-the financial crisis of 2008 was triggered by the implosion of the big banks. Further back in time, at the turn of the new millennium, the scandals in Enron, WorldCom, Tyco, and Qwest led to their demise. After each set of these scandals, policymakers raised questions about the effectiveness of corporate governance mechanisms in these companies. This led to the inevitable call for more regulation and laws to constrain and regulate corporate behavior, to wit, the Sarbanes Oxley Act of 2002 and the Dodd-Frank Act of 2010. Have these two rather extensive set of laws addressed the governance concerns of corporate America? The recent Wells Fargo and Equifax episodes would suggest otherwise; these are particularly noteworthy because they are both in finance industries, which Dodd-Frank 2010 was explicitly designed to address. We think a more fruitful approach to addressing the corporate governance concerns is to focus on possible common themes underpinning the Enron, WorldCom, Tyco, Qwest, the big banks circa 2008, Wells Fargo, and Equifax scandals. We propose, on the basis of our more recent research, that misaligned CEO incentive compensation is a common theme underpinning the above corporate scandals. 1 In our 2008 paper, "Corporate governance and firm performance," we focused on the question: How is corporate governance
The Wealth Effects of Interfirm Lawsuits: An Empirical Investigation
Issue costs to existing shareholders in competitive and negotiated underwritten public utility equit
This Essay offers an executive compensation reform proposal that is especially addressed to firms... more This Essay offers an executive compensation reform proposal that is especially addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that allfirms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that executive incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold or the option cannot be exercised for a period of at least two to four years after the executive's resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives to manage corporations in investors' longer-term interest, and diminish their incentives to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management's incentive to take on unwarranted risk, our proposal should therefore also decrease the threat that public resources will be wasted when a firm receives government assistance or is deemed by public officials as "too big to fail.
The non-correlation between board independence and long-term firm performance
Journal of Corporation Law, 2002
ABSTRACT The boards of directors of American public companies are dominated by independent direct... more ABSTRACT The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom. We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board. Note: This paper is identical to the article as published in the Journal of Corporation Law. The published article is available, without the Stanford Law and Economics cover page, at http://papers.ssrn.com/abstract=313026
Handbook of Law and Economics, 2007
This chapter reviews the empirical literature, especially the event study literature, as it relat... more This chapter reviews the empirical literature, especially the event study literature, as it relates to corporate and securities law. Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This chapter begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then discusses one of the limitations of more conventional empirical work (crosssectional analysis), the problem presented by the fact that the characteristics of firms that are studied in relation to each other (such as ownership and mechanisms of corporate governance) or to firm performance are not exogeneous but self-selected by firms. Thereafter it reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation. Subsequently, we focus on the methodology's application to corporate law and corporate governance issues, supplemented with discussion of other relevant empirical work as well. Event studies are emphasized because they have played an important role in the making of corporate law and in applied corporate finance and corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. A further reason for emphasizing event study data is that they avoid the endogeneity concerns that can limit the results of other modes of empirical research in this area. Because the empirical literature related to corporate and securities law is vast, the chapter is necessarily selective and omits important topics and individual contributions in the field.
An unresolved issue in empirical research on corporate control is the extent to which takeovers i... more An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, thi...
Independent Directors
We review here the evidence, principally from the United States, on the relationship between boar... more We review here the evidence, principally from the United States, on the relationship between board independence and firm behavior and performance. Board composition affects board behavior on a number of discrete board tasks. However, there is no strong evidence that higher board independence predicts better firm performance. For a longer, somewhat updated survey of the evidence on board independence, see Sanjai Bhagat & Bernard Black, Is There a Relationship Between Board Composition and Firm Performance?, 54 Business Lawyer 921-963 (1999), available at http://ssrn.com/abstract=11417. For the published version of Bhagat and Black (working paper 1997), cited in this review, see Sanjai Bhagat & Bernard Black, The Non-Correlation Between Board Independence and Long-Term Firm Performance, 27 Journal of Corporation Law 231-274 (2002), available at http://ssrn.com/abstract=133808.