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

SAN DIEGO STATE UNIVERSITY COLLEGE OF BUSINESS ADMINISTRATION

The Latest Research inCorporate Governance