When Managers Bypass Shareholder Approval of Board Appointments: Evidence from the Private Security Market

This paper investigates the influence of managerial entrenchment on private placements by examining the firm\u27s decision to appoint representatives of the private investors to the board without shareholder approval. By analyzing a sample of U.S. firms that appoint directors in combination with private offerings between 1995 and 2000, we find that firms with greater managerial entrenchment are more likely to bypass shareholder approval. Firms that bypass shareholders are less likely to appoint independent directors or to elect one of these directors as chairman. We also show that the market reacts more positively to the private offering announcement when the firm submits its board candidates for shareholder approval. Further, firms that bypass approval underperform compared to firms that obtain it. Overall our findings suggest that managers avoid shareholder approval to perpetuate entrenchment

A Survey of Litigation in Corporate Finance

Purpose The purpose of this paper is to review research on litigation in corporate finance. Design/methodology/approach This paper surveys studies on the estimation of litigation risk, litigation costs, stock reaction to lawsuit announcement, and the effect of litigation on corporate financial policies and outcomes. Findings The first section presents a survey of studies that estimate litigation risk. The authors then discuss a set of studies that focus on the various costs associated with litigation. The third area of review is about studies which estimate the market reaction to a lawsuit announcement. The next section surveys studies that examine the relation between litigation and a variety of corporate policies, behaviors, and outcomes. The authors then discuss the emerging literature on how corporate political connections can influence the outcome of litigation. The survey concludes with a brief summary and a discussion of suggestions for future research involving corporate litigation. Originality/value By providing an extensive review of the literature on litigation in corporate finance, this survey can help researchers to identify recent trends in litigation research and select promising new avenues of investigation in the field

A Global Analysis of Corporate Litigation Risk and Costs

We analyze a unique hand-collected international sample of 475 corporate lawsuits involving 361 publicly-traded defendant firms headquartered in 16 developed countries to explore how country factors influence litigation risk, equity market value, lawsuit outcomes, and settlement costs. Unlike U.S.-focused studies, we do not find a significant relation between stock turnover, equity performance, and the probability of litigation. Defendant firms headquartered in civil law countries or countries with less efficient judiciary systems face lower litigation risk and costs as well as less share price decline at filing. Countries whose courts are less independent demonstrate a significant bias against foreign defendant firms

Use of Economic Analysis in Fraud on the Market Cases

In 1988, in Basic, Inc. v. Levinson,1 (Basic), the United States Supreme Court adopted the fraud on the market theory in order to create a presumption of reliance in a Security & Exchange Commissions Rule 10(b) securities fraud case. This article first explains the economic and legal background behind the fraud on the market presumption. Then, the landmark case of Basic is examined for guidance in applying the presumption and proving defenses to that presumption. Lastly, it is shown how economic analysis can be used in proving or disproving fraud on the market, including an empirical study of the events in Basic. The Court\u27s decision in Basic invites the use of economic/financial analysis, without recognition or guidance concerning that use. This article illustrates the importance of financial analysis in pursuing and defending a securities fraud case based on the fraud on the market presumption

Use of Economic Analysis in Fraud on the Market Cases

In 1988, in Basic, Inc. v. Levinson,1 (Basic), the United States Supreme Court adopted the fraud on the market theory in order to create a presumption of reliance in a Security & Exchange Commissions Rule 10(b) securities fraud case. This article first explains the economic and legal background behind the fraud on the market presumption. Then, the landmark case of Basic is examined for guidance in applying the presumption and proving defenses to that presumption. Lastly, it is shown how economic analysis can be used in proving or disproving fraud on the market, including an empirical study of the events in Basic. The Court\u27s decision in Basic invites the use of economic/financial analysis, without recognition or guidance concerning that use. This article illustrates the importance of financial analysis in pursuing and defending a securities fraud case based on the fraud on the market presumption

Professional Fees and Other Direct Costs in Chapter 7 Business Liquidations

Here we provide a comprehensive look at direct costs associated with chapter 7 business bankruptcy liquidations by examining cases from five geographically dispersed judicial districts. This Article measures chapter 7 direct costs, which are essentially out-of-pocket administrative costs associated with chapter 7 proceedings. Examples of direct costs include attorneys\u27 fees, filing fees, and other professional fees. Part II describes the procedures we followed in gathering data. Part II also sets forth several assumptions we made when describing direct costs. Each time an assumption needed to be made, we took the assumption that produced the lowest bankruptcy costs. Accordingly, the data in this Article is a conservative estimate of chapter 7 costs. Part III describes the characteristics of the debtors and cases in our sample. Part IV discusses the actual cost measurements and quantifies the costs of chapter 7 business bankruptcy. Part V uses statistical analysis to identify determinants of chapter 7 costs. Part VI summarizes our major conclusions

IPO Underpricing Firm Quality, and Subsequent Reissuance Activity

A signaling argument has recently been developed whereby IPO underpricing is a signal of future firm value. Only higher quality firms can be expected to recover the cost of this signal through subsequent offerings of seasoned equities. This study uses three proxies for firm quality and finds evidence of a positive relationship between these measures of firm quality and reissuance activity. Greater IPO underpricing is also found to be associated with greater levels of future equity selling and higher levels of earnings per share

Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments

We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual

Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments

We examine the number of external appointments held by corporate directors. Directors who serve larger firms and sit on larger boards are more likely to attract directorships. Consistent with Fama and Jensen (1983), we find that firm performance has a positive effect on the number of appointments held by a director. We find no evidence that multiple directors shirk their responsibilities to serve on board committees. We do not find that multiple directors are associated with a greater likelihood of securities fraud litigation. We conclude that the evidence does not support calls for limits on directorships held by an individual