Archive for the ‘Research’ Category

Linguistic Diversity and Stock Trading Volume (SSRN)

Authors:  Yen-Cheng Chang,  Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR);  Harrison G. Hong, Princeton University – Department of Economics; National Bureau of Economic Research (NBER); Larissa Tiedens, Stanford Graduate School of Business;
Bin Zhao, Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR)
Paper Date: March 14, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 134

Abstract:      

We test the hypothesis that the linguistic diversity of a stock’s investor base leads to more trading. Trading might be due to beliefs differing across languages or investor exposure to multiple languages leading to more trading ideas. Using stock message boards from China, which has ten languages, we measure the linguistic diversity of a stock’s investor base using a Herfindahl index of messages posted from different languages. A firm’s diversity increases in the number of languages spoken in the province where it is headquartered. Using the latter as the instrument, trading volume in a stock rises with its linguistic diversity. We then attempt to discriminate among competing mechanisms. We also show using a sample of forty-one countries that countries with more linguistic diversity have greater stock market turnover.

Where Experts Get It Wrong: Independence vs. Leadership in Corporate Governance [PDF]
Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Date: March 14, 2013
Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 32

Over the last few decades, researchers have taken a thorough and critical look at corporate governance from various perspectives.  For the most part, they have found that structural features of corporate governance have little or no relation to governance quality.

For example, there is no evidence that having an independent chairman benefits companies.  At the same time, there is evidence that CEOs with different personalities require different levels of oversight. 

We examine this issue in greater detail.  We ask:

• Why isn’t more attention paid to contextual considerations in corporate governance?
• Why don’t governance experts base their recommendations on research rather than subjective opinion?
• How can corporate stakeholders take into account the quality of a company’s leadership to design more effective governance systems?

Read the attached Closer Look and let us know what you think!

Keywords: corporate governance, CEO and executive leadership, CEO personality, CEO-Chairman duality

Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters.

“And then a Miracle Happens!: How Do Proxy Advisory Firms Develop Their Voting Recommendations? (PDF)

Authors: David F. Larcker, Allan L.McCall and Brian Tayan, Stanford Graduate School of Business
Date: February 25, 2013
Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance and Leadership No. CGRP- 31

Abstract:

Proxy advisory firms are independent, for-profit consulting companies that provide voting recommendations to individual and institutional investors.  Research shows that these firms have significant influence on voting outcomes.  Given this influence, it is important that investors ensure that the policies of these firms are “accurate”—i.e., that they successfully and reliably differentiate between good and bad future outcomes.

In this Closer Look, we carefully examine the process by which proxy advisory firms formulate their voting policies.  In doing so, we identify serious issues that raise questions about the accuracy of their recommendations.

We ask:

• How exactly do proxy advisory firms determine that a policy is “correct”?
• Who participates in the policy development process with these firms?  How do we know that their opinions are representative of shareholder broadly?
• Why don’t proxy advisory firms disclose the research that supports each of their voting recommendations?

Does Going Public Affect Innovation? (SSRN)
Author: Professor Shai Bernstein, Stanford Graduate School of Business
Date: October 14, 2012

Abstract:      
This paper investigates the effects of going public on innovation. Using a data set consisting of innovative …firms that …filed for an initial public offering (IPO), I compare the long-run innovation of …firms that completed their filing and went public with that of …firms that withdrew their filing and remained private. I use NASDAQ ‡fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach reveals a complex trade-off between public and private ownership. The quality of internal innovation of public firms declines by 50 percent relative to …firms that remained private, measured by standard patent-based metrics. Public firms experience both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions.

Identifying Peer Firms: Evidence from EDGAR Search Traffic (SSRN)
Auhors:  Charles M.C. Lee, Stanford University – Graduate School of Business; Paul Ma, Stanford University – Department of Economics; Charles C. Y. Wang, Harvard Business School
Date: November 21, 2012; Harvard Business School Accounting & Management Unit Working Paper No. 13-048,  Rock Center for Corporate Governance at Stanford University Working Paper No. 128

Abstract: 
Using Internet traffic patterns from the Securities and Exchange Commission Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) website, we show that firms appearing in chronologically adjacent searches by the same individual are fundamentally similar on multiple dimensions. In fact, traffic-based peer firms identified by our algorithm significantly outperform peer firms based on six-digit Global Industry Classification Standard (GICS) groupings in explaining cross-sectional variations in base firms’ stock returns, valuation multiples, forecasted and realized growth rates, research and development expenditures, and various other key financial ratios. Our results highlight the usefulness of EDGAR data, as well as the latent intelligence in search traffic patterns.

Keywords: peer firms, EDGAR search traffic, revealed preference

Union Activism: Do Union Pension Funds Act Solely in the Interest of Beneficiaries? [PDF]

–Response from Brandon Rees, Acting Director, AFL-CIO Office of Investment

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: December 11, 2012

Union pension funds manage approximately $3.5 trillion in retirement assets on behalf of public and private sector employees covered by collective bargaining agreement.  They are also very active in the proxy process, sponsoring approximately one-third of the shareholder proposals that are included in corporate proxies each year.

Federal and state laws (including ERISA) require that the trustees and administrative bodies that oversee these funds manage their plans “solely in the interest of participants and beneficiaries.”  Furthermore, the U.S. Department of Labor is clear that pension funds are not to use plan assets and their voting rights “to further legislative, regulatory or public policy issues through the proxy process.”

We examine this issue is greater detail, including the types of proposals put forward but union pension funds, the support these proposals receive, and the companies they target.  We ask:

• Are union-sponsored proposals made solely in the interest of their pension beneficiaries?
• How can the public or a pension beneficiary assess the motives of funds that sponsor proxy proposals?
• How do union pension funds determine which positions to advocate and which companies to target?
• Are unions violating their ERISA duties by sponsoring these proposals?

Read the attached Closer Look and let us know what you think!

Shareholder Lawsuits: Where Is the Line Between Legitimate and Frivolous? [PDF]

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: November 27, 2012

Shareholders of public companies are not responsible for designing executive compensation packages. Still, a shareholder vote on compensation is required in two circumstances:  when a company wants to establish an equity-based compensation plan, and annually as part of the Dodd Frank requirement shareholders have an advisory “say on pay.”  In deciding how to vote, shareholders rely on information provided in the annual proxy.

Recently, shareholder groups have sued companies for inadequate disclosure.  They allege that the companies provide insufficient disclosure to determine how they should vote on these matters.

We explore this issue in closer detail and ask:

• How much disclosure is too much disclosure?
• If a company follows SEC guidelines, why is this not sufficient?
• When do lawsuits cross the line from legitimate to frivolous?
• If disclosure litigation is successful, what other board decisions would be subject to potential lawsuits?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at @StanfordCorpGov and  @StnfrdLeadrship.

Is a Powerful CEO Good or Bad for Shareholders  [PDF]

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: November 13, 2012

Americans tend to admire powerful leaders.  Powerful leaders are seen as exerting influence over their organizations and shaping outcomes around them.  CEO power can be exercised across a wide spectrum of decisions, including those regarding corporate strategy, operations, acquisitions, organizational design, culture, and governance.

However, it is not clear the extent to which having a powerful CEO is beneficial to an organization.  CEO power can be positive or negative, depending how it is manifested and how it is exercised.

We examine this topic in greater detail, and ask:

•        Are shareholders better or worse off with a powerful CEO?
•        Where should the board draw the line between giving its CEO discretion and providing appropriate oversight?
•        How much power is too much power?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at  @StanfordCorpGov and  @StnfrdLeadrship .

The Revenue Demands of Public Employee Pension Promises  (SSRN)
Robert Novy-Marx, University of Rochester – Simon Graduate School of Business; National Bureau of Economic Research (NBER);
Joshua D. Rauh, Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Abstract: 
We calculate increases in contributions required to achieve full funding of state and local pension systems in the U.S. over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1% of the total own-revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which goes to pay down legacy liabilities while half funds the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.

Keywords: pensions, state and local government, public finance