Università degli studi di Salerno
Corso di LM in Economia
Corso Corporate Governance
A.A. 2018/2019
II SEMESTRE
Docente: CRISTIAN BARRA
email: cbarra@unisa.it
ricevimento: Giovedì (14:30/16:30)
APPLICATIONS TO CORPORATE
GOVERNANCE: PART II!
Endogeneity (Equilibrium vs.
Non-Equilibrium Response)
• Implications endogeneity holds for econometric
analysis
• Implications for how to view actual governance
practice
• When we observe what appears to be a poor
governance structure, we need to ask why that
structure was chosen
• Governance structure may have been chosen by
mistake, or it represents the right, albeit poor,
solution to the constrained optimization problem
faced by the firm
Endogeneity and Firm Value!
Let us say that you find a
relationship between firm
governance and firm valuation
as shown below
(taken from Adams et al. 2010 (Journal of Economic
Literature)), where "Governance Attribute" is board
size
Endogeneity and Firm Value!
• Now consider the optimization problem faced
by each firm there is a
non-monotonic relation
between governance & performance
...relation
is concave and admits an interior maximum
Measuring Governance!
• Can we
quantify
the level of corporate governance
chosen by a firm?
• The power-sharing relationship between investors and
managers is defined by the rules of corporate
governance, but how best to capture such a
relationship?
• Gompers, Ishii and Metrick (2003) look at
provisions
(disposizioni o regole)
decided by firms, largely
dealing with the defence against takeovers
• Idea: più l’impresa impone regole anti-takeover,
maggiore sarà la protezione degli organi interni
contro la disciplina imposta dal mercato per il controllo
aziendale, minore sarà il ruolo della CG
The G index
• Data from publications of the Investor
Responsibility Research Center (IRRC)
• IRRC provides 24 distinct corporate-governance
provisions for approximately 1500 firms since 1990
• The index construction:
for every firm one point
is added for every provision that reduces
shareholder rights
• Firms in the highest decile of the index are placed
in the Dictatorship Portfolio highest management
power or weakest shareholder rights
• Firms in the lowest decile of the index placed in the
Democracy Portfolio lowest management power or
strongest shareholder rights
The G Index: Anti-Takeover
Mechanisms
• Why are anti-takeover provisions used to measure
firm’s level of internal governance?
• The idea is simple: in generale,
takeovers si
verifica se il management non massimizza il valore
sei soci
... in this case a bidder (raider; colui che fa
l’offerta per acquisire l’impresa) will start a bid for
the target to takeover the firm...
• ...if the bidder is successful, the old CEO (and
management team) will be replaced with the new
one
• Thus an
under-performing CEO (non si impegna al
massimo per aumentare il valore dei soci) has
incentives to introduce provisions that make
takeovers more difficult
The G index
• The index construction is straightforward:
for every firm
Gompers et al. add one point for every provision that
restricts shareholder rights (increases managerial
power)
• While this simple index does
not accurately reflect the
relative impacts of different provisions (in altri termini da
lo stesso peso a tutte le provisions)
, it has the
advantage of being transparent and easily reproducible
• The index does not require any judgments about the
efficacy or wealth effects of any of these provisions
•
Almost every provision gives management a tool to
resist different types of shareholder activism
, such as
calling special meetings (assemblee straordinarie),
changing the firm’s charter (regolamento o carta
aziendale) or by lawsers the impact on the balance of
power etc.
Provisions of the G index
• The Delay group includes provisions designed to
slow down a hostile bidder
ü For takeover battles that require a proxy fight to either
replace a board or dismantle (smantellare) a takeover
defense, these provisions are the most crucial
ü Some legal scholars argue that the dynamics of
modern takeover battles have rendered all other
defenses superfluous
• The Voting group contains provisions related to
shareholders rights in elections or charter/bylaw
amendments
• The Protection group contains provisions designed to
insure officers and directors against job-related
Meaning of the G index
• The index does not require any judgments (valutazione) about the efficacy or wealth effects of any of these provisions
• Only considers the impact on the balance of power between managers and shareholders
• For example, consider Classified Boards, a provision that
staggers (slittare) the terms and elections of directors and hence can be used to slow down (rallentare) a hostile takeover
ü If management uses this power judiciously, it could possibly lead to an increase in overall shareholder wealth; if
management uses this power to maintain private benefits of control, then this provision would decrease shareholder wealth ü In either case, it is clear that Classified Boards (struttura in cui
gli amministratori, in merito alla loro durata, hanno poteri che derivano dalla loro classificazione/gerarchia nel Consiglio)
increase the power of managers and weaken the control rights of large shareholders, which is all that matters for the index • Thus you need to pay a lot of attention to the meaning and
G index - Correlations
•
These correlations are descriptive and are intended to
provide some background for the analyses
• The strongest relation is between G and S&P 500 (indice
che segue l’andamento di un paniere azionario formato
dalle 500 aziende US a maggiore capitalizzazione)
• The G Index is also positively correlated with size (SIZE),
share price (PRICE), trading volume (VOLUME), and
institutional ownership (IO)
• Overall, it appears that firms with
weaker shareholder
rights tend to be large S&P firms with relatively high share
prices (PRICE), institutional ownership (IO) and trading
volume (VOLUME), relatively poor sales growth
(SGROWTH), and poor stock-market performance (BM:
performance del mercato azionario)
Governance and Valuation: Causation
or Association?
• The results can be consistent with three different hypotheses
ü Hypothesis 1: weak shareholder rights caused additional agency costs
• If the market underestimated these costs, then a firm’s stock returns would have been worse than expected, and its value at the beginning of the period would have been too high
ü Hypothesis 2: managers in the 1980s predicted poor performance in the 1990s, but investors did not
• In this case, the managers could have put governance provisions in place to protect their jobs
• While the provisions might have real protective power, they would not have caused the poor performance
ü Hypothesis 3: governance provisions did not cause poor performance (and need not have any protective power) but rather are correlated with other characteristics that were associated with abnormal returns in the 1990s
Governance and Product Market
Competition
• Question:
Do firms in noncompetitive industries benefit more
from good governance than do firms in competitive industries?
• Managers of firms in competitive industries may have strong
incentives to reduce slack and maximize profits, or else the firm
will go out of business
• Accordingly, the need to provide managers with incentives
through good governance—and thus the benefits of good
governance—should be smaller for firms in competitive
industries (Il manager sarebbe più pressato a dare il massimo e
quindi meno incentivato in mkt competitivi)
• In contrast, firms in noncompetitive industries, where lack of
competitive pressure fails to enforce discipline on managers,
should benefit relatively more from good governance
(in mktconcentrati il manager è meno pressato a dare il massimo rispetto a mkt concorrenziali. Ecco perchè tali mkt dovrebbero beneficiare
