Academic Roundup
Manifest-I presents a summary of recently released academic papers on international corporate governance
and corporate social responsibility issues.
What do Independent Directors Know? Evidence from their Trading
Enrichetta Ravina, Stern School of Business; and
Paoloa Sapienza, Kellogg School of Management. NBER Working Paper No. 12765.
This paper concerns itself with the US’ increased
emphasis on the importance of independent directors as a result of recent
scandals such as that at Enron, and the criticism that directors independent in
their scrutiny have at their disposal much less information with which to
evaluate the company. The authors address this through indirectly measuring the
level of inside information independent directors have access to by examining
the market-adjusted returns associated with their trades compared with those of
executive directors. The difference between the returns earned by independent
and executive directors is found to be relatively small in most areas analysed.
The paper also looks at how independent directors
acquire this information – whether through committee work, informal channels or
personal contact with management – by analysing how returns differ depending on
committee work and attendance at board meetings. It was found that independent
directors benefit from sitting on the audit committee – with increased returns
of up to 3.21% - and from belonging to bigger boards – possibly because there
are more independent directors on these boards and so it is easier for them to
acquire information. Furthermore, by examining the timing of independent
directors’ trades, the authors find evidence that positive returns are not
simply the result of them mimicking executives’ trades.
The Sarbanes-Oxley Act and the Flow of International Listings
Joseph Piotroski and Suraj Srinivasan, University of
Chicago
The recent call by Hank Paulson, US Treasury secretary,
for a more streamlined, less prescriptive regulatory system was prompted at
least in part by the perception that the Sarbanes-Oxley (SOX) legislation is
deterring foreign companies from listing on US markets. This paper attempts to
determine whether the rate of cross-listings on US exchanges has decreased in
the period following SOX’s enactment, and whether foreign exchanges – in
particular the London Stock Exchange (LSE) – are attracting companies that would
prior to SOX have listed in the US.
The paper confirms foreign listings on US exchanges have
decreased in the wake of SOX: in the four year period following SOX’s enactment,
foreign listings on the New York Stock Exchange and Nasdaq fell by nearly 63%.
The authors draw particular attention to firms choosing to bypass the US and
list on the LSE’s AIM, which in the same period experienced a sevenfold increase
in foreign listings. However, firms taking this route tend to be small and less
profitable than those actually listed on US exchanges. Furthermore, the paper
found a small set of large, profitable companies from predominantly emerging
markets are choosing to seek post-SOX US listings despite observers having
predicted they would favour London.
The Role of CEOs in Large Corporations: Evidence from Ken Lay at Enron
James Brickley, University of Rochester.
This paper is a clinical study of Ken Lay, the former
Enron who executive who was found guilty of complicity in the massive fraud at
the US energy company. The author comes to some unexpected conclusions about
Lay’s position at Enron, arguing Lay performed a role consistent with existing
economic theory and evidence, that he carried out this role with reasonable
diligence, and that it is unlikely he would have been informed about details of
many of the company’s transactions, including those fraudulent ones. The
evidence, argues the paper, suggests that Lay was not aware of the misconduct of
Andrew Fastow – Enron’s former chief fincial officer – and that the public has a
distorted view of the proper role of chief executives of large companies.
The paper also argues that the influence of Enron has had on causing chief
executives to spend more time monitoring financial reports and internal controls
– thereby devoting less time to external activities - may not be a change for
the better. Though stating the question cannot be fully answered without further
research, the paper suggests “while the gap between public opinion on the proper
role of the CEO behaviour could have narrowed in the post-Enron environment,
value may have been destroyed”.
February, 2007
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