March 30, 2008
Schwarcz on Disclosure in Subprime Crisis
Disclosure's Failure in the Subprime Mortgage Crisis, by STEVEN L. SCHWARCZ, Duke University - School of Law , was recently posted on SSRN. Here is the abstract:
This symposium article examines how disclosure, the regulatory focus of the federal securities laws, has failed to achieve transparency in the subprime mortgage crisis and what this failure means for modern financial securities markets.
Does Shareholder Voting Maximize Stock Market Value? , by YAIR JASON LISTOKIN , Yale Law School , was recently posted on SSRN. Here is the abstract:
This paper examines the relation between shareholder voting and stock market value from a novel empirical perspective. If voting maximizes value, then the outcome of close proxy contests should not have a systematic effect on stock prices; price setters will anticipate that voting aggregates information efficiently and will build this expectation into the price of the stock before the voting outcome is announced The paper shows, however, that close dissident victories are associated with significant positive movements in stock prices, while close management victories are associated with negative stock price effects. This suggests that voting outcomes favor management rather than maximizing value, with important policy ramifications. Viewed from a regression discontinuity (RD) design perspective, the study provides unique evidence that dissident control of decision making causes increases in stock value.
Kwall & Duhl on Backdating
BACKDATING, by JEFFREY L. KWALL, Loyola University of Chicago - School of Law, and STUART DUHL,
Harrison & Held, LLP, was recently posted on SSRN. Here is the abstract:
Backdating is a much misunderstood and largely unexplored subject. It involves a wide range of conduct, some of which is an integral part of everyday law practice. To the layperson, backdating connotes wrongdoing. The propriety of backdating, however, depends upon its purpose and effect. Every lawyer should be capable of distinguishing legitimate backdating from improper backdating. Unfortunately, the dividing line is often far from clear.
Little guidance exists on backdating, notwithstanding its pervasiveness, the complexity of determining its propriety, and the serious consequences of a misjudgment. An in-depth examination of the day-to-day backdating issues that most business lawyers face cannot be found in the literature. This Article begins to fill that void.
This Article explains the different meanings of backdating, explores the reasons why it is difficult to distinguish legitimate backdating from improper backdating, examines the impact of disclosure on the propriety of backdating, and develops an analytical approach to assist business lawyers in wrestling with the difficult situations most will confront in their daily practices. By illuminating the subject, it is hoped that this Article will begin a much needed dialogue about backdating.
Insider Trading Before Accounting Scandals, by ANUP AGRAWAL, University of Alabama - Culverhouse College of Commerce & Business Administration, and TOMMY COOPER, University of Alabama - Culverhouse College of Commerce & Business Administration, was recently posted on SSRN. Here is the abstract:
We examine insider trading in a sample of over 500 firms involved in accounting scandals revealed by earnings-decreasing restatements, and in a control sample of non-restating firms. Managers are less likely to trade before accounting scandals than before other major corporate events such as takeovers or bankruptcies. Managers who sell stock while earnings are misstated potentially commit two crimes, earnings manipulation and insider trading, and their selling increases investor scrutiny and the likelihood of the manipulation being revealed. We analyze open-market stock transactions of five groups of corporate insiders: top management, top financial officers, all corporate officers, board members, and blockholders. We examine their purchases, sales and net sales during the misstated period and a pre-misstated period, using a difference-in-differences approach. Using several measures of the level of insider trading, we estimate cross-sectional regressions that control for other determinants of the level of insider trading. For the full sample of restating firms, we find weak evidence that top managers of misstating firms sell more stock during the misstated period than during the pre-misstated period, relative to the control sample. But in a number of sub-samples where insiders had greater incentives to sell before the revelation of accounting problems, we find strong evidence that top managers of restating firms sell substantially more stock during the misstated period. These findings suggest that managers' desire to sell their stockholdings at inflated prices is a motive for earnings manipulation. Our finding that insiders brazenly trade on a crime for which they are potentially culpable suggests that insider trading is more widespread in the market than has been found in the prior literature.
Coffee on Opt Outs
Accountability and Competition in Securities Class Actions: Why 'Exit' Works Better than 'Voice,' by JOHN C. COFFEE Jr., Columbia Law School, was recently posted on SSRN. Here is the abstract:
The consensus view has long been that the class action plaintiff's attorney possesses excessive discretion to prefer his own interests over those of the class. Critics have thus favored remedies such as the "lead plaintiff" provision of the Private Securities Litigation Reform Act ("PSLRA"), which in theory give class members a stronger voice. Empirically, however, such "voice-based" reforms appear to have had no more than a modest impact. But an alternative remedy appears to be more promising: "exit-based" reforms that seek to provoke greater competition between class counsel and attorneys soliciting class members to opt out of the class and file individual actions with them in state court. Unnoticed by academics, a major trend towards institutional investors opting out of securities class actions has developed over the past five years. More importantly, these opt outs appear to be recovering per share amounts that are a multiple of the class per share recovery. This development poses a variety of issues that this paper examines: (1) Do the opt outs gains come at the expense of those who remain in the class?; (2) Can defendants feasibly restrict opt outs and how should courts respond to such attempts?; (3) Are institutional investors under a fiduciary or ERISA-based duty to opt out?; and (4) Will greater competition produce greater accountability?