SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION The Latest Research in Corporate 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, 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, 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, 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, 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, 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, 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, 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, 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, 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, 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, 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., 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

SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION The Latest Research in Corporate Governance