Future Shareholders Research Articles

Pre-IPO dividend puzzle: Reaction to IPO underpricing or post-IPO lockup? Evidence from China

It remains a puzzle as to why firms pay cash dividends to initial investors prior to their initial public offerings (IPOs) while at the same time raising capital through the IPOs. Leveraging mandatory disclosure from three years of pre-IPO data in China, we examine two possible explanations for this puzzle: strategic reactions to IPO underpricing and post-IPO lockup. Our findings suggest that (1) when an IPO firm expects a large IPO underpricing, it pays more cash dividends pre-IPO, suggesting that initial shareholders view large IPO underpricing as undervaluing the market value of the firm's cash pre-IPO. (2) When an IPO firm pays more cash dividends pre-IPO, its initial shareholders unload fewer shares post-IPO after lockup expiration, suggesting that the initial shareholders receive “compensation” via cash dividends to ease their liquidity concern from post-IPO lockup. Both results support the proposed explanations. Additional analyses show that high cash dividend payouts pre-IPO are associated with fewer fixed assets, less investment in research and development, and poor performance post-IPO. These results indicate that cash dividends pre-IPO are not consistent with shareholder value maximization. Overall, pre-IPO cash dividends reflect a type II agency conflict in which initial shareholders seek private benefits at the expense of future shareholders.

Sustainable Directors’ Duties and Reasonable Shareholders

This paper will examine the sustainability of directors’ duties from two perspectives, namely that the duties are stable in their own right and that they cover enough ground for them to help achieve sustainable goals. First, we will examine how directors’ duties to act in a company’s best interest operate well when shareholder interests are aligned. These duties, when breached, can be ratified by shareholders given the traditional understanding that they are the company. This may, in turn, have been associated with the growing acceptance of shareholder primacy over the past 40 years, seen most recently in the UK Supreme Court decision in BTI v Sequana (2022). The Supreme Court, however, also discussed the limitations of shareholder ratification, and its interaction with the rules protecting creditors, particularly as regards capital maintenance. Those rules have, however, been weakened, and private law has had to step in to address the abuse those rules were aimed at. Where the substantive content of directors’ duties is concerned, the focus everywhere is on how to make directors take account of external constraints such as environmental, social and governance (ESG) concerns and corporate purposes that may contradict enhancing shareholder value (as well as existing shareholder protection) as an established paradigm of company law. We will also analyse the difficulties in accommodating the interests of other internal constituents, like creditors (some of whom may have been externalised). This paper will build on earlier suggestions that the proper purpose rule has a part to play in balancing the interests of corporate constituents both inter and intra se and even in considering the position of future shareholders. The test of what is in the best interest of the company may not provide enough balance in this regard, as seen perhaps from the recent failed derivative action sought by some shareholders of Shell against its directors, and directors should take account of the interest of the reasonable shareholder in capturing the gist of what ESG should aim at.

Journalism: As Seen in the Eyes of Current Journalism and Digital Media Students

The world of journalism is complex, multifaceted, and intricate. No consensus exists on the definition of journalism or its characteristics, skill set, and career choices. Differing perceptions stem from journalism’s shifts to new forms, practices, and ways of thought. The digital revolution has drastically transformed the understanding and definition of journalism. Journalists, journalism educators, and even social critics have all offered varying notions on the field. However, the students, a key element, are often neglected in this equation. This paper explores how students view journalism. The current generation is arguably highly equipped with digital media through regular practice, consumption, and exposure to digitization. Journalists-to-be are considered to be the future shareholders and may be the directors of the profession. The study focused on how journalism and digital media students specifically classified journalism characteristics, the educational background they found necessary for journalists, as well as their work aspirations. As journalism is evolving and, in particular, digital journalism is a key factor in the study, the student sample was limited to those registered in the Journalism and Digital Media department at Al Maaref University. Al Maaref University has been categorized as one of the first universities in Lebanon to include the term “digital media” in their journalism degree in hopes of reflecting the fast-changing industry. This study used a quantitative approach based on a survey questionnaire administered online to all students enrolled in the above-mentioned department. Findings showed that the majority of students considered the top characteristics of a journalist to include traditional journalism skills before any digital journalism skills. Students also expressed areas of study at times consistent with those skills and other times consistent with their career choices. Moreover, a majority of current journalism students aspire to work in front of the camera.

Consistency of corporate governance statements with the Corporate Governance Code provisions. The case of Romanian oil market

Abstract The purpose of corporate governance is to achieve a responsible and value-oriented control of a company. The corporate governance provisions promote and strengthen the confidence of current and future shareholders, creditors, employees, business partners and the general public in national and international markets. For the resilience of financial markets but also for sustainable economic development it is crucial as a governance practice of companies listed on financial markets to be enshrined in the current corporate governance codes’ provisions. Therefore, the approaches of this research bring to the public's attention the conformity of the corporate governance declarations of companies from oil industry that trade shares on the Bucharest Stock Exchange. The results show that, in 2019, the analyzed companies register a high level of compliance with the provisions of the Corporate Governance Code applicable on the Romanian financial market.

Psychological Contract as a Mediator of the Leadership- Turnover Intentions Relationship

We developed and tested a model examining the influence of leadership styles on the psychological contract of different generations of professionals and subsequently their turnover intentions. The study proposed that there is a relationship between leadership styles and psychological contract breach and subsequently the turnover intentions of legal professionals – lawyers, tax advisors, and (candidate) civil law notaries – working in professional service firms. Because of the strategic importance of human capital in a professional service firm, it is important for the continuity of the organization that they will retain their legal professionals and inspire young associates to become future shareholders.

Board characteristics, IFRS adoption and voluntary disclosure: evidence from management forecasts accuracy in France

In this article, we examine whether the IFRS adoption and the strong corporate board contribute effectively to reduce the information asymmetry by enhancing the quality of voluntary disclosure in the case of French IPOs. Our measure of disclosure quality is denoted by the absolute forecast error as a proxy for management earnings forecasts accuracy. We find evidence that the adoption of IFRS gives a credible signal of higher disclosure quality and lower information asymmetry through the improvement of the management earnings forecasts accuracy. Also, we find that the independent and larger boards do play an important role in promoting corporate transparency by conveying more accurate earnings forecasts. These findings suggest that future shareholders can benefit from receiving better forecasts. Accurate management forecasts can allow them to identify the companies they want to invest in, and to reduce the costs of adverse selection that they have to face.

The Fiduciary Responsibility of Directors to Preserve Intergenerational Equity

The well-being of generations yet to come must necessarily be an important concern for the present. As an extension of Rawls’ ‘just savings’ principle, one of the arguments for sustainable development is that of intergenerational equity—the idea that future generations must have the same access to natural resources as the present generation. In this article, I attempt to reconcile the divergent positions of the shareholder and stakeholder primacy debate by proposing that directors—acting for the corporation—should preserve intergenerational equity. Three arguments are presented in course of this proposition. Firstly, corporations are perpetual in nature and their continuing existence is predicated upon the ability of individual owners to transfer their ownership. Second, directors have a higher fiduciary duty to the corporation and future shareholders, over that of present shareholders. Finally, in order to safeguard the interests of future shareholders, corporations must necessarily strive to preserve the natural and social environments upon which the future of the corporation and the wealth of future shareholders depend.

Information Disclosure, Real Investment, and Shareholder Welfare

This paper investigates the preferences of a firm's current and future shareholders for the quality of mandated public disclosures in a dynamic setting with real investments. We find that while the firm's investment monotonically increases in disclosure quality, the welfare of the firm's current shareholders can be maximized by an imperfect disclosure regime. In particular, the current shareholders prefer an intermediate level of public disclosures if (i) the firm's current assets in place are small relative to its future growth opportunities, and either (ii) the firm's investment is observable by the stock market and sufficiently elastic with respect to the cost of capital, or (iii) the firm's investment is not directly observable by the stock market and is sufficiently inelastic with respect to the cost of capital. The firm's future shareholders prefer more precise public disclosures if the firm’s growth rate during their period of ownership is sufficiently high.

Information disclosure, firm growth, and the cost of capital

We study how information disclosure affects the cost of equity capital and investor welfare in a dynamic setting. We show that a firm’s cost of capital decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) a certain threshold. The threshold growth rate is higher when the firm’s cash flows are more persistent, or when other firms in the economy are growing at low rates. While current shareholders always prefer maximum public disclosure, future shareholders’ welfare decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) the threshold.

The legal implications of the economic realities of artificially manipulating a decrease/increase of earnings per share - if any

Although probably oversimplified, calculating "earnings per share" or the "earnings-per-share ratio" entails the activity of dividing the net profit of a company by the number of its issued shares. The economic reality is that companies may use innovation and creativity to lawfully engineer a better earnings-per-share ratio in order to attract more shareholder investments. Neither the Companies Act of 1973 nor that of 2008 makes any provision for the maximum or minimum amount of capital required to float a company, or the minimum number of shares that should be issued. This depends solely on the promoters' discretion of the number of shares that must equal the capital amount. It is therefore possible that the promoters may excessively exercise their discretion when deciding on the authorised share capital, and later tailor-make or financially engineer the share capital structure of the business to make it attractive to shareholders or future shareholders. After all, the law does not prohibit statutory financial engineering. The purpose of this article is therefore to consider section 75 in the Companies Act of 1973 - or its equivalent (section 36(2)) in the Companies Act of 2008 - and the topic of statutory approval for an artificial decrease or increase in the number of issued shares. Possible methods of preventing or limiting artificial increases in earnings per share are also suggested.

Agency Implications of Equity Market Timing

We develop a rational expectations model to examine the conflicts of interest between different groups of shareholders in firms' market timing decisions. We show that current shareholders benefit from share repurchase timing, whereas future shareholders prefer issuance timing. Using a new empirical measure that captures the additional returns to shareholders from equity sales and stock repurchases, we document that managers of large firms time the market primarily through stock repurchases and are rewarded with higher compensation when they beat the market. In contrast, managers of small firms appear to cater more to future shareholders in their market timing decisions.

Current-Shareholder Bias and the Limits of Shareholder Empowerment

Why do managers of widely-held firms fail to maximize firm value? The standard answer is that managers often pursue their own interests rather than shareholders’. I explain, however, that even managers completely loyal to the investors who hire and fire them -- the firm’s current shareholders will act in ways that diminish firm value. In particular, managers loyal to current shareholders will reduce value to enrich current shareholders at future shareholders’ expense. This problem, which I call “current-shareholder bias,” arises even if markets are perfectly rational, and even if all current shareholders are long-term investors. My analysis suggests that empowering current shareholders is unlikely to solve (and may exacerbate) certain corporate governance problems that have long afflicted U.S. firms, including earnings manipulation, real earnings management, and value- destroying acquisitions.

Learning About Governance Through Nonprofit Board Service

Business educators have a responsibility to ensure that future managers, employees, and shareholders are well versed in governance. Governance provides a vital link between organizations and society, allowing people to place their trust in an organization, support its mission, and ensure a continuing flow of resources to accomplish the mission. This article discusses coursework in board governance that combines a 5-month internship on a community nonprofit board with academic class work on governance topics to create a unique learning opportunity. The course combines elements of internship, mentorship, and service learning with more traditional academic activities such as lectures, guest speakers, research, and analysis. Students gain greater awareness of the needs of the broader community and the challenges of serving them. The community gains from a growing pool of people with governance knowledge and skills who understand the value of community service.

Insider Trading and CEO Pay

This Paper presents evidence boards of directors “bargain” with executives about the profits they expect to make from trades in firm stock. The evidence suggests executives whose trading freedom is increased using Rule 10b5-1 trading plans experienced reductions in other forms of pay to offset the potential gains from trading. There are two benefits from trading—portfolio optimization and informed trading profits—and this Paper allows us to isolate them. The data show boards pay executives in a way that reflects the profits they are expected to earn from informed trades. The legal issues about paying using illegal profits are explored. As a matter of policy, the data seriously undercut criticisms of the laissez-faire view of insider trading most closely associated with Henry Manne. At least with respect to classic insider trading (that is, a manager of a firm trading on the basis of information about the firm where she works), if boards are taking potential trading profits into consideration when setting pay, it is difficult to locate potential victims of this trading. Current shareholders should be happy with a deal that pays managers in part out of the hide of future shareholders, and the firm should internalize any costs arising from this payment scheme, since future shareholders should take this into account when deciding whether and what price to buy shares. While there still may be good reasons to prohibit some individuals from trading on material, non-public information, the case for classic insider trading is made much weaker by this data.

Large shareholders and the pressure to manage earnings

We present empirical evidence that firms inflate earnings around seasoned equity offerings in the presence of large outsider blockholdings, but not in their absence. The finding is robust to several alternative explanations, including differences in firm characteristics, growth, performance, CEO incentives, and capital usage. While we do not dispute that CEOs behave opportunistically, we challenge that earnings management is solely a symptom of weak governance. We conclude that strengthening shareholder power to alleviate the conflict between shareholders and management can also have the unintended consequence of intensifying the conflict between current and future shareholders.

Value Addition Through Good Governance in Corporate Sector: Role of Disclosure and Transparency

The purpose of corporate governance is to achieve a responsible, value oriented management and control of companies. Corporate governance rules promote and reinforce the confidence of current and future shareholders, lenders, employees, business partners and the general public in national and international markets. Corporate governance has evolved and grown significantly in the last decade. Numerous countries have issued corporate governance codes, and the recommendations of these codes, that typify good corporate governance, undoubtedly contribute towards increased transparency and disclosure. By striving for better governance, firms are able to reduce their cost of capital, mitigate risk, enhance investors’ confidence and enhance corporate valuation.

Are Independent Audit Committee Members Objective? Experimental Evidence

ABSTRACT: We use experimental markets to examine stock-based compensation's impact on the objectivity of participants serving as audit committee members.We compare audit committee member reporting objectivity under three regimes: no stock-based compensation, stock-based compensation linked to current shareholders, and stock-based compensation linked to future shareholders. Our experiments show that student participants serving as audit committee members prefer biased reporting when compensated with stock-based compensation. Audit committee members compensated with current stock-based compensation prefer aggressive reporting, and audit committee members compensated with future stock-based compensation prefer overly conservative reporting. We find that audit committee members who do not receive stock-based compensation are the most objective. Our study suggests that stock-based compensation impacts audit committee member preferences for biased reporting, suggesting the need for additional research in this area.

Market Liquidity, Investor Participation and Managerial Autonomy: Why Do Firms Go Private?

This discussion paper resulted in a publication in 'The Journal of Finance' , 2008, 63(4), 2013-2059. We analyze a publicly-traded firm's decision to stay public or go private when managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in the liquidity of public ownership. While the liquidity of public ownership lets shareholders trade easily and supply capital at a lower cost, the liquidity-engendered trading also results in stochastic shocks to a firm's shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their extent of intervention in management decisions and in turn curtails managerial incentives. By contrast, because of its illiquidity, private ownership provides a stable shareholder base and improves these inputprovision incentives but results in a higher cost of capital. Thus, capital market liquidity, while being a principal advantage of public ownership, also has a surprising 'dark side' that discourages public ownership. Our model takes seriously a key difference between private and public equity markets in that, unlike the private market, the firm's shareholder base, namely the extent of investor participation, is stochastic in the public market. This allows us to extract predictions about the effects of investor participation on the stock price level and volatility and on the public firm's incentives to go private, thereby providing a link between investor participation and firm participation in public markets. Lesser investor participation induces lower and more volatile stock prices, encouraging public firms to go private, whereas greater investor participation encourages younger firms to go public. Moreover, IPO underpricing is optimal because it is shown to lead to a higher and less volatile post-IPO stock price, greater autonomy for the manager and a higher supply of privately-costly managerial inputs.

Putting Integrity into Finance: A Positive Approach (PDF of Keynote Slides)

Finance theory and practice are incomplete without an integrated theory of integrity. Following Erhard, Jensen and Zaffron (2007) I define integrity without reference to morals, values, religion, or ethics. Something is in integrity if it is whole, complete and sound. Integrity is closely related to workability because an entity or system that is out of integrity will not be whole, complete and sound. Workability is the bridge to value. The farther out of integrity the less well any given entity will work. The positive proposition that increasing the integrity of a firm will contribute to increasing its value is no different in kind from the positive proposition that the net present value investment rule will lead to value creation. The theory thus implies that integrity is a necessary, but not sufficient condition for the maximization of long-term value. The theory is testable and refutable. I illustrate the application of this concept in finance by considering several examples:1. The implicitly held proposition that firm's managers owe fiduciary responsibility to current shareholders only (excluding current and future bondholders and future shareholders). This leads to the widely held recommendation/belief that the appropriate action for a firm whose equity is substantially overvalued is to sell new equity and pay out the proceeds to current shareholders or to acquire a less overvalued firm through an equity transaction. Both of these policies will create a system in which future shareholders find that they have been taken in the transaction. Policies that expropriate wealth from future shareholders or bondholders cannot contribute to the creation of long-term value. Interestingly, U.S. disclosure laws provide some obligations for managers to take into account the interests of future bond and stockholders. 2. I discuss the extensive empirical evidence on the puzzling low-integrity value-destroying equilibrium between managers and capital markets and argue that understanding how this equilibrium continues to exist is a major challenge for our profession.-------PDF file of Keynote slides for speech first presented on the occasion of the presentation of the LECG Lifetime Achievement Award in Recognition of his Contributions to the Field of Financial Economics to Michael C. Jensen at the meetings of the American Finance Association, Boston, MA, Jan. 6, 2006; also presented to the Centre for Corporate Governance, London Business School, London, UK, Jan. 19, 2006; the Center for Corporate Governance, LeBow College of Business, Drexel University, Philadelphia, PA, March 1, 2006; Journal of Corporate Finance Conference on Private Equity, LBOs, and Corporate Governance, Rensselaer Polytechnic Institute, Troy, NY, April 21, 2006; CFO Forum, U. of Washington Business School, Seattle, WA, May 17, 2006, JOIMs Fall 2006 Conference, Boston, MA, Sept. 2006, Zicklin Center for Corporate Integrity, Baruch College, NYC, Oct. 2006; State Street Global Markets 7th Annual Research retreat, Boston, MA March 1, 2007: Society of Quantitative Analysts (SQA) Society, Fuzzy Day Conference, NY, NY, June 18, 2007; Smith Breeden Associates? Investment Research Seminar, Pinehurst, NC, Oct. 4, 2007; Tuck School of Business, Corporate Governance Workshop for Large Institutional Investors, Oct. 8, 2007; Deutsche Asset Management, Global Quantitative Investor Strategies: The Art of Alpha and Beta, NY, NY, Oct. 17, 2007; Financial Management Association, Orlando, FL, Oct. 18, 2007; DeAM European Investor Conference -- Alternative Sources of Alpha: The Art of Alpha and Beta, Berlin, Germany, Nov. 7, 2007; U. of South Florida and Society of Financial Analysts Conference on The Relationship of Value to Governance, Tampa, FL, Feb. 1; London Business School Private Equity Institute Seminar, April 14, 2008; Mays Business School, Texas AM Keynote Address, Financial Intermediation Research Society (FIRS), Prague, Czech Republic, May 29, 2009; and Keynote Address, European J. of Finance and J. of Business Ethics Joint Conference: Law, Ethics and Finance, Schulich Business School, York U., Sept. 17, 2010; Financial Accounting and Reporting Section (FARS) of the American Accounting Association (AAA), Plenary Session, Tampa, FL,January 28, 2011.

Market Liquidity, Investor Participation and Managerial Autonomy: Why Do Firms Go Private?

We analyze a publicly-traded firm's decision to stay public or go private, focusing on the stochastic nature of investor participation in the public market. The liquidity of public ownership is both a blessing and a curse: it facilitates trading and lowers the cost of capital, but it also introduces volatility in a firm's shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their intervention in management decisions, consequently affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, thereby providing a link between investor participation and firm participation in public markets.