Objectivity, Proximity and Adaptability in Corporate Governance

Countries appear to differ considerably in the basic orientations of their corporate governance structures. We postulate the trade-off between objectivity and proximity as fundamental to the corporate governance debate. We stress the value of objectivity that comes with distance (e.g. the market oriented U.S. system), and the value of better information that comes with proximity (e.g. the more intrusive Continental European model). Our key result is that the optimal distance between management and monitor (board or shareholders) has a bang-bang solution: either one should capitalize on the better information that comes with proximity or one should seek to benefit optimally from the objectivity that comes with distance. We argue that this result points at an important link between the optimal corporate governance arrangement and industry structure. In this context, we also discuss the ways in which investors have "contracted around" the flaws in their own corporate governance systems, pointing at the adaptability of different arrangements.http://deepblue.lib.umich.edu/bitstream/2027.42/39651/3/wp266.pd

Credit Ratings as Coordination Mechanisms

In this paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a "focal point" for firms and their investors. We explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency and a firm. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of ratings changes, the discreteness in funding cost changes, and the effect of the focus of organizations on the efficacy of credit ratings.http://deepblue.lib.umich.edu/bitstream/2027.42/39841/3/wp457.pd

Credit Ratings as Coordination Mechanisms

In this paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a "focal point" for firms and their investors. We explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency and a firm. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of ratings changes, the discreteness in funding cost changes, and the effect of the focus of organizations on the efficacy of credit ratings.coordination, credit ratings, multiple equilibria

Restructuring in the banking industry with implications for Europe

Set against the background of a rapidly consolidating financial sector, this paper explores the main forces that are driving this process. Acknowledging that the search for scale and scope economies is one of them, the paper emphasises that the empirical evidence in support of such economies is mixed, at best; while scale and scope economies exist, in principle, they are difficult to attain in practice. The paper considers strategic positioning in an uncertain and rapidly changing environment a more important factor: by expanding scope (and scale), financial institutions acquire options to venture into new activities. An implication of this strategic-option explanation is that consolidation, scope expansion in particular, will partially unravel as and when uncertainty declines and competition forces financial institutions to discover their true competitive advantages

'Trust is good, control is better': the 1974 Herstatt-Bank crisis and its implications for international regulatory reform

With its international supervisory and regulatory implications, the failure of Bankhaus Herstatt is one of the landmarks of post-war financial history. This article offers the first comprehensive historical account of the Herstatt crisis, and contributes to the wider discussions on international supervisory and regulatory reform since the mid-1970s, including regulatory capture, markets' self-regulation and resolution of failed banks. In doing so, it first argues that contrary to a widely held view, the German authorities received early and repeated warnings about Herstatt's dealings but this involved only limited and ineffective regulatory/supervisory responses, then it turns to the actual collapse of the bank in June 1974, and finally explores the wider regulatory issues raised by the Herstatt case

Superoxide dismutase downregulation in osteoarthritis progression and end-stage disease

Oxidative stress is proposed as an important factor in osteoarthritis (OA). To investigate the expression of the three superoxide dismutase (SOD) antioxidant enzymes in OA. SOD expression was determined by real-time PCR and immunohistochemistry using human femoral head cartilage. SOD2 expression in Dunkin–Hartley guinea pig knee articular cartilage was determined by immunohistochemistry. The DNA methylation status of the SOD2 promoter was determined using bisulphite sequencing. RNA interference was used to determine the consequence of SOD2 depletion on the levels of reactive oxygen species (ROS) using MitoSOX and collagenases, matrix metalloproteinase 1 (MMP-1) and MMP-13, gene expression. All three SOD were abundantly expressed in human cartilage but were markedly downregulated in end-stage OA cartilage, especially SOD2. In the Dunkin–Hartley guinea pig spontaneous OA model, SOD2 expression was decreased in the medial tibial condyle cartilage before, and after, the development of OA-like lesions. The SOD2 promoter had significant DNA methylation alterations in OA cartilage. Depletion of SOD2 in chondrocytes increased ROS but decreased collagenase expression. This is the first comprehensive expression profile of all SOD genes in cartilage and, importantly, using an animal model, it has been shown that a reduction in SOD2 is associated with the earliest stages of OA. A decrease in SOD2 was found to be associated with an increase in ROS but a reduction of collagenase gene expression, demonstrating the complexities of ROS function

Collateral and Debt Maturity Choice. A Signaling Model

This paper derives optimal loan policies under asymmetric information where banks offer loan contracts of long and short duration, backed or unbacked with collateral. The main novelty of the paper is that it analyzes a setting in which high quality firms use collateral as a complementary device along with debt maturity to signal their superiority. The least-cost signaling equilibrium depends on the relative costs of the signaling devices, the difference in firm quality and the proportion of good firms in the market. Model simulations suggest a non-monotonic relationship between firm quality and debt maturity, in which high quality firms have both long-term secured debt and short-term secured or non-secured debt.

Monitoring Corporate Performance: The Role of Objectivity, Proximity, and Adaptability in Corporate Governance

This Article identifies the fundamental tradeoff faced by individuals, firms and institutions that monitor corporate management\u27s performance. This tradeoff, between objectivity in monitoring and proximity in monitoring, is central to the corporate governance debate. Proximity exists when monitors maintain close contact with management and participate in important decisions on a real-time basis. Objectivity exists when monitors, such as hostile acquirers, analysts, credit rating agencies, accounting firms, and outside lenders, remain distant from management and evaluate management\u27s performance without influence by management