Thursday, July 17, 2014
Thomas Stratmann and John W. Welborn have posted Informed Short Selling in High Fail-to-Deliver Stocks on SSRN with the following abstract:
We find that stocks with high fails-to-deliver (FTDs) experience abnormal negative returns, both in future and present periods. These findings come from both an event study and a portfolio returns analysis using Fama-French factors. They are consistent with previous research documenting that high short interest stocks experience abnormal negative returns. Using proprietary data on stock borrow costs, we also show evidence that short sellers of high FTD stocks, on average, obtain economic profits from their trades. These findings provide support for the hypothesis that high FTD levels reflect a nonbinding short sale constraint that does not restrict informed short selling.
Wednesday, July 16, 2014
Wendy Gerwick Couture has posted The PSLRA Discovery Stay Meets Complex Litigation: Five Questions Answered on SSRN with the following abstract:
The Private Securities Litigation Reform Act (“PSLRA”) was enacted nearly 20 years ago in order to combat perceived abuses in private securities litigation. One key provision of the Act is the discovery stay, which applies in any private action under the Securities Act of 1933 or the Securities Exchange Act of 1934 and which states that “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.” Congress enacted the discovery stay to prevent the perceived abuses of fishing-expedition and extortive discovery. This stay, which applies in a straightforward fashion in simple cases, raises myriad issues in complex cases with multiple defendants, multiple claims, and staggered briefing schedules. The application of the discovery stay in complex cases is often outcome-determinative because, absent discovery, it is extraordinarily difficult for a plaintiff to meet the PSLRA’s heightened pleading standards. Yet, these complexities are rarely addressed by the appellate courts, leaving the district courts in disarray. In this essay, I seek to answer the following five questions that arise when the PSLRA discovery stay meets complex litigation: (1) When does the discovery stay begin? (2) Does the discovery stay apply to successive motions to dismiss, even if the first motion to dismiss was denied in part? (3) Does the discovery stay apply to 12(c) motions for judgment on the pleadings? (4) Does the discovery stay apply to the entire case, even if only a subset of defendants have pending motions to dismiss? (5) After the discovery stay has been lifted, does the PSLRA prevent the plaintiff from relying on discovered materials to assert additional claims against existing, new, or previously dismissed defendants?
I hope that this essay will help guide litigants and courts as they seek to apply the PSLRA discovery stay in complex litigation. I also hope that this essay will encourage other scholars and commentators to delve into this messy and unsettled, yet frequently outcome-determinative, area of securities litigation.
Dhammika Dharmapala and Vikramaditya S. Khanna have posted The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012 on SSRN with the following abstract:
The effect of mandatory securities regulation on firm value has been a longstanding concern across law, economics and finance. In 2012, Congress enacted the Jumpstart Our Business Startups ("JOBS") Act, relaxing disclosure and compliance obligations for a new category of firms known as "emerging growth companies" (EGCs) that satisfied certain criteria (such as having less than $1 billion of annual revenue). The JOBS Act’s definition of an EGC involved a limited degree of retroactivity, extending its application to firms that conducted initial public offerings (IPOs) between December 8, 2011 and April 5, 2012 (the day the bill became law). The December 8 cutoff date was publicly known prior to the JOBS bill’s key legislative events, notably those of March 15, 2012, when Senate consideration began and the Senate Majority Leader expressed strong support for the bill. We analyze market reactions for EGCs that conducted IPOs after the cutoff date, relative to a control group of otherwise similar firms that conducted IPOs in the months preceding the cutoff date. We find positive and statistically significant abnormal returns for EGCs around March 15, relative to the control firms. This suggests that the value to investors of the disclosure and compliance obligations relaxed under the JOBS Act is outweighed by the associated compliance costs. The baseline results imply a positive abnormal return of between 3% and 4%, and the implied increase in firm value is at least $20 million for an EGC with the median market value in our sample.
Vijay Singal and Jitendra Tayal have posted Does Unconstrained Short Selling Result in Unbiased Security Prices? Evidence from Futures Markets on SSRN with the following abstract:
We examine whether unconstrained short selling can result in unbiased security prices. Since constraints on short selling cannot be eliminated in equity markets, we use trades from futures markets where there is no distinction between short positions and long positions. We find that in those markets, even with unconstrained short selling, there is an upward bias in prices around weekends. The bias is stronger in periods of high volatility when short sellers are unwilling to accept higher levels of risk. On the other hand, riskiness of long positions does not seem to have a similar impact on prices. Thus, evidence in the paper shows that security prices may be biased upwards even without constraints on short selling, with greater overvaluation in the more volatile securities.
Paul Ali, Ian Ramsay, and Benjamin Saunders have posted Securities Lending, Empty Voting and Corporate Governance on SSRN with the following abstract:
This paper examines the corporate governance implications of securities loans, in particular the impact of securities loans on shareholders’ voting rights and the control of listed Australian companies. The paper considers whether the current regulatory framework for securities loans in Australia adequately addresses the concerns associated with securities loans and whether reform is required in order to protect the interests of shareholders in listed Australian companies and to ensure that the governance of these companies is not undermined by securities loans.
Adam J. Sulkowski and Sandra Waddock have posted Beyond Sustainability Reporting: Integrated Reporting is Practiced, Required & More Would Be Better on SSRN with the following abstract:
Ninety-five percent of the Global Fortune 250, along with thousands of other companies worldwide, voluntarily report on their environmental, societal, and economic impacts. The practice is variously known as sustainability reporting, corporate responsibility (CR) reporting, corporate social responsibility (CSR) reporting, citizenship reporting, environmental, societal, and governance (ESG) reporting, or triple bottom line (TBL) reporting. A growing number of countries now mandate or provide guidance related to this practice to some extent. For example, in the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act explicitly requires publicly traded companies to disclose data related to their supply chains of certain minerals.
Should greater disclosures be explicitly and specifically required? Should companies begin greater disclosures for their own benefit? Do the basic principles of existing laws already require a greater amount of disclosure in our current context? If so, what would be gained from greater and more explicit guidance from legislators or regulators such as the SEC? We seek to answer these questions.
This article summarizes the history, current state, and motivations and impacts of sustainability reporting and regulation-by-disclosure, along with data on the present needs of investors and recent market trends. It also reviews the definition of materiality under U.S. securities laws and regulations – the key to understanding what data a company must publicly disclose for the benefit of investors. Based on our review of recent history, the current needs of investors, and the definition of materiality, it is clear that existing laws and related rules already require greater disclosure of data on environmental and societal impacts than commonly understood. The article concludes with recommendations for managers, their attorneys, accountants, and policymakers, and provokes further questions for constructive scholarship in the fields of business and law.
Tuesday, July 15, 2014
Martin Hoesli, Anjeza Kadilli, and Reka Kustrim have posted Commonality in Liquidity and Real Estate Securities on SSRN with the following abstract:
We conduct an empirical investigation of the pricing and economic sources of commonality in liquidity in the U.S. REIT market. Taking advantage of the specific characteristics of REITs, we analyze three types of commonality in liquidity: within-asset commonality, cross-asset commonality (with the stock market), and commonality with the underlying property market. We find evidence that the three types of commonality in liquidity are priced in REIT returns but only during bad market conditions. We alsofind that using a linear approach, rather than a conditional, would have underestimated the role of commonality in liquidity risk. This explains (at least partly) the small impact of commonality on asset prices documented in the extant literature. Finally, our analysis of the determinants of commonality in liquidity favors a demand-side explanation.
Emilio Bisetti, Giacomo Nocera, Carlo A. Favero, and Claudio Tebaldi have posted A Multivariate Model of Strategic Asset Allocation with Longevity Risk on SSRN with the following abstract:
This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the strategic asset allocation model of Campbell and Viceira (2005) to include a longevity-linked investment in addition to equity and fixed income securities and describe the resulting term structure of risk-return trade-offs. The model highlights an unexpected predictability pattern of the survival probability estimates. The empirical valuation of the market price of longevity risk, based on prices for standardized annuities publicly offered by US insurance companies, confirms that longevity linked securities offer cheap funding opportunities to asset managers willing to leverage their investment portfolio.
Jordan M. Barry, John William Hatfield, and Scott Duke Kominers have posted Shareholder Decisionmaking in the Presence of Empty Voting and Hidden Ownership on SSRN with the following abstract:
We consider securities markets in which economic interests in firms and shareholder voting rights are traded independently; such markets allow for "empty voters" who hold voting rights in a firm that exceed their economic interests. We demonstrate that, in such settings, competitive equilibria generally do not exist and may be inefficient even when they do exist. As the competitive equilibrium solution concept does not provide useful predictions in the presence of empty voting, we focus on cooperative game-theoretic "core outcomes." We show that core outcomes always exist, are always efficient, and can be reached from any initial allocation through voluntary trading; moreover, at a core outcome, agents have efficient incentives with regards to information revelation.
John C. Coates, IV has posted Mergers, Acquisitions and Restructuring: Types, Regulation, and Patterns of Practice on SSRN with the following abstract:
An important component of corporate governance is the regulation of significant transactions – mergers, acquisitions, and restructuring. This paper (a chapter in Oxford Handbook on Corporate Law and Governance, forthcoming) reviews how M&A and restructuring are regulated by corporate and securities law, listing standards, antitrust and foreign investment law, and industry-specific regulation. Drawing on real-world examples from the world’s two largest M&A markets (the US and the UK) and a representative developing nation (India), major types of M&A transactions are reviewed, and six goals of M&A regulation are summarized – to (1) clarify authority, (2) reduce costs, (3) constrain conflicts of interest, (4) protect dispersed owners, (5) deter looting, asset-stripping and excessive leverage, and (6) cope with side effects. Modes of regulation either (a) facilitate M&A – collective action and call-right statutes – or (b) constrain M&A – disclosure laws, approval requirements, augmented duties, fairness requirements, regulation of terms, process and deal-related debt, and bans or structural limits. The paper synthesizes empirical research on types of transactions chosen, effects of law on M&A, and effects of M&A. Throughout, similarities and differences across transaction types and countries are noted. The paper concludes with observations about what these variations imply and how law affects economic activity.
Maya Steinitz has posted Incorporating Legal Claims on SSRN with the following abstract:
Recent years have seen an explosion of interest in commercial litigation funding which is regarded as a new phenomenon in the United States. Whereas the judicial, legislative and scholarly treatment of litigation finance has regarded litigation finance first and foremost as a form of champerty and sought to regulate it through rules of legal professional responsibility (hereinafter, the ‘legal ethics paradigm’) this Article suggests that the problems created by litigation finance are all facets of the classic problems created by ‘the separation of ownership and control’ that have been a focus of business law since the advent of the corporate form. Therefore, an ‘incorporation paradigm,’ offered here, is more appropriate. ‘Incorporating legal claims’ means conceiving of the claim as an asset with an existence wholly separate from the plaintiff. This can be done by issuing securities tied to litigation proceed rights. Such securities can be issued with or without the use of various business entities.
Indeed, in certain real life deals, previously overlooked by scholars, creative lawyers used securities tied to litigation proceed rights. The Article analyzes and then expands upon such instances of financial–legal innovation suggesting how various business entities can be used to deal with the core challenges presented by the separation of ownership of and control over legal claims. Specifically, the litigation funding problems being addressed by the incorporation of legal claims are (1) extreme agency problems; (2) extreme information asymmetries; (3) extreme uncertainty; and (4) commodification. In addition, the Article discusses how incorporation of legal claims can reduce various costs that litigation imposes in other transactions, such as mergers & acquisitions.
Karen K. Nelson and Adam C. Pritchard have posted Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors on SSRN with the following abstract:
This study investigates risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act and the SEC’s subsequent disclosure mandate. Firms subject to greater litigation risk disclose more risk factors, update the language more from year-to-year, and use more readable language than firms with lower litigation risk. These differences in the quality of disclosure are pronounced in the voluntary disclosure regime, but converge following the SEC mandate. Consistent with these findings, the risk factor disclosures of high litigation risk firms are significantly more informative about systematic and idiosyncratic firm risk when disclosure is voluntary but not when disclosure is mandated. Overall, the results suggest that for some firms voluntary disclosure of risk factors is not a substitute for a regulatory mandate.
Stephen J. Lubben has posted Nationalize the Clearinghouses! on SSRN with the following abstract:
Given the vital place of clearinghouses in Dodd-Frank, it is perhaps surprising that Dodd-Frank makes no provision for the failure of a clearinghouse. Indeed, it is arguable that the United States is not in compliance with its commitment to the G-20 on this point.
Clearinghouses are presently excluded from the new Orderly Liquidation Authority under title II, title II and titles VII and VIII do not work well together in any event, and the notion that a derivatives clearinghouse might file a regular bankruptcy petition is farcical, given that Congress previously decided to exclude derivatives, and most securities trades, from the most important parts of the Bankruptcy Code. A clearinghouse might file, but there would be little point.
And because clearinghouses are oddly defined as "commodities brokers" under the Bankruptcy Code, they are only permitted to file a chapter 7 liquidation cases.
In this paper I suggest two likely outcomes upon the onset of clearinghouse financial distress. First, Congress will be tempted to adopt an ad hoc statutory solution. The fate of Fannie Mae and Freddie Mac, the two mortgage companies who were placed in a conservatorship in September 2008, shortly after Congress had created that possibility under the Housing and Economic Recovery Act of 2008, looms large here. But ad hoc solutions simply exacerbate uncertainty in times of financial distress, and are subject to litigation risk too. And the sudden creation of a specialized resolution process is really not anything more than a bailout, since any solution will require massive capital injections to save the clearinghouses. Again consider the mortgage companies, and the U.S. Treasury’s large preferred share holdings therein.
So there will be a temptation to engage in direct bailout, despite Dodd-Frank’s claim to have ended bailouts. Bailouts of individual financial institutions may end, but bailouts of clearinghouses might become more common in a post-Dodd-Frank world. Given that most clearinghouses are themselves publicly traded companies, with strong connections to all the major banks, there are good reasons to wonder if we will not simply be bailing out a new type of financial institution in the future.
What to do? I suggest that the government should nationalize the clearinghouses upon failure, and the intention to exercise this option should be made clear ex ante. That is, the government should expressly state that clearinghouses designated under title VIII of Dodd-Frank that ultimately fail will be nationalized, with specific consequences to investors, and an expectation of member participation in the recapitalization of the clearinghouse, once that becomes systemically viable. This should provide stakeholders in the clearinghouses with strong incentives to oversee the clearinghouse’s management, and avoid such a fate.
Monday, July 14, 2014
On July 10, 2014 at a meeting of the Investor Advisory Committee in Washington, D.C., Commissioner Luis A. Aguilar delivered remarks on Combating the Financial Exploitation of Older Adults.
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending July 11, 2014).
The following law review articles relating to securities regulation are now available in paper format:
Oscar Bernal, Astrid Herinckx & Ariane Szafarz, Which Short-Selling Regulation Is the Least Damaging to Market Efficiency? Evidence from Europe, 37 Int'l Rev. L. & Econ. 244 (2014).
Latoya C. Brown, Rise of Intercontinental Exchange and Implications of its Merger with NYSE Euronext, 32 J.L. & Com. 109 (2013).
Jeffrey M. Colon, Oil and Water: Mixing Taxable and Tax-Exempt Shareholders in Mutual Funds, 45 Loy. U. Chi. L.J. 773 (2014).
David Hamid, Note, Substance vs. Form: Rethinking the Scope of Dodd-Frank's End-User Clearing Exception in Light of Systemic Risk, 12 Cardozo Pub. L. Pol'y & Ethics J. 183 (2013).
Debby Van Geyt, Philippe Van Cauwenberge & Heidi Vander Bauwhede, Does High-Quality Corporate Communication Reduce Insider Trading Profitability?, 37 Int'l Rev. L. & Econ. 1 (2014).
Thomas John Walker, et al., The Role of Aviation Laws and Legal Liability in Aviation Disasters: A financial Market Perspective, 37 Int'l Rev. L. & Econ. 57 (2014).
Third Annual Institute for Investor Protection Conference: Strategies for Investigating and Pleading Securities Fraud Claims. Introduction by Michael J. Kaufman; keynote address by Mark Whitacre; remarks by Wendy Gerwick Couture and Hon. Jed. S. Rakoff; essay by Geoffrey Christopher Rapp; articles by Gideon Mark, Marc I. Steinberg, Charles W. Murdock, Sharon Nelles, Hilary Huber, Steven A. Ramirez and John M. Wunderlich. 45 Loy. U. Chi. L.J. 525-772 (2014).
Tuesday, July 8, 2014
Basel Committee on Banking Supervision and IOSCO Task Force Conducts a Survey on Securitization Markets
The following law review articles relating to securities regulation are now available in paper format:
Neil Auerbach, The Future of Clean Energy Finance, 20 N.Y.U. Envtl. L.J. 363 (2014).
Chad Bonstead, Comment, Removing the FCPA Facilitation Payments Exception: Enforcement Tools for a Cleaner Business As Usual, 36 Hous. J. Int'l L. 503 (2014).
Alexandros Seretakis, Taming the Locusts? Embattled Hedge Funds in the E.U., 10 N.Y.U. J.L. & Bus. 115 (2013).
Tyce Walters, Comment, Regulatory Lies and Section 6 (c)(2): The Promise and Pitfalls of the CFTC's New False Statement Authority, 32 Yale L. & Pol'y Rev. 335 (2013).
Thursday, July 3, 2014
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending July 3, 2014).
Wednesday, July 2, 2014
Guangdong Xu, Tianshu Zhou, Zeng Bin, and Shi Jin have posted Directors’ Duties in China on SSRN with the following abstract:
This paper examines the development of the legal framework regarding fiduciary duties of directors in China. The concept of fiduciary duty was introduced by the 2005 revisions to China’s Corporate Law. The implementation of fiduciary duties in China has encountered considerable obstacles because of the inherent weakness of the legal system. The legal texts are simple, vague and rigid. In the enforcement process, formalized judgments have placed limitations on precedent creation, thus reducing the deterrent effect, and the judicial system has shown reluctance to intervene in matters related to directors’ duties in listed companies. There have been improvements, however. In a limited number of judicial decisions, courts have attempted to more clearly define the meaning of directors’ fiduciary duties. In the penalty decisions of the China Securities Regulatory Commission (CSRC), the duties of directors have been interpreted in a more sophisticated manner.