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Program on Corporate Governance
The Program on Corporate Governance is pleased to announce the following papers:
Learning and the Disappearing Association Between Governance and Returns
Corporate Political Speech: Who Decides?
Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge
Below are abstracts of these papers as well as links to them:
Learning and the Disappearing Association Between Governance and Returns
In an influential study, Gompers, Ishii, and Metrick (2003) show that a trading strategy based on an index of 24 governance provisions (G-Index) would have earned abnormal returns during the 1991-1999 period, and this intriguing finding has attracted much attention ever since it was reported. We show that the identified correlation between the G-Index and returns (as well as between the E-Index based on the provisions that matter the most) did not exist during the subsequent period 2000-2008, and we investigate what could explain both the existence of such correlation during the 1990s and its subsequent disappearance. We provide evidence consistent with the hypothesis that the correlation and its subsequent disappearance were due to market participants? gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices. Consistent with the learning hypothesis, we find that:
Abstract:
Under existing corporate-law rules, corporate political speech decisions are subject to the same rules as ordinary business decisions. Consequently, political speech decisions can be made without input from shareholders, a role for independent directors, or detailed disclosure - the safeguards that corporate law rules establish for special corporate decisions. We argue that the interests of directors and executives may significantly diverge from those of shareholders with respect to political speech decisions, and that these decisions may carry special expressive significance from shareholders. Accordingly, we suggest, political speech decisions are fundamentally different from, and should not be subject to the same rules as, ordinary business decisions.
We assess how lawmakers could design special rules that would align corporate political speech decisions with shareholder interests. In particular, we propose the adoption of rules that (i) provide shareholders a role in determining the amount and targets of corporate political spending; (ii) require that political speech decisions be overseen by independent directors; (iii) allow shareholders to opt out of - that is, either tighten or relax - either of these rules; and (iv) mandate disclosure to shareholders of the amounts and beneficiaries of any political spending by the company, either directly or indirectly through intermediaries. We explain how such rules can benefit shareholders. We also explain why such rules are best viewed not as limitations on corporations? speech rights but rather as a method for determining whether a corporation should be regarded as wishing to engage in political speech. The proposed rules would thus protect, rather than abridge, corporations? First Amendment rights.
We also discuss an additional objective that decisional rules concerning corporations? political speech decisions may seek to serve: protecting minority shareholders from forced association with political speech that is supported by the majority of shareholders. We discuss the economic and First Amendment interests of minority shareholders that lawmakers may seek to protect. We suggest that decisional rules addressing political spending opposed by a sufficiently large minority of shareholders are likely to be constitutionally permissible, and we discuss how such rules could be designed by lawmakers.
Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge
We measure the value of shareholder proxy access by using a recent development in the ability of shareholders to nominate candidates for board seats. We use the SEC?s October 4, 2010 announcement that it would significantly delay implementation of its August 2010 proxy access rule as a natural experiment. Because firms with substantial institutional ownership would have been most affected by the SEC?s now-delayed changes, we use the share and composition of institutional investors to sort firms into those more and less affected by the October 4 news. Firms that would have been most affected by proxy access, as measured by institutional ownership, lost value on that day. The value drop was 55 basis points for a 10 percentage point change in activist institution ownership. These results suggest that financial markets placed a positive value on shareholder access, as implemented in the SEC?s August 2010 Rule.
New on the HLS Forum on Corporate Governance and Financial Regulation:
Posts placed during the past ten days include:
Corporate Law and Political Spending
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