Posts Tagged 'Corproate Governance'

Corporate Fraud and Business Conditions: Evidence from IPOs

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, Febraury 18, 2010.

In our paper Corporate Fraud and Business Conditions: Evidence from IPOs, which is forthcoming in the Journal of Finance, we use a sample of firms that went public between 1995 and 2005 to test a set of theories modeling how a firm’s incentive to commit fraud when raising external capital varies with investor beliefs. Instead of a strictly increasing relationship between investor beliefs and fraud propensity as highlighted in Hertzberg (2005), we find evidence more consistent with the predictions of Povel, Singh, and Winton (2007): a firm is more likely to commit fraud when investors are more optimistic about the firm’s industry’s prospects, but in the presence of extreme investor optimism, the probability of fraud becomes lower as the firm is able to obtain funding without misrepresenting information to outside investors.

Further analysis suggests that both investor monitoring and executive pay structure play a role in the relationship between investor beliefs and fraud. Using venture capitalists as specialized investors with lower monitoring costs than other institutional investors, we find evidence supporting the prediction of Povel et al. Fraud is less likely for low investor beliefs but more likely for high investor beliefs for firms backed by venture capitalists than non-VC-backed firms, and for firms backed by venture capitalists of a higher level of industry expertise. Also, investor beliefs about business conditions have a positive impact on short-term compensation, which in turn has a positive impact on a firm’s fraud propensity, consistent with the predictions in Hertzberg. Nevertheless, the level of investor beliefs continues to have an independent, hump-shaped impact on the incidence of fraud even after controlling for executive compensation. This suggests that the mechanisms in both Hertzberg and Povel et al. are relevant for IPO fraud…(continue reading)


SA corporate governance still underdeveloped – Fitch

by Business Day, January 20, 2010.

Fitch Ratings said in a report published today that South African corporate governance practices were considered relatively mature in comparison to emerging market peers, however they remained underdeveloped by international market standards.

The ratings firm Fitch said that further improvements in South African corporate governance are required, “especially regarding transparency and disclosure of interim financial reporting, and related-party transactions and internal audit processes.”

“South African corporate governance practices have improved in recent years, but significant further improvement is still required to meet the King III corporate governance guidelines published on September 1, 2009.

However, this is expected to be a gradual process,” said Roelof  Steenekamp, director in Fitch’s South African corporate team…(continue reading)

Risks to Overbidders Under Delaware Law

by William Savitt, for The Harvard Law School Forum at Harvard Law School, January 18, 2010.

A recent Delaware Court of Chancery decision refusing to dismiss damages claims by NACCO Industries arising out of its failed attempt to acquire Applica Inc. provides important guidance for parties contemplating an overbid and highlights the risks that remain even after a topping deal is successfully closed. NACCO Indus., Inc. v. Applica Inc., C.A. No. 2541-VCL (Dec. 22, 2009).

The complaint alleged that while NACCO and Applica were negotiating a merger agreement in 2006, Applica insiders provided information to principals at the Harbinger hedge funds, which were then considering their own bid for Applica. During this period, Harbinger amassed a substantial stake in Applica (which ultimately reached 40 percent) but reported only an “investment” purpose on its Schedule 13D filings, disclaiming any intent to control the company. After NACCO signed up the merger, the complaint alleged, communications between Harbinger and Applica management about a topping bid continued. Eventually, Harbinger amended its Schedule 13D disclosures and made a topping bid for Applica, which then terminated the NACCO merger agreement. After a bidding contest with NACCO, Harbinger succeeded in acquiring the company…(continue reading)

Pros and Cons of Voluntarily Implementing Proxy Access

by Charles Nathan, for The Harvard Law School Forum at Harvard Law School, January 13, 2010.

Although many things about proxy access remain uncertain, it is clear the SEC remains committed to adopting a final rule in early 2010. The new rule will likely be effective for the 2011 proxy season.

In our previous Proxy Access Analysis No. 4 we observed that:

  • A critical question for companies and investors alike is whether the final rule will permit shareholders to adopt bylaws that impose greater limitations on proxy access than the SEC rule (for example, by raising the minimum number of shares that a nominating shareholder must own or increasing the holding period).
  • If the final rule does permit shareholders to adopt such a bylaw (commonly called an opt-out bylaw), it seems safe to assume many companies will propose opt-out bylaws to their shareholders in order to tailor proxy access better to the particular circumstances of each company.
  • It would make sense for companies to consider over the next several months whether they would prefer to propose an opt-out bylaw at their 2010 annual meetings, rather than waiting until their 2011 meetings or later…(continue reading)

Basel Committee Proposes Strengthening Bank Capital and Liquidity Regulation

by H. Rodgin Cohen,  for The Harvard Law School Forum at Harvard Law School, January 7, 2010.

On December 17, 2009, the Basel Committee issued two consultative documents proposing reforms to bank capital and liquidity regulation, which are intended to address lessons learned from the financial crisis that began in 2007. [1] The document titled Strengthening the Resilience of the Banking Sector proposes fundamental, although in many respects anticipated, changes to bank capital requirements. The document titled International Framework for Liquidity Risk Measurement, Standards and Monitoring proposes specific liquidity tests that, although similar in many respects to tests historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation.

The proposals in the first document, which we refer to as the “capital proposals”, would significantly revise – and, as described by the consultative document, simplify – the definitions of Tier 1 Capital and Tier 2 Capital, with the most significant changes being to Tier 1 Capital. Among other things, the proposals would disqualify innovative capital instruments – including U.S.-style trust preferred securities and other instruments that effectively pay cumulative distributions, and in many cases are debt for tax purposes – from Tier 1 Capital status. They would also re-emphasize that Common Equity is the “predominant” component of Tier 1 Capital by (i) adding a minimum Common Equity to risk-weighted assets ratio, with the ratio itself to be determined based on the outcome of an impact study that the Committee is conducting, and (ii) requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier 1 Capital instead be deducted from Common Equity as a component of Tier 1 Capital. This approach could have a significant impact on acquisitions in which goodwill arises…(continue reading)

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