Blue Sky Workshop 2013-2014

January 27, 2014

Jerome Greene Hall - Room 602

12:00 p.m.

Wolf-Georg Ringe, Professor of International Commercial Law, Copenhagen Business School

Discussion Topic: Banking Union Resolution Without Deposit Guarantee: A Transatlantic Perspective On What It Would Take, authored with Jeffrey N. Gordon

The project of creating a Banking Union is designed to overcome the fatal link between sovereigns and their banks in the Eurozone. As part of this project, political agreement for a common supervision framework has been reached with difficulty, and it looks possible that resolution may follow soon. However, Member States’ disagreements appear to rule out a federalized deposit insurance scheme, commonly regarded as the necessary third pillar of a successful Banking Union. This paper argues for an organizational and capital structure substitute that can minimize the systemic distress costs of the failure of a large financial institution. We borrow from the approach the FDIC has devised in the implementation of the "Orderly Liquidation Authority" under the Dodd Frank Act. The FDIC’s experience teaches us three important lessons: first, systemically important institutions need to have in their liability structure sufficient subordinated term debt so that in the event of bank failure, the conversion of debt into equity will be sufficient to absorb asset losses without impairing deposits and other short term credit; second, the organizational structure of the financial institution needs to permit such a debt conversion without putting core financial constituents through a bankruptcy, and third, a federal funding mechanism deployable at the discretion of the resolution authority must be available to supply liquidity to a reorganizing bank. On these conditions, deposit insurance plays a subsidiary role in resolution and could remain at the national (not EU) level.

January 22, 2014

Jerome Greene Hall - Room 646

12:00 p.m.

Kevin Haeberle, Post-Doctoral Research Scholar
Program in the Law & Economics of Capital Markets
Columbia Law School & Columbia Business School

Discussion Topic: Stock-Market Law and the Accuracy of Public Companies' Stock Prices

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January 16, 2014

Jerome Greene Hall - Room 502

2:00 p.m.

Martijn Cremers, Professor at Mendoza College of Business

Discussion Topic: Staggered Boards and Firm Value, Revisited

This discussion revisits the association between firm value (as proxied by Tobin’s Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978 – 2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

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October 30, 2013

Robert M. Daines, Pritzker Professor of Law and Business Stanford Law School

Discussion Topic: "Right on Schedule: CEO Option Grants and Opportunism" (Authored with Grant R. McQueen and Robert J. Schonlau)

In the wake of the backdating scandal, many firms began awarding options at the same time each year. These scheduled option grants eliminate backdating but create other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to get options with lower strike prices. We provide evidence that CEOs respond to this incentive and document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are higher when CEOs have the incentive and ability to influence stock price. For example, the size of the abnormal returns is increasing in the number of options awarded to the CEO. We document several mechanisms CEOs use to manipulate the strike price, including changing the substance or timing of the firm’s disclosures.

For a pdf of the paper, click here.