The Latest Research in Corporate Governance: Finance

The Latest Research inCorporate Governance:Finance Joseph K. Tanimura, Ph.D., J.D.

Top-Tier Finance Journals • Journal of Business • Journal of Finance • Journal of Financial and Quantitative Analysis • Journal of Financial Economics • Review of Financial Studies

Current Areas of Research • Litigation and corporate governance • Firm performance and corporate governance • Responses to bad acquisition bids • Cash holdings and corporate governance • Labor and corporate governance • Determinants of corporate governance

Litigation and Corporate Governance • Class-action lawsuits • There is broad agreement that financial fraud leads to significant valuation losses for investors • What is the role of reputation in the market for directorships as an incentive mechanism for monitoring fraudulent behavior?

Class-Action Lawsuits • Fich, Eliezer M. and Anil Shivdasani, 2007. Financial Fraud, Director Reputation, and Shareholder Wealth • Primary findings • Following a financial fraud lawsuit, outside directors do not face abnormal turnover on the board of the sued firm • However, they experience a significant decline in the number of other board seats held

Class-Action Lawsuits (cont.) • Helland, Eric, 2006. Reputational Penalties and the Merits of Class-Action Securities Litigation • Primary findings • There is little evidence of a negative effect associated with allegations of fraud • Only in shareholder class actions in the top quartile of settlements, or in which the SEC has initiated a case, do directors appear to suffer a reputational penalty when a board they serve on is accused of fraud

Litigation and Corporate Governance • SEC and DOJ enforcement actions • There is broad agreement that financial fraud leads to significant valuation losses for investors • Do managers suffer personal consequences for cooking the books?

SEC and DOJ Enforcement Actions • Karpoff, Jonathan M., D. Scott Lee and Gerald S. Martin, 2007. The Consequences to Managers for Financial Misrepresentation • Primary findings • Most lose their jobs • Culpable managers bear substantial financial losses through restrictions on their future employment and SEC fines • A sizeable majority face criminal charges and penalties

Litigation and Corporate Governance • Derivative lawsuits • Many legal commentators question whether derivative lawsuits serve a useful purpose • Do they have positive effects on corporate governance?

Derivative Lawsuits • Ferris, Stephen P., Tomas Jandik, Robert M. Lawless and Anil Makhija, 2007. Derivative Lawsuits as a Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding Filings • Primary findings • Proportion of outside representation on the board increases after a derivative lawsuit • Outside representation increases by 6% for successful and by 2% for unsuccessful suits

Firm Performance and Corporate Governance • Operating performance • Is stronger corporate governance associated with higher operating performance? • What are the different ways in which to measure corporate governance?

Operating Performance • Fich, Eliezer M. and Anil Shivdasani, 2006. Are Busy Boards Effective Monitors? • Primary findings • Firms with busy boards exhibit lower operating performance • A significant relation between performance and CEO turnover exists only when a majority of board members are not regarded as busy

Operating Performance (cont.) • Dahya, Jay and John J. McConnell, 2007. Board Composition, Corporate Performance, and the Cadbury Committee Recommendation • Primary findings • Compliance with the Cadbury Report results in an increase in operating performance

Operating Performance (cont.) • Core, John E., Wayne R. Guay, and Tjomme Rusticus, 2006. Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations • Primary findings • Weak shareholder rights are associated with poor operating performance

Firm Performance and Corporate Governance • Stock price effects • How does the market react to changes in firms’ corporate governance? • Does the market forecast the difference in operating performance based on differences in corporate governance?

Stock Returns – Event Studies • Fich, Eliezer M. and Anil Shivdasani, 2006. • Primary findings • The departure of a busy outside director that leaves a majority of the remaining outside board members as non-busy leads to an average abnormal return of 2.2%

Stock Returns – Event Studies (cont.) • Dahya, Jay and John J. McConnell, 2007. • Primary findings • Instances in which companies with fewer than three outside directors announced the addition of enough to get over three are accompanied by a 2-day abnormal return of 0.44%

Stock Returns – Market Efficiency • Core, John E., Wayne R. Guay, and Tjomme Rusticus, 2006. • Primary findings • Weak shareholder rights are associated with poor operating performance • However, analysts’ forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market

Responses to Bad Acquisition Bids • CEO turnover • Several studies document a relation between firm performance and CEO turnover • Does corporate governance affect the relation between bidder returns and the probability of CEO turnover in acquiring firms?

CEO Turnover • Lehn, Kenneth M. and Mengxin Zhao, 2006. CEO Turnover after Acquisitions: Are Bad Bidders Fired? • Primary findings • An inverse relation exists between bidder returns and the likelihood of CEO turnover • However, this relation is not associated with governance structure

Responses to Bad Acquisition Bids • Corrective action • Results of existing studies suggest that investors believe that independent boards are good for them • Does corporate governance influence the decision to complete value-decreasing bids or to initiate asset restructuring following completed bids?

Corrective Action • Paul, Donna L., 2007. Board Composition and Corrective Action: Evidence from Corporate Responses to Bad Acquisition Bids • Primary findings • Firms with independent boards are less likely to complete value-decreasing bids • Board independence is also associated with unusually high frequencies of asset restructuring for bids that are completed

The Latest Research inCorporate Governance

The Latest Research in Corporate Governance: Finance