Archive for January, 2010

A Gap-filling Theory of Corporate Debt Maturity Choice

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, January 29, 2010.

In our paper A Gap-filling Theory of Corporate Debt Maturity Choice, which was recently accepted for publication in the Journal of Finance, we develop a new theory to explain time-variation in corporate maturity choice. As in BGW (2003), our theory allows for predictability in bond market returns and has the feature that corporate issuers tend to benefit from this predictability – i.e., they use short-term debt more heavily when its expected returns are lower than the expected returns on long-term debt. Crucially, however, we do not assume any forecasting advantage for corporate issuers: they have no special ability to predict future returns, or to recognize sentiment shocks. Instead, the key comparative advantage that corporate issuers have relative to other players in our model is an advantage in macro liquidity provision.

More specifically, our theory has the following ingredients. First, the bond market is partially segmented, in that there are some important classes of investors who have a preference for investing at given maturities. These investors might include, for instance, pension funds, which, based on the structure of their liabilities, have a natural demand for long-term assets. Second, there are shocks to the supply of long- and short-term bonds that are large relative to the stock of available arbitrage capital. In our empirical work, we associate these supply shocks with changes in the maturity structure of U.S. government debt. And third, there are arbitrageurs (e.g., broker-dealers and, more recently, hedge funds) who attempt to enforce the expectations hypothesis, but  – given limited capital and the undiversifiable nature of the required trade  – do so incompletely, leaving behind some residual predictability in bond returns…(continue reading)


CSR & Corporate Governance – Part 1

by Wine Visser, January 29, 2010.

There is no explicit CSR-related role for NEDs in the corporate governance codes – only an emphasis on their role in questioning the strategy, performance and controls for risk management. So once again, CSR would have to be inferred. There are a few hooks, however:

Last week, I spoke on the links between CSR, corporate governance and competitiveness at the 3rd International Conference on Corporate Governance in Istanbul. It is a topic close to my heart, as I have for a long time believed that corporate governance may be the best route to mainstreaming CSR.

When I was Director of KPMG’s Sustainability Services in South Africa, we were fortunate that Judge Mervyn King – under the auspices of the Institute of Directors and through the Code that bears his name – took a global lead on integrating CSR ideas into corporate governance.

The King Report, issued in 1994, was the first corporate governance code in the world to include explicit reference to stakeholders and the 2002 revised code (King II) included major sections on business ethics and integrated sustainability reporting.

King III, launched in 2009, goes even further. According to Mervyn King – who chaired also the conference panel I spoke on in Istanbul and who I interviewed while I was there – says that “the philosophy of King III revolves around leadership, sustainability and corporate citizenship.”…(continue reading)

Morning business news

by RTÉ Business, January 29, 2010.

ANGLO: ISE HAD ‘LIMITED’ ROLE – The Irish Stock Exchange is hosting a conference on corporate governance in Dublin today.

Asked about Anglo Irish Bank, ISE chief executive Deirdre Somers said that while corporate governance had a role in that case, regulation and market circumstances were also key issues.

She said the fundamental corporate governance issue at Anglo was the separation of the roles of chairman and chief executive, and whether or not it was appropriate to have a chairman who was a former chief executive.

Ms Somers told RTE radio this was the main corporate governance issue at Anglo Irish Bank. But, asked if the ISE could have done anything better in regard to Anglo, Ms Somers said that, because of its limited regulatory role, she would have to say ‘no’…(continue reading)

Hawkamah and CISI Hold Joint Seminar on New UAE Corporate Governance Code

by Eye of Dubai, January 29, 2010.

The Hawkamah Institute for Corporate Governance and the Chartered Institute for Securities & Investment (CISI), the professional body for practitioners in the securities and investment industry, today held a joint seminar in Abu Dhabi to discuss the new UAE Corporate Governance Code.

The simenar provided a platform to discuss the new corporate governance law for UAE publicly listed companies, which will come into force in April 2010. The Code will apply to public joint stock companies established in the UAE and companies listed on the Abu Dhabi Securities Market (ADX) and Dubai Finance Market (DFM) and to their Board of Directors.

Key speakers at the event included Maryam Al-Suwaidi, Deputy CEO for Legal Affairs, Securities & Commodities Authority; Peter King, Partner, Weil, Gotshal & Mangees LLP; and Nick Nadal, Director, Hawkamah Institute for Corporate Governance…(continue reading)

FDIC and Private Capital: Moving the Goal Lines

by Margaret E. Tahyar, for The Harvard Law School Forum at Harvard Law School, January 28, 2010.

For the second time since adopting its Final Statement of Policy for Failed Bank Acquisitions (the “Policy Statement”), the FDIC has issued “Questions and Answers” (the“Revised Q&As”) about the Policy Statement that appear to make it more difficult for private investors to avoid the onerous standards and requirements of the Policy Statement. [1] The FDIC will now presume that, if more than two-thirds of the total voting stock of an insured depository institution or its holding company that acquires a failed bank or thrift is held by private investors that each own 5% or less of the voting stock, the private investors are acting in concert as a single investor group. The private investors will be subject to the requirements of the Policy Statement unless they can satisfy the FDIC that the presumption has been rebutted. This position seems to confirm the FDIC’s preference for transactions in which an existing bank holding company owns at least two-thirds of the voting stock of the acquiring depository institution or its holding company or is itself the acquirer (with new private investors limited to no more than one-third of the existing bank holding company’s total equity)…(continue reading)

Daily Mail & General Trust attacked over share structure and editor’s pay

by Chris Tryhorn, for The Guardian, January 28, 2010.

Daily Mail & General Trust has been criticised by corporate governance watchdogs over bonuses, Daily Mail editor Paul Dacre‘s pay deal and its shareholder structure.

The shareholder consultants Pirc and Manifest have both flagged up what they regard as a number of problems with the company’s annual report ahead of its annual general meeting on 10 February.

Pirc is recommending that shareholders vote against the company’s remuneration report because of concerns about bonuses and other rewards.

It is also urging them to oppose the report and accounts as a protest against DMGT’s dual share structure, which allows the chairman, Lord Rothermere, to control the company.

Pirc drew attention to the £3.23m bonus paid to Padraic Fallon, the chairman of Euromoney Institutional Investor, which was the equivalent of 15.44 times his £209,000 salary as he benefited from a profit-sharing scheme. “Combined remuneration is considered to be potentially excessive,” it said…(continue reading)

Why Investment Bankers Should Have (Some) Personal Liability

by Scott Hirst, for The Harvard Law School Forum at Harvard Law School, January 28, 2010.

Commentators on this blog and elsewhere have discussed solutions to problems that caused the most recent financial crisis. A pervasive theme has been the excessive appetite for risk in the banking industry and the impact of compensation on attitudes toward risk.

Some commentators have proposed making stock-based compensation more “long term” by requiring bankers to retain stock holdings in their employers. Others such as Lucian Bebchuk and Holger Spamann have recommended that bankers’ compensation be tied to the fortunes of creditors, not just shareholders. (Learn more about their views here.) Many of these proposals would be an improvement upon the status quo.

We are concerned, however, that these proposals – and others currently being considered in Congress – do not go far enough in linking the financial interest of bankers with the financial health of their banks. Bankers may lose upside profits if their banks do not do well, but they do not share the downside impact that their own risk taking has on broad segments of society – creditors, customers, employees and ultimately, taxpayers…(continue reading)

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