Saturday, May 31, 2008
The Impact of the General Counsel on Corporate Governance, by ALAN D. JAGOLINZER, Stanford Graduate School of Business, DAVID F. LARCKER, Stanford University, DANIEL TAYLOR, Stanford University, was recently posted on SSRN. Here is the abstract:
Most corporate governance research has focused on the behavior of executive officers, board members, institutional shareholders, and other similar parties. However, little research has focused on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the General Counsel in restricting insider trading by corporate officers during the blackout window specified by corporate insider trading policies. We find that abnormal returns to trades within mandatory blackout windows are statistically higher than abnormal returns to trades outside such windows, by 15.48% over a 180-day period. However, when General Counsel approval is required to execute a trade, abnormal returns to trades within these windows are statistically lower than abnormal returns to trades outside these windows by 5.26% over a 180-day period. Thus, when given the authority, it appears the General Counsel can effectively limit the extent to which officers use their private information to extract rents from shareholders.