Who Cares? Corporate Governance in Today’s Equity Markets

Mats Isaksson and Serdar Çelik, 19th April 2013, OECD Corporate Governance Working Papers

There are two main sources of confusion in the public corporate governance debate. One is the confusion about the role of public policy intervention. The other is a lack of empirical knowledge about the corporate landscape where rules are supposed to be implemented and the functioning of today’s equity markets, where voting rights and cash flow rights are traded. To mitigate some of this confusion, this paper provides both an analytical framework for the role of public policy and a description of the empirical context that influences the conditions for that policy. It underlines the importance of focusing on the overall economic outcome and, in particular, how rules and regulations impact the conditions for companies to grow and create value by accessing public equity markets. In terms of the empirical context, we point to fundamental changes in the functioning of equity markets that may call for a fresh look at the economic effectiveness of corporate governance regulations.

Among other things, we document a dramatic shift in listings from developed to emerging markets over the last decade, which means that concentrated ownership at company level has become the dominant form of ownership in listed companies worldwide. We also discuss whether the lack of new listings of smaller companies in developed markets is related to excessive regulatory burdens and unintended consequences of a decade of profound stock market deregulation. The discussion about listings illustrates that corporate governance rules and regulations do not only affect companies that are already listed. From a policy perspective, it is equally important to assess the implications for unlisted companies that may, in the future, require access to public equity markets for growth and job creation. We also document how the lengthened and ever more complex chain of intermediaries between savers and companies may influence the efficiency of capital allocation and the willingness of investors to take an active long-term interest in the companies that they own. It is shown that institutional investors are a highly heterogeneous group and that their willingness and ability to engage in corporate governance primarily depend on the economic incentives that follow from their different business models, investment strategies and trading practices. We provide examples of how regulatory initiatives to increase shareholder engagement may have unintended consequences, and note that the diversity and complexity of the investment chain can render general policies or regulation ineffective. Continue reading…

Why Do Foreign Firms Leave U.S. Equity Markets?

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, Febraury 17, 2010.

In our paper, Why Do Firms Leave U.S. Equity Markets?, which is forthcoming in the Journal of Finance, we analyze a sample of firms that voluntarily deregister from the SEC and leave the U.S. equity markets over the period from 2002 through 2008. Because it was extremely difficult to deregister before March 21, 2007 when the SEC adopted its new Exchange Act Rule 12h-6, foreign firms that wished to deregister most likely did not do so because they were unable to meet the necessary requirements. When Rule 12h-6 came into effect, deregistration became substantially easier and the change in the rules was followed by a large spike in the number of deregistrations. We investigate why foreign firms deregister, how the Rule change affected firms’ deregistration decisions, and what the economic consequences are of the decisions to deregister.

Two theories offer predictions on which firms are likely to deregister and on the consequences of deregistration for minority shareholders. The first theory follows directly from the bonding theory of cross-listing that predicts corporate insiders value a listing when their firm has valuable growth opportunities that they can finance on better terms by committing to the laws and rules that govern U.S. markets. The listing comes at a cost to insiders since it limits their ability to extract private benefits from their controlling position. If a firm is no longer expected to require outside financing because its growth opportunities have been taken advantage of, or because they have disappeared, a listing is no longer valuable for insiders; the costs of a U.S. listing outweigh the benefits. Consequently, firms that deregister should be those with poor growth opportunities, with little need for external capital, and those which perform poorly. We find support for these predictions…(continue reading)