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SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION
The Latest Research inCorporate Governance:
Finance
Joseph K. Tanimura, Ph.D., J.D.
Top-Tier Finance Journals
Journal of Business Journal of Finance Journal of Financial and Quantitative Analysis Journal of Financial Economics Review of Financial Studies
Current Areas of Research
Litigation and corporate governance Firm performance and corporate governance Responses to bad acquisition bids Cash holdings and corporate governance Labor and corporate governance Determinants of corporate governance
Litigation and Corporate Governance
Class-action lawsuits There is broad agreement that financial fraud
leads to significant valuation losses for investors What is the role of reputation in the market for
directorships as an incentive mechanism for monitoring fraudulent behavior?
Class-Action Lawsuits
Fich, Eliezer M. and Anil Shivdasani, 2007. Financial Fraud, Director Reputation, and Shareholder Wealth
Primary findings Following a financial fraud lawsuit, outside
directors do not face abnormal turnover on the board of the sued firm
However, they experience a significant decline in the number of other board seats held
Class-Action Lawsuits (cont.)
Helland, Eric, 2006. Reputational Penalties and the Merits of Class-Action Securities Litigation
Primary findings There is little evidence of a negative effect
associated with allegations of fraud Only in shareholder class actions in the top
quartile of settlements, or in which the SEC has initiated a case, do directors appear to suffer a reputational penalty when a board they serve on is accused of fraud
Litigation and Corporate Governance
SEC and DOJ enforcement actions There is broad agreement that financial fraud
leads to significant valuation losses for investors Do managers suffer personal consequences for
cooking the books?
SEC and DOJ Enforcement Actions
Karpoff, Jonathan M., D. Scott Lee and Gerald S. Martin, 2007. The Consequences to Managers for Financial Misrepresentation
Primary findings Most lose their jobs Culpable managers bear substantial financial
losses through restrictions on their future employment and SEC fines
A sizeable majority face criminal charges and penalties
Litigation and Corporate Governance
Derivative lawsuits Many legal commentators question whether
derivative lawsuits serve a useful purpose Do they have positive effects on corporate
governance?
Derivative Lawsuits
Ferris, Stephen P., Tomas Jandik, Robert M. Lawless and Anil Makhija, 2007. Derivative Lawsuits as a Corporate Governance Mechanism: Empirical Evidence on Board Changes Surrounding Filings
Primary findings Proportion of outside representation on the board
increases after a derivative lawsuit Outside representation increases by 6% for
successful and by 2% for unsuccessful suits
Firm Performance and Corporate Governance
Operating performance Is stronger corporate governance associated with
higher operating performance? What are the different ways in which to measure
corporate governance?
Operating Performance
Fich, Eliezer M. and Anil Shivdasani, 2006. Are Busy Boards Effective Monitors?
Primary findings Firms with busy boards exhibit lower operating
performance A significant relation between performance and
CEO turnover exists only when a majority of board members are not regarded as busy
Operating Performance (cont.)
Dahya, Jay and John J. McConnell, 2007. Board Composition, Corporate Performance, and the Cadbury Committee Recommendation
Primary findings Compliance with the Cadbury Report results in an
increase in operating performance
Operating Performance (cont.)
Core, John E., Wayne R. Guay, and Tjomme Rusticus, 2006. Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations
Primary findings Weak shareholder rights are associated with poor
operating performance
Firm Performance and Corporate Governance
Stock price effects How does the market react to changes in firms’
corporate governance? Does the market forecast the difference in
operating performance based on differences in corporate governance?
Stock Returns – Event Studies
Fich, Eliezer M. and Anil Shivdasani, 2006. Primary findings
The departure of a busy outside director that leaves a majority of the remaining outside board members as non-busy leads to an average abnormal return of 2.2%
Stock Returns – Event Studies (cont.)
Dahya, Jay and John J. McConnell, 2007. Primary findings
Instances in which companies with fewer than three outside directors announced the addition of enough to get over three are accompanied by a 2-day abnormal return of 0.44%
Stock Returns – Market Efficiency
Core, John E., Wayne R. Guay, and Tjomme Rusticus, 2006.
Primary findings Weak shareholder rights are associated with poor
operating performance However, analysts’ forecast errors and earnings
announcement returns show no evidence that this underperformance surprises the market
Responses to Bad Acquisition Bids
CEO turnover Several studies document a relation between firm
performance and CEO turnover Does corporate governance affect the relation
between bidder returns and the probability of CEO turnover in acquiring firms?
CEO Turnover
Lehn, Kenneth M. and Mengxin Zhao, 2006. CEO Turnover after Acquisitions: Are Bad Bidders Fired?
Primary findings An inverse relation exists between bidder returns
and the likelihood of CEO turnover However, this relation is not associated with
governance structure
Responses to Bad Acquisition Bids
Corrective action Results of existing studies suggest that investors
believe that independent boards are good for them
Does corporate governance influence the decision to complete value-decreasing bids or to initiate asset restructuring following completed bids?
Corrective Action
Paul, Donna L., 2007. Board Composition and Corrective Action: Evidence from Corporate Responses to Bad Acquisition Bids
Primary findings Firms with independent boards are less likely to
complete value-decreasing bids Board independence is also associated with
unusually high frequencies of asset restructuring for bids that are completed
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