Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board?

We develop and apply a new and more rigorous methodology by which to measure and understand both insider trading and the agency costs of hedge fund activism. We use quantitative data to show a systematic relationship between the appointment of a hedge fund nominated director to a corporate board and an increase in informed trading in that corporation’s stock (with the relationship being most pronounced when the fund’s slate of directors includes a hedge fund employee). This finding is important from two different perspectives. First, from a governance perspective, activist hedge funds represent a new and potent force in corporate governance. A robust debate continues as to whether activist funds reduce the agency costs of corporate governance, but this is the first attempt to investigate whether the activist hedge fund also imposes new agency costs through widened bid/ask spreads and informed trading. Second, although insider trading is almost universally condemned, it has only been studied in individual cases. Using instead a quantitative approach, we develop a tool that enables regulators (civil and criminal) to identify suspicious trading patterns: Both to demonstrate such a pattern and to map these new agency costs, we assembled a data set of 475 settlement agreements, between target companies and activists funds relating to the appointment of fund nominated directors, from 2000 and 2015, in order to focus on what happens once such a fund-nominated director goes on the board. Among our principal findings are: Prevalence of Hedge Fund Employees on Slate. Approximately 70% of fund-nominated director slates include a hedge fund employee. Increase in Information Leakage. Once a fund-nominated director goes on the board, an abrupt increase in “information leakage” follows, with the result that the target corporation’s stock price begins to anticipate future public disclosures. Specifically, we examine some 635,450 Form 8-K’s filed by 7,799 public traded companies over the period of January 1, 2000 to September 30, 2016, and we construct a control group for each of the corporations subject to an activist intervention. We find that firms appointing an activist nominee or nominees experience a difference-in-differences increase in leakage of 25-27 percentage points. Hedge Funds versus Other Activists. We next consider whether post-appointment increases in leakage depend on the identity of the activist investors (i.e., hedge fund versus other activist investors). We find that the leakage effect is clearly driven by hedge fund activists (and no other type of activist). Leakage and Hedge Fund Employees. We investigate whether leakage increases depend on the identity of the director appointed to target firm’s board, distinguishing between hedge fund employees and non-hedge fund employees. We find that the increase in leakage is driven by the appointment of activist fund employees to the corporate board (and not by the appointment of other persons, such as industry professionals). Leakage and Confidentiality Provisions. We consider whether post-settlement increases in leakage are associated with confidentiality provisions restricting information sharing in the settlement agreements. The majority of settlement agreements have no confidentiality provisions, and information leakage is concentrated in these cases. Market Response to Settlement Agreements. We next examine whether the stock market’s response to settlement agreements depends on (a) whether a hedge fund employee is on the director slate, and (b) whether the settlement agreement contains or refers to a confidentiality provision. We find that the 5-day CAR is more than twice as high (4.2% vs. 1.97%) for settlements with only non-employee directors and also significantly higher (2.02% vs. 0.42%) for settlements with an explicit restriction on information sharing. Effect on Bid-Ask Spread. Bid-ask spreads increase by statistically meaningful amounts in our treatment group after an activist director gains access to the boardroom. Bid-ask spreads do not widen for the control groups. Further, we find that the increase in bid-ask spreads is concentrated in those cases in which (i) a hedge fund employee is appointed to the board, or (ii) no confidentiality provision is referenced in the settlement agreement. Options Trading. We find that options trading increases significantly after the appointment of an activist director and in a manner consistent with informed trading. Consistent with earlier research on informed trading, we find that options traders exploit unscheduled Form 8-K filings. Implications. The foregoing pattern is most plausibly explained as the product of informed trading. Material, non-public information appears to travel on a conduit from the hedge fund’s employee-director to others, whose trades move the market price prior to public disclosure. We reach no conclusions about who is trading or its legality in any individual case. Yet, the widened bid-ask spread strongly suggests that the market expects such trading, and the much more positive market response to director slates without a hedge fund employee (or with a confidentiality provision) suggests that the market suspects that informed trading is closely associated with the appointment of a hedge fund employee to the board. Hypothesis. Our data suggests that the ability to engage in informed trading is a significant subsidy that may inflate the rate of hedge fund activism (producing more engagements than if stronger controls on information sharing were imposed) and may encourage activists to pursue inefficient engagements. Further, information sharing may be the cement that holds together a “wolf-pack” of activists that would otherwise logically be unstable. Reforms. We consider and evaluate a variety of possible reforms that are consistent with an energetic role for hedge fund activism, but that remove (to various degrees) the subsidy of informed trading

Brief of Corporate Law Professors as Amici Curie in Support of Respondents

The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors

Utilizing a reviewer database to facilitate integration of an investigator-focused translational research and career development program across the state of Indiana

OBJECTIVES/SPECIFIC AIMS: The Indiana CTSI is investigating innovative approaches to integrate resources that will enrich scientific investigators. Our goals are to enhance the availability and communication among CTSI resources, for example internal funding, and to expand existing mentorship. METHODS/STUDY POPULATION: Developed a reviewer database that serves to streamline reviewer identification, decrease reviewer fatigue, and promote collaboration among disciplines. We started with a pool of NIH-funded investigators from across the Indiana CTSI core institutions and merged this list with previous CTSI reviewers and internal funding awardees. To expand this list, names and expertise from new faculty hires were added. RESULTS/ANTICIPATED RESULTS: Though this tool is relatively new, we have already observed an increase in junior faculty awareness and engagement with the CTSI. This database allows for increased opportunities of junior faculty to serve as reviewers and to refine grant writing skills and provides a platform for networking and collaborating across disciplines. It also allows for increased integration of programs with a shared reviewer database and promotes grant review standardization. DISCUSSION/SIGNIFICANCE OF IMPACT: Our database utilization seeks to decrease the time for junior faculty to obtain their first extramural grant, to enhance promotion and tenure packages, strengthen integration among CTSI programs, increase interactions between clinical and basic science investigators, and promote team science

Supreme Court Amicus Brief of 19 Corporate Law Professors, Friedrichs v. California Teachers Association, No. 14-915

The Supreme Court has looked to the rights of corporate shareholders in determining the rights of union members and non-members to control political spending, and vice versa. The Court sometimes assumes that if shareholders disapprove of corporate political expression, they can easily sell their shares or exercise control over corporate spending. This assumption is mistaken. Because of how capital is saved and invested, most individual shareholders cannot obtain full information about corporate political activities, even after the fact, nor can they prevent their savings from being used to speak in ways with which they disagree. Individual shareholders have no “opt out” rights or practical ability to avoid subsidizing corporate political expression with which they disagree. Nor do individuals have the practical option to refrain from putting their savings into equity investments, as doing so would impose damaging economic penalties and ignore conventional financial guidance for individual investors

Risk-shifting Through Issuer Liability and Corporate Monitoring

This article explores how issuer liability re-allocates fraud risk and how risk allocation may reduce the incidence of fraud. In the US, the apparent absence of individual liability of officeholders and insufficient monitoring by insurers under-mine the potential deterrent effect of securities litigation. The underlying reasons why both mechanisms remain ineffective are collective action problems under the prevailing dispersed ownership structure, which eliminates the incentives to moni-tor set by issuer liability. This article suggests that issuer liability could potentially have a stronger deterrent effect when it shifts risk to individuals or entities holding a larger financial stake. Thus, it would enlist large shareholders in monitoring in much of Europe. The same risk-shifting effect also has implications for the debate about the relationship between securities litigation and creditor interests. Credi-tors’ claims should not be given precedence over claims of defrauded investors (e.g., because of the capital maintenance principle), since bearing some of the fraud risk will more strongly incentivise large creditors, such as banks, to monitor the firm in jurisdictions where corporate debt is relatively concentrated

Histone deacetylases suppress cgg repeat-induced neurodegeneration via transcriptional silencing in models of Fragile X Tremor Ataxia Syndrome

Fragile X Tremor Ataxia Syndrome (FXTAS) is a common inherited neurodegenerative disorder caused by expansion of a CGG trinucleotide repeat in the 59UTR of the fragile X syndrome (FXS) gene, FMR1. The expanded CGG repeat is thought to induce toxicity as RNA, and in FXTAS patients mRNA levels for FMR1 are markedly increased. Despite the critical role of FMR1 mRNA in disease pathogenesis, the basis for the increase in FMR1 mRNA expression is unknown. Here we show that overexpressing any of three histone deacetylases (HDACs 3, 6, or 11) suppresses CGG repeat-induced neurodegeneration in a Drosophila model of FXTAS. This suppression results from selective transcriptional repression of the CGG repeat-containing transgene. These findings led us to evaluate the acetylation state of histones at the human FMR1 locus. In patient-derived lymphoblasts and fibroblasts, we determined by chromatin immunoprecipitation that there is increased acetylation of histones at the FMR1 locus in pre-mutation carriers compared to control or FXS derived cell lines. These epigenetic changes correlate with elevated FMR1 mRNA expression in pre-mutation cell lines. Consistent with this finding, histone acetyltransferase (HAT) inhibitors repress FMR1 mRNA expression to control levels in pre-mutation carrier cell lines and extend lifespan in CGG repeat-expressing Drosophila. These findings support a disease model whereby the CGG repeat expansion in FXTAS promotes chromatin remodeling in cis, which in turn increases expression of the toxic FMR1 mRNA. Moreover, these results provide proof of principle that HAT inhibitors or HDAC activators might be used to selectively repress transcription at the FMR1 locus.open293

FMR1 premutation and full mutation molecular mechanisms related to autism

Fragile X syndrome (FXS) is caused by an expanded CGG repeat (>200 repeats) in the 5′ un-translated portion of the fragile X mental retardation 1 gene (FMR1) leading to a deficiency or absence of the FMR1 protein (FMRP). FMRP is an RNA-binding protein that regulates the translation of a number of other genes that are important for synaptic development and plasticity. Furthermore, many of these genes, when mutated, have been linked to autism in the general population, which may explain the high comorbidity that exists between FXS and autism spectrum disorders (ASD). Additionally, premutation repeat expansions (55 to 200 CGG repeats) may also give rise to ASD through a different molecular mechanism that involves a direct toxic effect of FMR1 mRNA. It is believed that RNA toxicity underlies much of the premutation-related involvement, including developmental concerns like autism, as well as neurodegenerative issues with aging such as the fragile X-associated tremor ataxia syndrome (FXTAS). RNA toxicity can also lead to mitochondrial dysfunction, which is common in older premutation carriers both with and without FXTAS. Many of the problems with cellular dysregulation in both premutation and full mutation neurons also parallel the cellular abnormalities that have been documented in idiopathic autism. Research regarding dysregulation of neurotransmitter systems caused by the lack of FMRP in FXS, including metabotropic glutamate receptor 1/5 (mGluR1/5) pathway and GABA pathways, has led to new targeted treatments for FXS. Preliminary evidence suggests that these new targeted treatments will also be beneficial in non-fragile X forms of autism

A Social Identity Approach to Sport Psychology: Principles, Practice, and Prospects.

Drawing on social identity theory and self-categorization theory, we outline an approach to sport psychology that understands groups not simply as features of sporting contexts but rather as elements that can be, and often are, incorporated into a person's sense of self and, through this, become powerful determinants of their sport-related behavior. The underpinnings of this social identity approach are outlined, and four key lessons for sport that are indicative of the analytical and practical power of the approach are presented. These suggest that social identity is the basis for sports group (1) behavior, (2) formation and development, (3) support and stress appraisal, and (4) leadership. Building on recent developments within sport science, we outline an agenda for future research by identifying a range of topics to which the social identity approach could fruitfully contribute

International Financial Reporting Standards and Earnings Management in Latin America

This study analyzes the level of earnings management in Latin America after the adoption of the International Financial Reporting Standards (IFRS) and analyzes the role of cross-listing in the United States. The literature on earnings management in less developed countries is still under construction, and few studies focus on this issue, especially with respect to Latin America, despite its relevant role in the global economy. This paper fills this gap in the literature as it analyzes the level of IFRS earnings management regarding the first and main Latin American countries applying IFRS (Brazil and Chile), when compared to the main Anglo-Saxon countries with IFRS tradition (United Kingdom and Australia), and with the main Continental European economies (France and Germany). The results show that Latin American firms present a higher level of earnings management than Continental European and Anglo-Saxon firms, and this opportunistic behavior remains significant when only global players with cross-listing in the United States are analyzed. Thus, even with a unique set of high quality accounting standards (IFRS) and strong reporting incentives, countries’ specific characteristics still play an important role in the way IFRS is implemented in each country

Canagliflozin and Renal Outcomes in Type 2 Diabetes and Nephropathy

BACKGROUND Type 2 diabetes mellitus is the leading cause of kidney failure worldwide, but few effective long-term treatments are available. In cardiovascular trials of inhibitors of sodium–glucose cotransporter 2 (SGLT2), exploratory results have suggested that such drugs may improve renal outcomes in patients with type 2 diabetes. METHODS In this double-blind, randomized trial, we assigned patients with type 2 diabetes and albuminuric chronic kidney disease to receive canagliflozin, an oral SGLT2 inhibitor, at a dose of 100 mg daily or placebo. All the patients had an estimated glomerular filtration rate (GFR) of 30 to 300 to 5000) and were treated with renin–angiotensin system blockade. The primary outcome was a composite of end-stage kidney disease (dialysis, transplantation, or a sustained estimated GFR of <15 ml per minute per 1.73 m 2), a doubling of the serum creatinine level, or death from renal or cardiovascular causes. Prespecified secondary outcomes were tested hierarchically. RESULTS The trial was stopped early after a planned interim analysis on the recommendation of the data and safety monitoring committee. At that time, 4401 patients had undergone randomization, with a median follow-up of 2.62 years. The relative risk of the primary outcome was 30% lower in the canagliflozin group than in the placebo group, with event rates of 43.2 and 61.2 per 1000 patient-years, respectively (hazard ratio, 0.70; 95% confidence interval [CI], 0.59 to 0.82; P=0.00001). The relative risk of the renal-specific composite of end-stage kidney disease, a doubling of the creatinine level, or death from renal causes was lower by 34% (hazard ratio, 0.66; 95% CI, 0.53 to 0.81; P<0.001), and the relative risk of end-stage kidney disease was lower by 32% (hazard ratio, 0.68; 95% CI, 0.54 to 0.86; P=0.002). The canagliflozin group also had a lower risk of cardiovascular death, myocardial infarction, or stroke (hazard ratio, 0.80; 95% CI, 0.67 to 0.95; P=0.01) and hospitalization for heart failure (hazard ratio, 0.61; 95% CI, 0.47 to 0.80; P<0.001). There were no significant differences in rates of amputation or fracture. CONCLUSIONS In patients with type 2 diabetes and kidney disease, the risk of kidney failure and cardiovascular events was lower in the canagliflozin group than in the placebo group at a median follow-up of 2.62 years