Shareholder Class Research Articles

Resolving Tensions Between Heterogeneous Investors in a Startup

Legal scholars highlight the tensions that exist between different classes of shareholders in startups. We model a startup owned by undiversified investors with heterogeneous capital contributions and risk preferences. A social planner runs the firm on behalf of all investors. We compare investors’ expected utility with a hypothetical first-best decentralized benchmark. The startup’s optimal investment policy is procyclical and a time-varying weighted average of shareholders’ optimal investment policies. The optimal contracts issued to investors are tailor-made, interdependent, and include equity claims resembling preferred stock with heterogeneous payout caps, leading to a complex capitalization table as more investors join the startup. This paper was accepted by Will Cong, finance. Funding: This work was supported by the Cambridge Endowment for Research in Finance and Keynes Fellowship. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2022.01724 .

Homogeneity and Heterogeneity in How Institutional Investors Perceive Corporate and Securities Regulations

We use an in-depth survey of institutional investors investing in Japan to reveal the homogeneity and heterogeneity of their views on corporate governance regulations. Their opinions exhibited high homogeneity in favoring legislative intervention in corporate management but nuanced heterogeneity with respect to the degree of intervention that they regarded as desirable. A certain cluster of investors, to which investment trusts and advisors were more likely to belong, tended to prefer stronger legal intervention; these investors favored strict tender-offer rules, and they more clearly supported intervention in the composition of boards and the pursuit of executive liability. These reactions may have been motivated by concern for the fact that a certain class of shareholders, particularly banks and insurance companies, was vulnerable to pressure by management, making it hard for corporations functioning autonomously to maximize shareholder values. The survey results suggest that shareholder composition may affect the necessity and effectiveness of legal interventions.

The Steinhoff Corporate Scandal and the Protection of Investors Who Purchased Shares on the Secondary Market

The December 2017 revelations of accounting irregularities in the Steinhoff group resulted in the share price dropping more than 95%. Investors, including pension funds, lost millions. This contribution deals with some of the legal issues arising from the misstatement of the financial position of Steinhoff International Holdings NV and its South African predecessor Steinhoff International Holdings Ltd, which resulted in the inflation of its quoted share price. It considers how retail and institutional investors who had acquired their shares through trades on the regulated secondary market might recover the losses they suffered. The administrative penalty provisions in relation to market abuse are briefly considered but shown to be of very limited application as regards compensation to investors. Common-law delictual liability and statutory civil liability in terms of section 218(2) and section 20(6) of the Companies Act are considered in the context of the first reported attempt at the certification of a shareholder class action. Unfortunately, both the potential statutory remedies were interpreted so restrictively by the court in the class action certification application that they would hardly serve any purpose. The interpretations are shown to cause anomalies in the context of the Companies Act and to be out of step with established principles of company law. Also, the certification court's application of the reflective loss and proper plaintiff principles is questioned. Some of these issues might have been solved through further litigation, but for statutory compromise and composition mechanisms that brought a mutually acceptable early end to the uncertainty of protracted litigation.

The Relationship between Corporate Governance and Performance of Pension Fund Managers in Kenya

Pension funds performance in Kenya have been facing myriad of challenges ranging from poor administration and investments of pension funds, lack of transparency and accountability, non-remittance of monthly contributions by employers, misappropriation of scheme assets by the trustees, loss of scheme funds through negligence of trustees and poor investment of the scheme assets. The objective of this study was to examine the relationships between corporate governance, and performance of registered pension fund managers in Kenya. This study adopted positivism philosophy. The study employed a cross sectional survey design whereby access to the widest possible amount of data from the targeted Fund Managers in Kenya was sought. The population of interest of the study was 31 Fund Managers in Kenya licensed by RBA and CMA. The study used purely primary data sources. Primary data was obtained from the selected respondents. Primary data was collected through questionnaire. Regression analysis was used to establish the relative significance of each of the variables on the influence of corporate governance on the performance of pension fund managers in Kenya. The study findings indicated that there was significant relationship between corporate governance and performance of pension fund managers in Kenya. The study concluded that there is significant relationship between corporate governance and performance of pension fund managers in Kenya. The study determined that the corporate governance practices being implemented had been incorporated in the Pension Fund’s investment management decisions with its assets being more diversified and having enhanced reporting on investments. The study recommends on pension reforms, by creating a new class of potential activist shareholders in the form of pension funds, could in principle improve corporate governance and increased shareholder discipline. The governments as well as Pension Fund Managers supervisors should consider a more active role in the selection process of the board members, while reducing their choices to professional beneficiaries of the pension funds Keywords: Corporate Governance, Transparency, Ownership Structure, Accountability, Participation Performance, Pension Fund Managers & Kenya

Dividend Policy of Different Market Segmentations: A Dynamic Panel Data Analysis

Dividend policy is determined by a company's board of directors (BOD) and is used to make dividend decisions. Dividend is a fragment of a firm's distributable earnings1 that is announced by the firm's BOD with inputs from senior management (Baker, 2009). The dividends are determined according to the class of the firm's shareholders. Dividends can be given out as payments in cash, shares of stock or other assets. Dividend payment also affects the firm's ability to continue its earning in sustaining growth opportunities and shareholder wealth. The Asian financial crisis was a wake-up call for all Asian markets to recognise the structural issue that played an important part towards the disaster. Asian firms have however improved their corporate governance and transparency after the crisis. Consequently, the bond markets3 and equity markets4 especially in the United States, United Kingdom and Europe started to look into the prices of the Asian market. The investors found sustainable growth and income in the Asian market. Moreover, Asian countries for the last two decades have improved considerably and have been the driving engine for the world economic growth. Since firms in the Asian countries are not just about capital growth, firm's dividends are becoming the main sources of income for investors. Hence, distributing cash to shareholders via alternatives such as qualified dividends, stock splits and stock dividends, has increased significantly in many countries. In defining the determinants of dividend policy, numerous empirical studies have been conducted in many countries. Earlier studies include Lintner (1956) and Miller & Modigliani (1961). However, application of the dividend policy may be different across countries, either in terms of legal system or firm-specific differences. The differences complicate the transferability of dividend payments and decisions. Thus, dividend policy may vary across countries specifically in Singapore, Malaysia and Saudi Arabia, that over a period of time, has not been empirically investigated. Persistent focus on the developed market is another issue that endows fuzziness regarding dividend policy. Abandoning the developing and emerging markets also deters further new outlooks (Jabbouri, 2016). Keywords: Dividend policy, Generalized Method of Moment, Dynamic panel, key determinants

Class Actions and Human Rights Litigation in Australia: Realising the Potential

Most commentary and, indeed, most controversy concerning class actions in Australia has concerned shareholder class actions and how they are funded. This paper consciously changes the focus of its commentary away from such debates and towards examining human rights class actions in Australia. As Australia is the only advanced country without national constitutional or statutory protections of human rights, attempts to legally protect human rights have manifested themselves indirectly in various areas of the law that might not at first glance seem to have much to do with human rights. Class actions has been one of those legal areas. Given the paucity of existing commentary on Australian human rights class actions this paper begins with an examination of the types of cases that have been bought as human rights class actions and provides examples of them. Drawing on literature concerning the effectiveness of actions undertaken to protect human rights and on class actions protecting human rights overseas, it uses publicly available information to undertake a qualitative analysis concerning the effectiveness of such litigation. After coming to some tentative conclusions about such effectiveness, it examines whether US class actions law might be a source of ideas that could be adapted to address any such limitations of effectiveness in the same way that US class actions jurisprudence was originally drawn upon by the Australian Law Reform Commission to recommend that class actions provisions be enacted in Australia. Given the relative absence of legal norms protecting human rights in Australia as well as the relative weakness of social movements seeking greater legal protection for human rights in Australia, the search by human rights advocates for ways to access courts and obtain greater legal furtherance of human rights is a task of some urgency. This paper attempts to contribute to that search as well as to advance the analysis of Australian human rights class actions and their effectiveness more generally.

Long‐tenured independent directors and firm performance

AbstractResearch SummaryAgency perspectives suggest long‐tenured independent directors (LTIDs) may be cronies of the CEO, making their boards less effective, but we theorize that LTIDs may have particular expertise and motivation to improve board effectiveness and ultimately firm performance. We find strong support for this prediction using 15 years of data on the S&P 1,500 firms and an instrument based on director age at time of hire. We also find that an LTID adds more value to firms that are complex or mature, had more CEOs during the LTID's tenure, and have less entrenched management. Post hoc analyses of director deaths and shareholder class action lawsuits and activist motions provide additional evidence that LTIDs add value to the firms on whose boards they serve.Managerial SummaryWe study whether having a long‐tenured independent director (LTID) on the board has implications for firm performance. In general, we find that firms with an LTID perform better than firms without one. The performance benefits accrue primarily to firms that have complex operations, are in the mature stage of their lifecycle, and had more CEOs during the LTID's tenure. That said, firms with entrenched management do not benefit from having an LTID. We also find that firms with an LTID experience fewer class action lawsuits and shareholder activist motions and that the stock market reacts adversely to the death of an LTID. Overall, the evidence is that LTIDs offer valuable experience and stability to the firms on whose boards they serve.

Courting innovation: The effects of litigation risk on corporate innovation

In this study, we examine the impact of class action litigation shocks on corporate innovation. Our experimental design is based on an unanticipated court ruling that reduces the risk of shareholder class action lawsuits for firms located within the jurisdiction of the US Ninth Circuit. Innovation output by firms headquartered in this area increased significantly after this decision compared with that of firms elsewhere. This result is consistent with our trading hypothesis, which states that the threat of litigation leads to managerial myopia. The increase in innovation is more pronounced at high-tech firms and firms operating in a competitive environment. Other measures of ex ante litigation risk indicate that firms with the greatest litigation risk experience the greatest increase in innovation after this decision. We conclude that a reduction in the threat of class action litigation leads firms to increase innovation.

Is “Not Guilty” the Same as “Innocent”? Evidence from SEC Financial Fraud Investigations

When the Securities and Exchange Commission (SEC) investigates firms for financial fraud, investors learn about the investigation only if managers disclose it, or regulators sanction the firm. We investigate the effects of such disclosures using confidential records on all investigations, regardless of outcome. Even when no charges are brought, firms that voluntarily disclose an investigation underperform non‐disclosing firms by 11.7 percent over the following year. Disclosure is associated with a higher chance of shareholder class action lawsuits, and more prominent disclosures are associated with worse returns. CEOs who disclose an investigation are 14 percent more likely to experience turnover. Our results are consistent with transparency about bad news being punished by financial and labor markets.

Labor’s Capital and Worker Well-Being: Do US Pension Funds Benefit Labor Interests?

Abstract Since the 1980s, the shareholder value revolution has undermined the position of workers and organized labor within US firms. At the same time, workers have paradoxically become one of the largest classes of shareholders through labor pension funds (LPF), including state public employee funds and private sector union-affiliated funds. Does workers’ concentrated ownership of capital in LPF represent a mechanism to advance worker interests against the prevailing wage, benefit, and jobs squeeze in publicly traded firms? This article links data on US state pension funds’ investments and shareholder activism to firm-level data on work and employment outcomes from 2001–2016. LPF shareholder proposals targeting large firms have declined over time. However, panel regression models show that intra-firm mobilization by LPF in the form of shareholder proposals is associated with modestly improved worker outcomes. There is no evidence that greater ownership share by public pension funds (PPF) is associated with more labor-friendly outcomes. This null association obtains even when focusing only on ownership by the most socially activist funds, or those from Democrat-controlled states. Nor does PPF ownership buffer workers from the negative impact of extractive hedge funds. Together, the results help reconcile contending accounts of pension fund capitalism’s effects on worker well-being. The analysis contributes to the sociological study of financialization, corporate governance, work and employment, and labor movements.

Corporate Law of Malaysia: The Rights of Shareholders and Members in Malaysian Business Entities

This article explains the law and procedures relating to rights enjoyed by different classes of shareholders and variation of those rights, liabilities of members, special rights associated to preference shareholders, pre-emptive rights and the effect of share dilution. Discussion is based on the Companies Act 2016. The writing of this article employs the hermeneutics analysis of relevant legislation(s). It provides a quick and simplified reference for students and non-practitioner.

Empirical Data On How Investors Are Harmed When Companies Do not Disclose Information About Violence and Lack of Indigenous Consent

The Justice and Corporate Accountability has filed a number of complaints to the Ontario Securities Commission, the British Columbia Securities Commission and the United States Securities and Exchange Commission relating to the failure of Canadian mining companies to disclose information on community conflict, violence and Indigenous consent. An analysis of the cases found four indicia that showed that the information disclosed in the complaints (but not disclosed by the companies) was important material information relating to the health of the company, including a drop in share price; divestment by institutional investors; and shareholder class action law suits against the company. The study recommends that extractive companies should have more explicit guidance related to disclosure of violence and human rights issues, including specific disclosure requirements relating to free, prior, and informed consent of Indigenous peoples (FPIC). This study is a follow-up to the JCAP report, “The Canada Brand: Violence and Canadian Mining Companies in Latin America” (2016), which found that publicly listed companies reported only 24.2% of the deaths and 12.3% of the injuries listed in that report.

The effect of securities class action lawsuits on mergers and acquisitions

This paper investigates whether shareholder class action litigation affects the takeover candidacy, premium, and completion rate of mergers and acquisitions involving defendant target firms. We use a comprehensive dataset of publicly traded U.S. firms that became the targets of takeover bids between 1998 and 2016 and find that firms subject to shareholder class action lawsuits within the previous two years are more likely to be targeted for acquisition while commanding a significantly higher premium. Firms that face such litigation after a takeover announcement experience a significant decrease in takeover completion.

A Cause for Alarm? The Long‐term Performance of Shareholder Class Action Defendants

Using two decades of shareholder class action filings, we provide evidence of significant and consistent long‐run price underperformance in defendant firms. By partitioning our sample according to the merits of an action, we show that firms less likely to have been involved in earnings manipulation, but who may have benefited from corrective management improvements and better signalling, go on to experience significant price reversals within a year of the filing date. Firms identified as high probability manipulators underperform over the long‐term. Our results have important implications for ongoing policy discussions on the merits of shareholder class actions.

Facilitating the Optimal Mechanism in Mergers & Acquisitions: A Comparative Perspective from the Commonwealth and United States

This paper attempts to identify the salient economic features of M&A transactions that are relevant to takeover regulation. While attainment of the optimal mechanism in every instance may not be possible, we have suggested general guidelines as to how takeover regulation should move towards the optimal mechanisms that are applicable given real-world assumptions. With efficiency as the appropriate normative yardstick, we suggest the removal of defensive measures, the removal of Revlon-type duties and the enforcement of ex-ante deal protection measures as simple reforms that would substantially improve a given takeover regime. This represents the state of Singapore presently, which arguably has merged the best of the US and UK laws. The efficiency properties of the regime arise from the recognition of a proper purpose rule. Simply put, in cases where the exercise of a power would affect the strength and relative positions within the company of different sections or classes of shareholders, we should consider whether or not the power in the hands of directors was properly exercised in accordance with welfarist standards. This balancing process is vital in takeovers where the use of soft law and flexible standards are administered by a market regulator, as opposed to the use of specific rules, which are better implemented by courts.

Shareholder litigation rights and corporate acquisitions

We examine the effect of shareholder litigation rights on managers' acquisition decisions. Our experimental design exploits a U.S. Ninth Circuit Court of Appeals ruling on July 2, 1999 that resulted in a reduction in shareholder class actions. We find that, since the ruling, firms in Ninth Circuit states acquire larger targets. Furthermore, acquirers' returns are lower in these states, especially for those with weaker corporate governance. Further analysis shows that value destruction is the result of managers' freedom to conduct empire-building acquisitions using overvalued equity. Overall, our findings indicate the importance of shareholder litigation as an external governance mechanism.

Shareholder Class Actions in Australia – Myths v Facts

Shareholder class action litigation is the most discussed and controversial category of class actions but, unfortunately, much of the analysis and commentary on shareholder class actions has been inaccurate. The purpose of this report is to provide comprehensive and accurate data with respect to the first 27 years and four months of shareholder class actions in Australia so as to facilitate an accurate evaluation of (or even an accurate general dialogue with respect to) shareholder class actions. The period in question - the review period - goes from 4 March 1992 to 30 June 2019. In light of the claims that have been made on numerous occasions over the last few weeks that there has been an explosion of class actions over the last 12 months or so, I will also provide some data on all Australian class actions filed over the review period.

How Long Does It Last to Systematically Make Bad Decisions? An Agent-Based Application for Dividend Policy

Bad decisions have harmful effects on the quality of human life and an increase of their duration expands these undesirable effects. Systematic bad decisions related to dividend policy can affect the investors’ quality of life in the long-term. We propose an agent-based model for the estimation of the duration of systematically making bad decisions, with an application on dividend policy. We propose an algorithm that can be used in modelling the interaction between different classes of shareholders and for predicting this duration. We perform numerical simulations based on this model using NetLogo 6.0.4. We prove that, as a result of agents’ interaction, in some conditions, the duration of systematically making bad decisions can be very long: some numerical simulations suggest that, in some circumstances, this duration can significantly exceed the human lifetime. Additionally, in some conditions, the company can fail before the power is switched. This duration can increase dramatically if the shareholders have a great level of trust in the management’s decisions. As an implication, a greater concern for the quality of financial education, and more performant instruments for controlling the power’s decisions are required.

The (re)introduction of dual-class share structures in Hong Kong: a historical and comparative analysis

ABSTRACTIn April 2018, Hong Kong issued new listing rules to introduce the dual-class share structure, also known as weighted voting rights (WVR), under which a special class of shareholders' voting rights are conferred disproportionately with respect to their equity interest. The WVR was used in Hong Kong in the 1980s but was banned in 1989. The debate on the WVR was rekindled by the Alibaba event in 2013. The WVR structure has benefits and costs. Thus, Hong Kong lays down relevant supporting mechanisms, including entry requirements, disclosure requirements and safeguard requirements. The WVR regime in Hong Kong appears to be more stringent than jurisdictions that have either long allowed WVR listings, notably the United States and Canada, or recently chose to do so such as Singapore. This paper argues that the (re)introduction of the WVR regime is generally a positive development for Hong Kong, but there are still some lingering concerns.

The reaction of firm ex ante cost of equity capital to the resolution of shareholder class action lawsuits

Existing research provides evidence that providers of capital (banks, public debt, and equity) all increase the expected return on securities after the initiation of a shareholder lawsuit. Many of these lawsuits are dismissed or settled with trivial monetary penalties, which suggests that an across-the-board permanent increase in the cost of capital is misguided. After estimating the probable outcome of a shareholder lawsuit using only information available at the time the shareholder lawsuit is filed, we study the resolution of shareholder lawsuits to determine if market participants adjust their expected return after a case is resolved. We find an increase (decrease) in the ex ante cost of equity capital when there is a surprise settlement (dismissal), which is consistent with an efficient market. Further, we present evidence consistent with equity market participants monitoring the progress of shareholder lawsuits prior to resolution. Overall, our results suggest that firm ex ante cost of equity capital only changes after the resolution of a shareholder lawsuit if the outcome of the case is different than initially predicted.