Dual-bid corporate charters, entrepreneurial incentives and social efficiency

We make use of data on anti-takeover provisions (ATPs) and top characteristics hand-collected from IPO prospectuses to analyze the effect of the pre-IPO innovativeness and the top quality of private firms on the number and strength of ATPs in their corporate charters (formed at IPO). We test two opposing hypotheses: the value hypothesis, which predicts that more innovative private firms and those with higher top quality will include a larger number of (and stronger) ATPs in their corporate charters; and the management hypothesis, which makes the opposite prediction. Our empirical findings are as follows. First, firms with greater pre-IPO innovativeness (as measured by the number of patents and citations per patent) and higher top quality are each associated with a larger number of and stronger ATPs; the joint effect of pre-IPO innovativeness and top quality on the number and strength of ATPs is also positive. Second, the IPO market rewards firms with a combination of greater pre-IPO innovation productivity and stronger ATPs with higher IPO and immediate post-IPO secondary market valuations. Third, we use an instrumental variable analysis by exploiting the quasi-random assignment of patent applications to examiners with different grant rates to show that the above results are causal. Finally, firms with stronger ATPs at IPO have significantly greater post-IPO innovation productivity, measured by the quantity and quality of innovation. Overall, our findings support the long-term value creation hypothesis and reject the entrenchment hypothesis.

Environmental and social disclosure, managerial entrenchment, and investment efficiency

Environmental and Social Disclosure, Managerial Entrenchment, and Investment Efficiency

The paper examines the relationship between share ownership by boards of British stock exchange listed companies and accrual based earnings management. It provides the first empirical evidence that the relationship is impacted by UK Company Law and the institutional governance framework.We specifically model nonlinear relationships between the equity stakes owned by executive directors and discretionary accruals to account for managerial alignment-incentive and entrenchment at different levels of share ownership. To explain the nonlinear relationship, we discuss the UK institutional governance framework and highlight key regulatory thresholds. Piecewise linear regressions test the impact of these key regulatory thresholds on the earnings management-ownership relationship. We find that share ownership by executive directors has a significant impact on the level of discretionary accruals. The relationship is negative when the equity stakes of executive directors are below the 5% threshold of the ABI dilution limit and sections 376-378 of Companies Act 1985. Earnings management increases above 5% and below 10% of share ownership by executives. Once the 10% equity threshold of section 209 of Companies Act 1948 is reached, executive share ownership effectively mitigates accrual based earnings management. We find no evidence that equity ownership by non-executive directors mitigates earnings management practice of British companies.

Executive share ownership, trading behavior, and corporate control: Evidence from top management turnover during financial distress

PurposeThe purpose of this paper is to investigate the relation between the value of executive director share ownership and discretionary accruals.Design/methodology/approachThis study uses a dataset of 1,173 firm‐year observations drawn from 188 Australian listed companies for the period 2000‐2006. The analysis is based on multivariate regression analysis and ordinary least square models were used to investigate the relation between the value of managerial ownership and discretionary accruals. The issue of potential endogeneity is addressed by using a simultaneous equation system.FindingsA negative relation is found between value of managerial share ownership and discretionary accruals at lower levels of value of ownership, which is consistent with the theorised incentive alignment that as the managers commit more resources to their firms, stakeholders impose less contractual constraints specified in terms of accounting numbers and managers make lower accrual adjustments. After a certain level of value of ownership is attained, a positive relations seen, consistent with increased discretionary accrual adjustments associated with stakeholders anticipating managerial entrenchment. Also, it is found that these results are driven by firms with income increasing, as opposed to income decreasing, discretionary accruals.Practical implicationsShares and options are forming an increasing proportion of executive remuneration that continues to be the subject of much debate amongst regulators and in the media. Showing that the value of share ownership may be an effective internal governance mechanism to help align incentives adds to the debate and has policy implications.Originality/valueThe paper's primary contribution is finding that the value (as opposed to proportion) of share ownership, typically representing a sizeable proportion of managers' undiversified wealth, is a potentially direct driver of theorised incentive alignment and entrenchment effects associated with share ownership.

The relationship between managerial share ownership and the firm’s change in leverage around a security issuance is examined. We find that entrenched managers are not more likely to issue equity, however they do affect lower leverage by choosing debt issuances which are smaller and equity issuances that are larger than those chosen by managers that are not entrenched. The magnitude of the decline in leverage that occurs from before the issuance to after the issuance is positively related to managerial share ownership. In addition, this relationship is confined to only the “entrenchment” range of managerial share ownership. The market reacts negatively to an issuance announcement when managerial share ownership is high.

We present the first empirical analysis of the relationship between a firm’s management quality and the prevalence of antitakeover provisions in its corporate charter and their influence on initial public offering (IPO) valuation and post-IPO performance. We test the implications of the managerial entrenchment hypothesis, which implies that antitakeover provisions serve only to enhance the control benefits of incumbent management, and the long-term value creation hypothesis, which implies that such provisions can enhance value in the hands of higher quality management. We find that, first, firms with higher quality management and greater growth options are associated with a greater number of antitakeover provisions. Second, firms with higher management quality and a greater number of antitakeover provisions outperform other firms in the sample in terms of post-IPO operating and stock return performance and obtain higher IPO valuations. Our findings reject the managerial entrenchment hypothesis and support the long-term value creation hypothesis.

W HEN investors purchase shares of common stock, they typically acquire the right to vote in the election of the firm's board of directors and on other major issues facing the corporation. In most corporations board members are elected through "straight voting." In straight voting each shareholder is entitled to cast votes equal to the number of shares held for each director position. If a group controls 51 percent of the vote, it can elect the entire board of directors by casting all of its votes for the candidate that it favors for each position. Some firms do not use straight voting but elect their board members through "cumulative voting" instead. In cumulative voting each share entitles the shareholder to as many votes as there are directors to be elected. A shareholder may cast all votes for a single candidate or distribute them among more than one nominee. With cumulative voting it may be possible for minority shareholders to elect some board members even if the majority of shareholders oppose their election. To elect these directors, the minority shareholders would cumu-

PurposeThe purpose of this paper is to critically review the relevant literature from the perspective of dual-class firms and to provide suggestions for future research on dual-class firms, and on methodological issues that should be addressed in such research.Design/methodology/approachThe research design consists of three parts: an introduction to dual-class firms (motivations for; firm life cycle effects) in Part 1; concerns with firms with such share class structures (valuation; governance; accounting and corporate policy issues) in Part 2; and some solutions or ways to accommodate the trade-offs involved with such share class structures (retention arguments; index/exchange exclusions; contractual provisions; external monitoring) in Part 3. Throughout the paper, the authors provide some critiques of existing studies, particularly from a methodological perspective, the authors’ opinion on the state of the literature and suggestions for future areas of research.FindingsWhile motivations for the use of dual-class voting structures include flexibility so that the idiosyncratic vision of their entrepreneurs/founders can be pursued in a less encumbered fashion, greater innovation and long-term managerial orientation, there are many possible costs (e.g. underinvestment and managerial entrenchment) to this ownership structure. Nevertheless, the authors believe that such firms should have provisions in place that facilitate a reversion to a single-class structure longer term when such firms have become more mature, less dependent on the idiosyncratic vision of the entrepreneurs/founders at IPO and have attracted more managerial talent.Originality/valueThe literature arrives at no consensus on the benefits/drawbacks of this type of share ownership structure which means that many topics of research require further academic examination. The authors provide suggested directions for such future enquiries.

Agency theory embeds the influential relationship that exist between managers and shareholders of firms. This relationship has the potential to influence decision-making in the firm which in turn has potential impacts on firm characteristics such as firm value. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by proposing a further link between ownership structure and capital structure. Using an agency framework we argue that the distribution of equity ownership among corporate managers and external blockholders has a significant relationship with leverage. The paper tests four hypotheses that explore various aspects of this relationship. The empirical results provide support for a positive relationship between external blockholders and leverage, a curvilinear relationship between the level of managerial share ownership and leverage and finally, the results suggest that the relationship between external block ownership and leverage varies across the level of managerial share ownership. These results parallel and are consistent with the active monitoring hypothesis, convergence-of-interests and the entrenchment hypotheses which have been proposed in a different context.

By utilizing a sample of 44 Taiwanese banks, this study analyses whether banks can mitigate agency costs, to increase firm performance through optimization of capital structure. The stochastic frontier approach is adopted to determine cost efficiency as the firm performance indicator, an approach that is capable of controlling outside environmental factors. Furthermore, this study uses two-stage least squares to estimate two simultaneous equations that are then used to examine the relationship between capital structure and firm performance. This study includes indicators of ownership structure. The main results are: first, optimal capital structure is selected by the manager to combat the agency problem and thus improve performance, yielding results consistent with agency theory; and second, reducing managerial share ownership will decrease agency cost and increase firm performance, a finding that is consistent with the Entrenchment Hypothesis.

THIS spring the Supreme Court rejected a claim that the anti-fraud provisions of the Securities Exchange Act' impose a general fiduciary duty on those who control a corporation to act fairly toward minority interests.2 This decision, rejecting attempts to expand federal authority over internal corporate affairs through interpretation and thereby limiting the federal role to preventing fraud in securities transactions, may well increase the demands for major federal regulatory legislation governing the shareholdercorporation relationship. It is almost universally the opinion of academic commentators that state corporation codes do not impose sufficiently stringent controls on corporate management and are lax in protecting shareholders. Only federal intervention, it is said, can correct this sorry situation. This article will test the intellectual underpinnings of the conventional wisdom and of the rather venerable proposals calling for the federal regulation of the governance of corporations3 against an economic theory of corporate function and control. It will conclude both that state corporate legal systems are

The agency relationship between managers and shareholders has the potential to influence decision‐making in the firm which in turn potentially impacts on firm characteristics such as value and leverage. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by examining a further link between ownership structure and capital structure. Using an agency framework, it is argued that the distribution of equity ownership among corporate managers and external blockholders may have a significant relation with leverage. The empirical results provide support for a positive relation between external blockholders and leverage, and non‐linear relation between the level of managerial share ownership and leverage. The results also suggest that the relation between external block ownership and leverage varies across the level of managerial share ownership. These results are consistent with active monitoring by blockholders, and the effects of convergence‐of‐interests and management entrenchment.

The conditional awarding of shares to shareholder-manager is a mechanism that can be found in business agreements, particularly in startups, private equity transactions and corporate governance arrangements. This paper examines the legal validity and enforceability of agreements under the Kosovo legal framework that provides a shareholder-manager to own shares upon the condition of the fulfilment of certain business targets. While these mechanisms are meant to align managerial performance with shareholder interests, their legality under the current legislative framework in Kosovo is questionable. This research discusses the use of the corporate charter and the incorporation agreement in setting out the terms of share ownership. It explores the legality of having such provisions in the company’s constituting documents and determines how judicial bodies, such as courts and arbitration tribunals, may interpret these provisions. Besides, this paper explores the primary risks and advantages for companies and shareholder-managers, including protection against poor performance, the threat of shareholder disagreements, and the enforceability of vesting and cliff-period structures. The paper presents a comparative analysis of corporate governance norms in the European Union (EU) and private equity practices in the United States (U.S.), highlighting best practices for the design of conditional share ownership agreements. It also discusses the role of commercial courts and arbitration in resolving disputes arising from such agreements, assessing whether the legal framework in Kosovo provides sufficient guarantees for contractual certainty and business stability. The research concludes with practical suggestions for businesses, investors and attorneys, recommending legislative clarifications and contract drafting techniques to make shareholder agreements both legally effective and enforceable. Consolidating the legal framework on conditional share ownership is bound to foster a more investor-friendly and stable business environment in Kosovo, thereby stimulating heightened corporate transparency, accountability and long-term sustainable value creation.