Approval of shareholder-sponsored proposals: Evidence from Canada

Little is known about shareholder voting at firms incorporated outside of the United States. Proposals sponsored at such firms and the voting patterns and factors associated with these proposals should conceivably be similar to those in the U.S. if the legal and governance structures of the countries are similar. We examine 264 shareholder proposals sponsored at Canadian firms between 2001 and 2005 in order to determine if differences created by the Canadian governance system, being more voluntary than that of the U.S. system, lead to differences in shareholder voting. We find many similarities between voting at the Canadian firms and those found in the literature for their U.S. counterparts, including some types of frequently submitted proposals and factors impacting the level of shareholder approval. However, unlike the concurrent literature on U.S. firms, we find very few majority approved proposals and a much lower overall level of affirmative voting returns.     

Accounting conservatism of cross-listing firms in the pre- and post-Sarbanes Oxley periods

This study investigates the level of accounting conservatism of a sample of cross-listed firms, American Depository Receipts (ADRs), during the pre- and post-Sarbanes Oxley (SOX) periods. After examining two proxies for accounting conservatism, Basu's [Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics 24(1), 3-37.] conservatism measure and abnormal accruals, we find that the SOX-exposed Levels II and III ADRs become more conservative during the post-SOX period while the SOX-unexposed Level I ADRs have no increase in the level of accounting conservatism. Further, we investigate whether such an increase in accounting conservatism is associated with different levels of shareholder protection in ADRs' home countries, and find that only Levels II and III ADRs from code law (weak shareholder protection) countries become more conservative and Levels II and III ADRs from common law (strong shareholder protection) countries have no change in accounting conservatism. These results suggest that SOX-exposed cross-listing firms from weak shareholder protection countries are most greatly influenced by the stringent requirements in SOX, and hence respond by increasing conservatism in their financial reporting.     

Legal shareholder protection and corporate R&D investment

This paper investigates the effects of shareholder protection law on corporate R&D investment. I find that the institutional protection of shareholder benefits reduces both underinvestment and overinvestment in R&D projects. Legal shareholder rights significantly increase R&D investment for firms that may underinvest, but reduce R&D for firms that may overinvest. Shareholder protection further enhances the growth of firms in R&D intensive industries, and promotes the economic growth of innovative countries. The results consistently show that enforcing stronger legal shareholder protection can help firms achieve an overall more efficient capital allocation to productive R&D investment.     

When do peers matter?: A cross-country perspective

We assess the importance of industry peers for a firm's own decision making strategy, using a rich sample of data covering 47 countries and 87 different industries between 1990 and 2011. Following the instrumental variable approach suggested by Leary and Roberts (2014), we find that, similar to U.S. firms, foreign firms do follow their peers when they make financial policy decisions. A standard deviation increase in peer firms' average leverage leads to about 5 percentage point increase in a firm's own leverage. We also find evidence that firms are more likely to follow their peers when investor protection laws including information disclosure and minority shareholder protection are weak, when creditor rights laws are strong, and when equity markets are more developed, suggesting that peers matter the most when firms have the greatest need to learn and to demonstrate their quality. These results hold even when we perform the analysis on a matched sample of firms.     

Weakened outside shareholder rights in dual-class firms and timely loss reporting

In this paper, we examine timely loss reporting for U.S. firms with a dual-class share structure, i.e., firms characterized by a divergence (wedge) between insiders’ voting rights and cash flow rights. In our primary analysis, we find compelling evidence that the wedge (quantified by excess voting rights) is associated with less timely loss reporting for these firms. In our secondary analysis, in which we match our sample of dual-class share observations with a sample of single-class share observations, we find similar results. Our paper informs public policy by showing that weakened outside shareholder rights matter, even in the U.S., where, despite a strong investor protection environment, dual-class firms are less timely in recognizing bad news in reported earnings.     

Underwriting Fees and Shareholder Rights

Do firms’ governance provisions affect their terms of obtaining external financing? We hypothesize that it is more difficult for firms with more restrictions on shareholder rights to raise external equity, and that since analyst coverage is an important part of underwriting services, underwriters would use analyst recommendations to promote issuing firms with weaker shareholder rights more strongly and charge them higher underwriting fees. Consistent with our hypothesis, we find that analyst recommendations on issuing firms with weak shareholder rights increase more than those with strong shareholder rights prior to SEOs, and that underwriting spreads are positively related to issuing firms’ shareholder rights as proxied by the G‐index. Furthermore, the effect of shareholder rights on underwriting fees is largely contained in the six provisions in the E‐index.     

An analysis of the liquidity benefits provided by secondary markets

Listing shares in liquid secondary markets either to facilitate acquisitions or to diversify owner’s personal wealth are among the most important reasons for firms to go public [Brau, J.C., Fawcett, S.E., 2006. Initial public offerings: An analysis of theory and practice. Journal of Finance 61, 399–436]. We contend that the expected benefits derived from the liquidity provided by secondary markets are relevant for understanding important decisions made in preparation for an IPO. We hypothesize that the potential losses caused by an IPO failure induce firms that benefit more from going public to hire more reputable underwriters and to adopt more conservative pricing policies. We use several proxies for the benefits firms derive from post-IPO liquidity. The results indicate that firms that benefited more from liquidity were taken public by more prestigious underwriters and exhibited substantially larger levels of price revisions and underpricing. Post-IPO liquidity is also important for understanding the decision to retain the lead underwriter in subsequent SEOs.     

The Impact of the Corporate Control Market on IPO Decisions

Entrepreneurs who take their firm public during an active corporate control market face an increased risk of losing control through a takeover. I examine the extent to which the threat of takeover impacts IPO firms’ decisions and find that an active takeover market in an IPO firm's industry increases the probability that the firm incorporates in a state with state‐level antitakeover provisions. IPO firms backed by venture capital investors and reputable underwriters are less likely to incorporate in a state offering antitakeover provisions. A closer examination of equity carve‐outs suggests that control is not a first‐order consideration for some IPO firms.     

Has European corporatism delivered? A survey with preliminary evidence

I ask whether European firms' investments in stakeholder welfare come at the cost of lower shareholder value. Focusing on the largest 50 public firms in four European countries, I find a valuation discount in the Tobin's Q of continental European firms relative to matched US firms. The valuation discount is correlated with presence of large block holders in European firms but not with the poorer disclosure record of US firms on the environmental (E) and social (S) dimensions. In sum, poorer governance (G) in continental Europe appears to destroy more shareholder value than better E and S disclosure can add.     

The effect of securities class action lawsuits on mergers and acquisitions

This paper investigates whether shareholder class action litigation affects the takeover candidacy, premium, and completion rate of mergers and acquisitions involving defendant target firms. We use a comprehensive dataset of publicly traded U.S. firms that became the targets of takeover bids between 1998 and 2016 and find that firms subject to shareholder class action lawsuits within the previous two years are more likely to be targeted for acquisition while commanding a significantly higher premium. Firms that face such litigation after a takeover announcement experience a significant decrease in takeover completion.     

Financial crisis,shareholder protection and cash holdings

In this paper, I investigate the relationship between shareholder protection and corporate cash holdings under the impact of the global financial crisis. With a sample of 192,807 observations across 40 countries during the period 2002–2015, I find that the global financial crisis mitigates the controlling effect of shareholder protection on corporate cash holdings. In addition, this mitigating role is stronger in financially constrained firms. Overall, the results suggest that managers are more likely to expropriate shareholders through corporate liquidity policy during a financial crisis.     

Corporate Governance and Its Impact on R&D Investment in Emerging Markets

Corporate R&D activities are inherently risky but also difficult to monitor. Against this background, we examine the impact of ownership concentration and legal shareholder rights protection on corporate R&D investments in emerging markets. Based on a comprehensive sample of publicly listed firms from 24 countries, we find that R&D intensity is lower in firms with (strategic) block ownership, and this effect is more pronounced in countries with stronger shareholder rights protection. This suggests that, similar to the situation in developed economies, dispersed ownership, which allows shareholders to diversify their investment risks, is beneficial for corporate R&D and that this effect is intensified by more developed institutions.     

How crosslisting affects merger and acquisition activity

Consistent with crosslisting decreasing the cost of capital, we find that firms which issue American Depositary Receipts (ADRs) are much more likely to undertake an acquisition than non-crosslisted firms. The results do not appear to be driven by self-selection, as the increase in acquisitions is robust to a Heckman correction as well as to a fixed-effect analysis. Adding the home country’s shareholder rights to the analysis, we find that crosslisted firms increase their takeover activity primarily if they are from weak shareholder rights countries. This evidence is consistent with crosslisting reducing the cost of capital of firms from weak governance countries significantly, and this reduction in cost of capital allows these firms to pursue more domestic and international takeovers.     

Why Are U.S. Stocks More Volatile?

U.S. stocks are more volatile than stocks of similar foreign firms. A firm's stock return volatility can be higher for reasons that contribute positively (good volatility) or negatively (bad volatility) to shareholder wealth and economic growth. We find that the volatility of U.S. firms is higher mostly because of good volatility. Specifically, stock volatility is higher in the United States because it increases with investor protection, stock market development, new patents, and firm‐level investment in R&D. Each of these factors is related to better growth opportunities for firms and better ability to take advantage of these opportunities.     

International Cross‐Listings and Subsequent Security‐Market Choices: Evidence from ADRs

We study the link between the attributes of American depositary receipt (ADR)‐listed firms and their post‐listing security‐market choices. We find that developed market firms are more likely to issue equity and debt than their emerging market counterparts. Furthermore, we find that large firms are more likely to issue debt and less likely to issue equity. When we examine locations where ADR firms raise their capital, we find that firms originating from countries where the protection of minority shareholders is weak are more likely to issue debt on their home markets and less likely to issue debt on international markets (excluding U.S. markets). Furthermore, ADR firms originating from developed (emerging market) countries are more (less) likely to issue their equity on their domestic markets and less (more) likely to issue equity on international markets (excluding U.S. markets).     

Two‐Sided Matching: How Corporate Issuers and Their Underwriters Choose Each Other

In this article, the authors update and confirm the findings of a 2005 article that was the first to view corporate underwriter choices as the outcome of a two‐sided matching process in which issuers look to the abilities of the underwriters offering their services and underwriters focus on the quality of the issuers that wish to use their services. This view offers a contrast with both the conventional representation of issuer‐underwriter associations as one‐sided decisions (by either issuers or underwriters) and the classical economist's representation of a competitive market in which prices serve as the primary market‐clearing mechanism. In their examination of both initial public offerings (IPOs) and seasoned equity offerings (SEOs) during the period 1980–2010, the authors continue to find strong evidence that higher‐quality issuers associate with more reputable underwriters and lower‐quality issuers match with lower reputation underwriters. Moreover, when examining cases of underwriter switching between an IPO and SEOs by the same issuer, they find that cases involving the largest divergence in the relative rankings of issuer and underwriter were the most likely to produce a change of underwriter—and that issuers that experienced larger post‐ IPO increases in quality were more likely to find more reputable underwriters for their SEOs (than for their IPOs). The authors also find that the larger the number of offerings brought to market in a given year, the smaller the market share of the top‐tier underwriters, likely reflecting the willingness of the most reputable underwriters to turn down business to maintain quality and reputation. Finally, the most reputable underwriters appear to benefit from the fact that the issuers whose IPOs they underwrite end up raising larger amounts of capital, both at the time of the IPO and in the larger and more frequent seasoned offerings by such issuers that come after the IPO. This evidence in support of two‐sided matching suggests that, especially for high‐quality issuers, the reputation of the underwriters they contract with for security offerings is likely to be more important than the underwriting fees they incur. What's more, the authors' finding that the most reputable underwriters are less likely to lose high‐quality clients and have more stable market share—and that the higher‐quality issuers they attract end up raising larger amounts of capital over their lives as public companies—suggests that underwriters' investments in building and preserving their reputations have a large expected payoff.     

Underwriter learning about unfamiliar firms: Evidence from the history of biotech IPOS

This study examines the ability of underwriters to properly value unfamiliar firms prior to issuance. I use a sample of IPOs in biotechnology, a relatively new but thriving industry. The first American biotech IPO was in 1980. Through the end of 2004, almost 500 biotech IPOs have appeared in the public market. I find that biotechnology differs from other industries in the attributes of individual firms valued by the market. In particular, R&D and the quality of human capital (e.g., star scientists on the staff) are much more important for biotech valuations. I find also that underwriters appeared not to appreciate this distinction for early biotech IPOs; in those cases, first-day market returns were predictable by firm attributes not used by underwriters to establish IPO issue prices. I also find that underwriters have learned over time, albeit slowly. Over the 20+ years of biotech history, IPO issue prices have become more dependent on firm attributes unique to biotechs while first-day market returns have become less predictable.     

Large shareholders, board independence, and minority shareholder rights: Evidence from Europe

We examine the relation between minority shareholder protection laws, ownership concentration, and board independence. Minority shareholder rights is a country-level governance variable. Ownership structure and board composition represent firm-level governance variables. Prior research hypothesizes and documents a negative relation between countries' minority shareholder rights quality and firms' ownership concentration. We introduce the hypothesis that shareholder protection rights and firms' board independence are positively related. When a country's minority shareholder rights are strong, then minority shareholders should have the legal power to affect board composition. Using a sample of large firms from 14 European countries, we test both hypotheses and find that countries with stronger shareholder protection rights have firms with lower ownership concentrations and with more independent directors, consistent with both hypotheses. We also find evidence that ownership concentration and board independence are negatively related.     

Underwriter reputation and the quality of certification: Evidence from high-yield bonds

This paper provides primary evidence of whether certification via reputable underwriters is beneficial to investors in the corporate bond market. We focus on the high-yield bond market in which certification of issuer quality is most valuable to investors owing to low liquidity and issuing firms’ high opacity and default risk. We find bonds underwritten by the most reputable underwriters to be associated with significantly higher downgrade and default risk. Investors seem to be aware of this relation, as we further find the private information conveyed via the issuer-reputable underwriter match to have a significantly positive effect on at-issue yield spreads. Our results are consistent with the market-power hypothesis, and contradict the traditional certification hypothesis and underlying reputation mechanism.     

How the Legal System Affects the Equity Mix in Executive Compensation

We examine variation in relative use of equity-based compensation (equity mix) across firms from different legal environments by studying 381 non-US firms from 43 countries during the 1996-2000 period. These firms are from countries that provide varying degrees of legal protection for shareholders. The data indicate association between equity mix and the degree of legal protection of shareholder rights. Specifically, firms use relatively more equity-based compensation if in a legal environment where shareholder rights are more strongly protected and where laws are more effectively enforced. These findings add to the literature demonstrating a relationship between institutional factors and financial decisions.