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Law - International Last Updated: Jun 26th, 2005 - 08:48:30


Law - International : North America
Asymmetric Information and the Choice of Corporate Governance Arrangements

This article courtesy of  http://www.ssrn.com/update/lsn/index.html  SSRN - Legal Scholarship Network and authored by Professor Lucian Bebchuk.

Abstract:     
This paper analyzes how asymmetric information affects which corporate governance arrangements firms choose when they go public. It is shown that such asymmetry might lead firms to adopting through the design of securities and corporate charters - corporate governance arrangements that are known to be inefficient both by public investors and by those taking firms public. When assets with higher value produce opportunities for higher private benefits of control, asymmetric information about the asset value of firms going public will lead some or all such firms to offer a sub-optimal level of investor protection. The results can help explain why charter provisions cannot be relied on to provide optimal investor protection in countries with poor investor protection, why companies going public in the US commonly include substantial antitakeover provisions in their charters, and why companies rarely restrict self-dealing or the taking of corporate opportunities more than is done by the corporate laws of their country. The analysis also identifies a potentially beneficial role that mandatory legal rules might play in the corporate area.

Keywords: adverse selection, asymmetric information, corporate governance, investor protection, security design, private benefits of control, agency costs, expropriation, minority shareholders, IPO, going public, corporate charter, contractual freedom, private ordering, takeovers, antitakeover provisions, self-dealing


May 6, 2005, 13:28

Law - International : North America
Managerial Power and Rent Extraction in the Design of Executive Compensation

This article courtesy of  http://www.ssrn.com/update/lsn/index.html  SSRN - Legal Scholarship Network and authored by Professors Lucian Bebchuk, Jesse Fried and David Walker.

Abstract:     
This paper develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm's length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes that produce compensation arrangements, and the various market forces and constraints that act on these processes, leave managers with considerable power to shape their own pay arrangements. Examining the large body of empirical work on executive compensation, the authors show that managerial power and the desire to camouflage rents can explain significant features of the executive compensation landscape, including ones that have long been viewed as puzzling or problematic from the optimal contracting perspective. The authors conclude that the role managerial power plays in the design of executive compensation is significant and should be taken into account in any examination of executive pay arrangements or of corporate governance generally.

Keywords: corporate governance, managers, shareholders, directors, boards, executive compensation, stock options, private benefits of control, principal-agent problem, agency costs, rent extraction, golden parachutes, accounting, FASB rules, disclosure, camouflage, insider trading, indexed options, vesting, "at-the-money options", reload options


May 6, 2005, 13:22

Law - International : North America
Executive Compensation as an Agency Problem

This article courtesy of  http://www.ssrn.com/update/lsn/index.html  SSRN - Legal Scholarship Network and authored by Professors Lucian Bebchuk and Jesse Fried.

Abstract:     
This paper provides an overview of the main theoretical elements and empirical underpinnings of a managerial power approach to executive compensation. Under this approach, the design of executive compensation is viewed not only as an instrument for addressing the agency problem between managers and shareholders but also as part of the agency problem itself. Boards of publicly traded companies with dispersed ownership, we argue, cannot be expected to bargain at arm's length with managers. As a result, managers wield substantial influence over their own pay arrangements, and they have an interest in reducing the saliency of the amount of their pay and the extent to which that pay is de-coupled from managers' performance. We show that the managerial power approach can explain many features of the executive compensation landscape, including ones that many researchers have long viewed as puzzling. Among other things, we discuss option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, the use of compensation consultants, and the observed relationship between CEO power and pay. We also explain how managerial influence might lead to substantially inefficient arrangements that produce weak or even perverse incentives.


May 6, 2005, 13:16

Law - International : North America
What Matters in Corporate Governance?

This article courtesy of  http://www.ssrn.com/update/lsn/index.html  SSRN - Legal Scholarship Network and authored by Professors Lucian Bebchuk, Alma Cohen and Allen Ferrell.

Abstract:     
We investigate which provisions, among a set of twenty-four governance provisions followed by the Investor Responsibility Research Center (IRRC), are correlated with firm value and stockholder returns. Based on this analysis, we put forward an entrenchment index based on six provisions - four "constitutional" provisions that prevent a majority of shareholders from having their way (staggered boards, limits to shareholder bylaw amendments, supermajority requirements for mergers, and supermajority requirements for charter amendments), and two "takeover readiness" provisions that boards put in place to be ready for a hostile takeover (poison pills and golden parachutes). We find that increases in the level of this index are monotonically associated with economically significant reductions in firm valuation, as measured by Tobin's Q. We present suggestive evidence that the entrenching provisions cause lower firm valuation. We also find that firms with higher levels of the entrenchment index were associated with large negative abnormal returns during the 1990-2003 period. Moreover, examining all sub-periods of two or more years within this period, we find that a strategy of buying low entrenchment firms and selling short high entrenchment firms out-performs the market in most such periods and does not under-perform the market even in a single sub-period. Finally, we find that the provisions in our entrenchment index fully drive the correlation, identified by prior work, that the IRRC provisions in the aggregate have with reduced firm value and lower stock returns during the 1990s; we do not find any evidence that the other eighteen IRRC provisions are negatively correlated with either firm value or stock returns during the 1990-2003 period.


May 6, 2005, 13:02

Law - International : North America
Organization Theory and Methodology

This article courtesy of SSRN - Legal Scholarship Network and authored by  Professor Michael Jensen.

Abstract:     
The foundations are being put in place for a revolution in the science of organizations. Some major analytical building blocks for the development of a theory of organizations are outlined and discussed in this paper. This development of organization theory will be hastened by increased understanding of the importance of the choice of definitions, tautologies, analytical techniques, and types of evidence. The two literatures of agency theory are briefly discussed in light of these issues. Because accounting is an integral part of the structure of every organization, the development of a theory of organizations will be closely associated with the development of a theory of accounting. This theory will explain why organizations take the form they do, why they behave as they do, and why accounting practices take the form they do. Because such positive theories as these are required for purposeful decision making, their development will provide a better scientific basis for the decisions of managers, standard-setting boards, and government regulatory bodies.


May 5, 2005, 15:14


 

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