March 16, 2009
Geithner's Statement at G-20 Meeting
Here is the Prepared Statement by Treasury Secretary Tim Geithner at the G-20 Finance Ministers and Central Bank Governors Meeting March 14, 2009.
SEC Will Consider Short Sale Price Rules
The SEC announced that it will hold an open meeting on April 8 to consider whether to propose short sale price test rules.
March 15, 2009
Cheffins & Bank on Berle & Means
Is Berle and Means Really a Myth?, Brian R. Cheffins, University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI), and Steven A. Bank, University of California, Los Angeles - School of Law, was recently posted on SSRN. Here is the abstract:
Berle and Means famously declared in 1932 that a separation of ownership and control was a hallmark of large U.S. corporations and their characterization of matters quickly became received wisdom. A series of recent papers (Hannah, 2007; Santos and Rumble, 2006, Holderness, forthcoming) has called the Berle-Means orthodoxy into question. This paper surveys the relevant historical literature on point, acknowledging in so doing that the pattern of ownership and control in U.S. public companies has been anything but monolithic but saying a separation between ownership and control remains an appropriate reference point for analysis of U.S. corporate governance.
Hail, Leuz & Wysocki on IFRS in the US
Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors, by Luzi Hail, University of Pennsylvania - The Wharton School, Christian Leuz, University of Chicago - Booth School of Business, and Peter D. Wysocki, Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA), was recently posted on SSRN. Here is the abstract:
Drawing on the academic literature in accounting, finance and economics, we analyze economic and policy factors related to the potential adoption of International Financial Reporting Standards (IFRS) in the U.S. We highlight the unique institutional features of U.S. markets to assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We discuss the compatibility of IFRS with the current U.S. regulatory and legal environment as well as the possible effects of IFRS adoption on the U.S. economy as a whole. We also consider how a switch to IFRS may affect worldwide competition among accounting standards and standard setters, and discuss the political ramifications of such a decision on the standard setting process and on the governance structure of the International Accounting Standards Board. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit tradeoff between (1) recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings that will largely accrue to multinational companies, and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. We conclude by outlining several possible scenarios for the future of U.S. accounting standards, ranging from maintaining U.S. GAAP, letting firms decide whether and when to adopt IFRS, to the creation of a competing U.S. GAAP-based set of global accounting standards that could serve as an alternative to IFRS.
Bhattacharya & Marshall on Insider Trading
Do They Do It For The Money?, by Utpal Bhattacharya, Indiana University Bloomington - Department of Finance, and Cassandra D. Marshall, Indiana University Bloomington - Department of Finance, was recently posted on SSRN. Here is the abstract:
Using a sample of all top management who were convicted of illegal insider trading in the United States for trades during the period 1989-2002, we explore the economic rationality of this white-collar crime. If this crime is an economically rational activity in the sense of Becker (1968), where a crime is committed if its expected benefits exceeds its expected costs, we should see "poorer" top management doing the most illegal insider trading. This is because the expected costs of insider trading (loss of reputation and future wages if they are caught) are lower for the "poorer" strata. We find in the data, however, that convictions are concentrated in the "richer" strata in a cohort group, where cohort is defined by firm size and industry. Our results remain after we control for the expected benefits of illegal insider trading. Our results also remain after we control for the obvious alternate explanation: it is not the "richer" strata that do illegal insider trading, but that the regulators target the "richer" strata. We thus cannot rule out psychological motives (like hubris) or sociological motives (like company culture) behind this white-collar crime.
Barnard on Securities Fraud Recidivism
Securities Fraud, Recidivism, and Deterrence, by Jayne W. Barnard, William & Mary Law School, was recently posted on SSRN. Here is the abstract:
Legal scholars have expended considerable energy on the study of high-level securities fraud violators -- Ken Lay, Bernie Ebbers, Dennis Kozlowski, etc. There has been little attention, however, to the perpetrators of "retail" securities fraud -- the con artists who sell bogus stock over the Internet, orchestrate elaborate pump-and-dump schemes, and create a never-ending array of purportedly "risk free" investment opportunities. Collectively, and in a cruel mockery of capitalism, these offenders extract hundreds of millions dollars from investors each year.
In this article, Professor Barnard examines this group of offenders, focusing particularly on those who recidivate -- often moving from state to state and scheme to scheme, with little interruption from the law enforcement community. She hypothesizes that offenders in this group, much like sex offenders, may be "hard wired" to engage in fraudulent behavior. Even if that is not the case, however, these offenders present a much greater risk to the public than the current SEC enforcement regime contemplates. She proposes a series of new enforcement strategies to deal with this predatory population
Barnard on SEC & Corporate Therapeutics
Corporate Therapeutics at the Securities and Exchange Commission, by Jayne W. Barnard, William & Mary Law School, was recently posted on SSRN. Here is the abstract:
The Securities and Exchange Commission in recent years has often employed its remedial powers to shape corporate governance norms. By negotiating "therapeutic undertakings" as a condition of settlement, the SEC has forced scores of corporations to redesign their boards, fire top executives, realign incentives, create compliance bureaucracies, and submit to the oversight of unaccountable consultants. In this Article, Professor Barnard examines the origins, evolution, and current use of therapeutic sanctions at the SEC. She then explores the most problematic aspects of the SEC's current practice and proposes several corrective measures
Thompson on Superfund for Hedge Funds
Why We Need a Superfund for Hedge Funds, by Dale B. Thompson, University of St. Thomas - Department of Ethics & Business Law, was recently posted on SSRN. Here is the abstract:
The current financial crisis has led to numerous calls for regulation of hedge funds. This article argues that the appropriate response is a combination of mechanisms: establishment of a Superfund financed by a tax on hedge funds, whose revenues are then used to conduct market purchases of "toxic" financial assets, along with supporting regulations. This article develops this solution by focusing on the market failures caused by hedge funds, namely the externalities posed by liquidity risks, and the inability of market prices to provide information about the valuation of financial securities. It then considers possible solutions through the prism of our past experiences with environmental protection. This analysis suggests that the Superfund will be not only applicable to this financial crisis, but will remain effective even as hedge funds and their strategies evolve.
Reiss on Rating Agencies & Reputational Risk
Rating Agencies and Reputational Risk, by David J. Reiss, Brooklyn Law School, was recently posted on SSRN. Here is the abstract:
This essay is a lightly-edited version of a talk given at the University of Maryland School of Law and the Journal of Business & Technology Law's Conference on the Subprime Meltdown in October 2008. It briefly reviews the reputational risk literature and applies it to the rating agency industry. In particular, it looks at three of the inputs into reputation - trust, transparency, and leadership - and evaluates how rating agencies fared in the period leading up to the subprime meltdown. It concludes that rating agencies did poorly when it came to all three of these reputational inputs.
Carlin & Gervais on Legal Protection in Retail Financial Markets
Legal Protection in Retail Financial Markets, by Bruce I. Carlin, University of California, Los Angeles - Anderson School of Management, and Simon Gervais, Duke University - Fuqua School of Business, was recently posted on SSRN. Here is the abstract:
Given the importance of sound advice in retail financial markets and the fact that financial institutions outsource their advice services, how should consumer protection law be set to maximize social welfare? We address this question by posing a theoretical model of retail markets in which a firm and a broker face a bilateral hidden action problem when they service clients in the market. All participants in the market are rational, and prices are set based on consistent beliefs about equilibrium actions of the firm and the broker. We characterize the optimal law, and derive how the legal system splits the blame between parties to the transaction. We also analyze how complexity in assessing clients and conflicts of interest affect the law. Since these markets are large, the implications of the analysis have great welfare import.