Rule 144A Research Articles

How does the JOBS act affect the rule 144A market?

AbstractIn this article, we examine the effects of Title II of the Jumpstart Our Business Startups (JOBS) Act on the cost and issue size of Rule 144 debts for a sample from 2002 to 2019. We find that after the enactment of the JOBS Act, the average cost (issue size) of the Rule 144 A offers decreases (increases) significantly. The findings are robust after controlling for issue‐, issuer‐, and country‐specific characteristics as well as market conditions. Evidence based on the propensity‐score‐matched sample, including public debt issues, subsample analyses, difference‐in‐differences tests, and alternative event windows, further shows that domestic firms benefit more from the JOBS Act as they have a greater reduction in the cost of debt and increase in the issue size. Overall, our results are consistent with the increased investor base hypothesis and suggest that Title II of the JOBS Act satisfies Congress's goal of making it more cost efficient for Rule 144 A issuers.

The Unintended Impact of the Volcker Rule on Primary Market Bond Pricing: Evidence from the Rule 144A Bond Market

The Unintended Impact of the Volcker Rule on Primary Market Bond Pricing: Evidence from the Rule 144A Bond Market

SEC Rule 14a-8 shareholder proposals: No-action requests, determinants, and the role of SEC staff

Under SEC Rule 14a-8, shareholders can petition management to include a topic for vote on the annual proxy statement. In response, management may request no-action relief from the Securities and Exchange Commission (SEC) staff to exclude unwelcome proposals. Using a sample of 3,040 no-action letters from the SEC between 2008 and 2019, I examine the determinants of the SEC staff’s decision to grant no-action relief. I find that legal characteristics, pressures on the staff, and proposal attributes have a statistically significant association with the SEC’s decision. Beyond these factors, I find evidence individual SEC staff members differ in the likelihood that they grant no-action relief. On average, these staff members appear to add value, as evidenced by a positive market response to their decisions, but this favorable valuation effect is concentrated among relatively more experienced staff.

The SEC's Shareholder Proposal Rule

In this Article, we take advantage of this Symposium’s goals to think broadly about the future of Rule 14a-8 of the Securities Exchange Act of 1934, the shareholder proposal rule. We set forth a vision for the rule to address boardroom insularity by likening the shareholder proposal rule as the public square for shareholders. The existence of such a forum would redound to the benefit of investors, officers, and boards of directors as a fount of current and useful information about their investors’ and stakeholders’ concerns. 
 We therefore rethink the mission of Rule 14a-8. In doing so, we explore whether it can provide a ready-made corporate public square for all companies; that is, rather than view Rule 14a-8 as purely enabling shareholders to sample the beliefs of their fellow shareholders, we perceive a broader social value. We cast Rule 14a-8 as a mechanism for assisting corporate directors generally, meaning not just those on the board of the corporation that is the target of a proposal, but also directors at all corporations, in gathering valuable information to help them better perform their duties. 
 In making these claims, we fully accept the functional view that Rule 14a-8 addresses itself to shareholders facing high barriers to their efforts to communicate with their directors and among themselves by providing them with an inexpensive vehicle for making their views known. We also believe it is equally important to understand that the message derived from proposals, and the votes they garner, is also heard by managers of other companies. We see that the temperature being taken through Rule 14a-8 is not just that of the proponent but a broad group of the company’s stockholders that likely is reflective of societal beliefs. 
 Construing Rule 14a-8 to facilitate a public square will weaken the social and psychological forces that can insulate management and the board from alternative perspectives regarding the firm’s objectives. Board directors often live cloistered lives and naturally identify with the firm’s successes and the operating practices. Thus, as their length of service increases, directors risk failing to broaden their perspectives to reflect the constellation of views held by the shareholders. Overall, a public square could help directors preserve and even gain a far richer and aligned perspective. 
 Moreover, as opposed to one-off meetings with portfolio companies, voting on shareholder proposals provides both the chance to discern the views of other financial institutions and the opportunity to present a cohesive voice across a group of investors behind a recommended course of action set forth in a proposal. 
 To be sure, some conditions should be imposed on proponents to guard against abusive proposals. We review the data bearing on the extent that a small group of investors, so-called “gadflies,” produce a disproportionate number of the poorly tailored proposals and hence are a distraction, and we believe that the SEC should study whether their proposals are associated with negative returns. 
 We conclude that recent SEC amendments to Rule 14a-8 are ill-advised. In making these changes, the SEC assessed the value of Rule 14a-8 by narrowly focusing on votes garnered by proposals. We argue the worth of this rule has many more features than the outcome of the votes cast in favor of a proposal.

The role of social capital in private placement: evidence from Rule 144A debt issuances

PurposeThe purpose of this paper is to investigate the role of social capital in the issuances of Rule 144A debt. Using a sample of 1,378 debt offerings from 1997 to 2015 in the US, this paper provides empirical evidence on whether and to what extent social capital affects the cost of Rule 144A debt.Design/methodology/approachThis paper employs a county-level measure of social capital and links social capital to the yield spreads of Rule 144A debt. A Heckman selection model is sued to address the sample selection bias, and an instrumental variable approach and propensity score matching methodology are implemented to deal with the potential endogeneity issue. The authors check for robustness using an alternative measure of social capital.FindingsThe results of the analysis provide evidence that issuers headquartered in the counties with higher levels of social capital experience lower yield spreads in their Rule 144A debt offerings. The findings are robust to a Heckman selection model, an instrumental variable approach and propensity score matching. Furthermore, the analysis reveals the marginal effect of social capital that the effect of social capital is more pronounced for the issuing firms with higher agency cost of debt and lower institutional ownership. The effect of social capital is more prominent after financial crisis.Originality/valueThis paper provides novel evidence of the effect of social capital on the cost of privately placed debt. The issuances of Rule 144A debt are subject to significant information asymmetry and are targeted at sophisticated institutional investors. This paper sheds further light on how institutional investors incorporate the regional social capital in their pricing scheme of private placement of Rule 144A debt.

Information and liquidity of over-the-counter securities: Evidence from public registration of Rule 144A bonds

We examine the market liquidity effects of enhanced information induced by the public registration of 144 A bonds, a significant and growing segment of the U.S. bond market. Using the regulatory version of TRACE data for the 2002–2013 period, we find that liquidity measures improve consistently for higher ex-ante information asymmetry issues following public registration of 144 A bonds. Our results support that disclosure improves liquidity in the OTC bond market.

Role of Institutional Investors: Evidence from the Foreign Rule-144A Debt Market

We examine the unique role played by institutional investors in the private corporate debt market for Rule 144A debt. We use the recent global financial crisis as a quasi-natural experiment to study how qualified institutional buyers (QIBs) facilitated funding to the foreign debt issuers in U.S. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine (a) corporate decisions involving debt choice and market timing, and (b) determination of offer spreads. Our findings collectively support the notion that QIBs enabled funding in the foreign 144A debt market despite the financial crisis.

The impact of global financial crisis on regulation S private debt market

This study examines the impact of the 2007–08 global financial crisis on issuance activity and yield spreads in the Regulation S private debt market. We explore the implications of the flight-to-quality effect by comparing two types of Regulation S issues subject to different jurisdictions and territorial boundaries - standalone Regulation S issuance and combined Regulation S and Rule 144A issues. Our results suggest that flight-to-quality is the main effect during the crisis; this effect partially reversed after the crisis. We find that debt issuance declined by more than 70% during the crisis, and the yield spreads jumped by 50 basis points relative to the pre-crisis period. This effect is more pronounced for the combined Regulation S and Rule 144A issues that comprise mostly speculative-grade issues. After the crisis, the number of Regulation S debt issues more than doubled, but the average credit rating declined. We also find the yield spread difference between the standalone and combined issuance shrank after the crisis. Our evidence supports market segmentation between the two types of issuances due to substantial differences in geographical jurisdictions, investor base, and credit quality.

SEC Rule 14a-8 Shareholder Proposals: No-Action Requests, Determinants, and the Role of SEC Staff

Under SEC Rule 14a-8, shareholders have the right to petition management to include a topic for vote on the annual proxy statement. In response, management may request no-action relief from the Securities and Exchange Commission (SEC) staff to exclude unwelcome proposals. Using a sample of 2,972 no-action letter responses from the SEC between 2008 and 2019, I examine the determinants of the SEC staff’s decision to grant no-action relief. I find the legal characteristics, pressures on the SEC staff, and proposal attributes have a statistically significant association with the SEC’s decision. Beyond these factors, I find evidence individual SEC staff members differ in the likelihood they grant no-action relief, suggesting heterogeneity among SEC staff characteristics is important for understanding no-action relief decisions.

Experimental Shareholder Activism: A novel approach for studying top management decision making and employee career issues

Decision making processes and consequent policy decisions of top management teams often have tremendous impact on employee careers and wellbeing, but the difficulty of accessing executive decision making has made studying such processes especially difficult. Whereas scholars have often relied on their own professional networks to gather small samples of executives or leveraged proxy measures compiled from publicly-available documents, we propose and demonstrate an alternative approach which we term Experimental Shareholder Activism (ESA). ESA allows researchers to directly study executive leadership via the shareholder proposal process—under Rule 14a-8—by purchasing relatively small amounts of stock in a company, and experimentally manipulating features of shareholder proposals to elicit responses from key stakeholders within the company. This approach allows for the direct examination of executive decision making with the benefit of quasi-experimental design. We describe the method, identify vocational and career-relevant areas of inquiry best suited to ESA, and discuss manipulations readily embedded in shareholder proposals. We then provide a toolkit for scholars interested in studying executive decision making on employee career and Human Resource-related outcomes, and demonstrate the viability of such an approach via a pilot experiment.

The Pricing of New Corporate Debt Issues

Using computational linguistics, we examine whether risk factor disclosure in the offering prospectus provides unique information in the pricing of initial public offerings of bonds. Both credit ratings and initial yields are related to risks that discuss the financial condition of the firm, its indebtedness, covenants, and repayment. Aftermarket yields are more sensitive to risk when traded in the Rule 144A private market than in the publicly-traded market. However, the effect of disclosure on bond outcomes is similar for both public and private firms in either market. Thus, mandated disclosure provides valuable information to both public and private market participants.

Measuring the Perceived Liquidity of the Corporate Bond Market

We propose a novel measure of bond market liquidity that does not depend on transaction data: the strength of the cross-sectional relationship between mutual fund cash holdings and fund flow volatility. Our measure captures how liquid funds perceive their portfolio holdings to be at a given point in time. The perceived liquidity of speculative grade and Rule 144A bonds is significantly lower than investment grade bonds in the cross section and deteriorated significantly following the 2008-9 financial crisis. Our measure can be applied in settings where either transaction data are not available or transactions are rare, including the markets for asset-backed securities, syndicated loans, and municipal bonds.

Agency Costs, Corporate Governance and the American Labor Union

Acute agency costs exist in unions as they do in other complex organizations. Specifically, union officials are not perfect representatives of the rank-and-file workers they ostensibly represent. Far less attention has been paid to addressing the agency costs in unions than has been paid to addressing agency costs in the context of public corporations, where the separation of share ownership and managerial control long has been the subject of intense scrutiny by academics and policymakers. By contrast, context, concrete suggestions for confronting agency problems in unions are few on the ground. This Article attributes the secular decline in union membership and power largely to unions own inability to control agency costs. Specifically, workers who think that unions are corrupt and incapable of faithfully representing their interests in the workplace rationally will eschew union membership. The lack of focus on agency costs in the union context appears to be based on ideological and political considerations that tend to conflate the interests of workers with the interests of union officials, notwithstanding the fact that these interests often diverge in significant ways with workers’ focused on job security, wages and working conditions, and union officials focused on maximizing the private benefits of office. By way of solution, this article proposes a strategy of policy arbitrage consisting of identifying effective mechanisms for controlling agency costs in the corporate context that can be transferred to the union context and showing how such arbitrage could be accomplished. I identify four corporate governance mechanism as particularly promising candidates for import into the union context. First, proxy advisory firms could be employed to provide rank-and-file workers with high quality advice about how to vote in union elections. Second, existing disclosure obligations under the Landrum-Griffen Act should be both enhanced to include better disclosure of union officials’ compensation and “weaponized” by providing rank-and-file workers the right to vote up-or-down on such compensation through the provision of what are known in the corporate context as “say-on-pay” voting rights. Third, following Securities Exchange Act Rule 14a-8, union voting procedures should be reformed to give workers the right to make shareholder proposals that are distributed, along with the union’s voting materials, at union expense, to workers for their approval. Allowing rank-and-file workers to make direct appeals to other rank-and-file workers would allow workers to recommend internal corporate governance reforms of unions and empower them to nominate rival slates of union directors and officers for their unions. Finally, following well-established norms of corporate governance, independent directors should be introduced to union boards of directors and the responsibility for nominating union directors, determining compensation for top union officials, setting internal governance rules, and selecting the union’s independent, outside auditors should be removed from the board as a whole and delegated to committees of these independent board members.

Climate Corporate Governance: Europe vs. USA?

According to economic literature, climate change is a financial factor: this is the logical premise of the European Directive N. 2014/95/EU requiring disclosure on the policies adopted by big corporations on climate change risks and opportunities. Through disclosure, climate change imprints the contents of directors’ duty of skill and care in Europe. On the contrary, in US there is no federal legislation or SEC regulations specifically on climate disclosure. Absent any binding decision yet, the current assessment of directors’ fiduciary duties under state law does not include consideration of climate change risks and opportunities according to American authors, even though fiduciary duties may evolve. The sole effective tool is the Martin Act. Levels of disclosure of US and EU corporations are therefore already significantly different both in terms of climate risks and opportunities. This situation can drive the financial sector to direct capital to Europe. Institutional investors in US have been trying to increase disclosure through shareholders’ proposals under Rule 14a-8 but these efforts have been recently undermined by the micro-management argument used by SEC. The conclusion is that the market cannot govern climate change by itself: because of regulation, European corporations are better positioned to mitigate the “carbon bubble”. What is at stake is the profitability of American corporations.

Pricing of International 144A Debt: Evidence from the U.S. Secondary Bond Market

We study the information processing role of intermediaries, known as qualified institutional buyers (QIBs), using the secondary market trades of Rule 144A and Yankee debt issued by all foreign issuers in the U.S. Using an exhaustive sample of secondary U.S. bond market trades of over 260 international issuers from 40 countries during 1994-2010, we document three findings: (a) secondary yield spreads are significantly higher in foreign 144A versus Yankee market; (b) while credit, liquidity, governance, and familiarity risks are key yield drivers, each risk has a lower incremental impact on 144A spreads versus the Yankee control sample; and (c) during periods of high trading activity, QIBs provide liquidity and price support thereby moderating pressure on bond prices. Overall, our findings are consistent with the notion that specialized lenders, or QIBs, have the ability to better monitor and process information at lower costs in the private debt markets. This, in turn, leads to high-yield issuers opting for the Rule 144A market, causing credit segmentation across the Yankee versus 144A market for foreign debt.

Malign Manipulations: Can Google's Shareholders Save Democracy?

Research shows that by manipulating Google Search—or more precisely, the order of the search results—a malign actor can shift public opinion regarding a candidate for political office, or public policy issue. One double-blind study conservatively estimated the shift at twenty percent of undecided voters. See Robert Epstein & Ronald Robertson, The Search Engine Manipulation Effect, 112 PNAS E4512 (2015). However, it is not clear the extent to which Google Search has, to date, been manipulated for political purposes. The answer to that question is a carefully guarded secret at Google (or the subject of willful blindness). Some light was shed on the matter during the December 11, 2018 House Judiciary Committee Hearing on Transparency and Accountability: Examining Google and its Data Collection, Use and Filtering. At that hearing, Google CEO, Sundar Pichai testified on the issue for several hours. However, his testimony left many questions unanswered (and raised many more). For that reason—to provide answers—this Article argues that Google's shareholders must compel the company to disclose the extent to which Google Search has, to date, been manipulated by bad actors. This Article explains how Google's shareholders can compel such disclosure using Rule 14a-8 under the Securities Exchange Act of 1934. Unfortunately, search engine manipulation has been loosely defined by authors. Many authors use search engine manipulation as a catch-all term for any reordering of search results (other than by relevance). This Article precisely defines search engine manipulation as: (1) malign third-parties gaming the search algorithm for political ends, or (2) malign insiders tweaking the search algorithm for political ends. Finally, while this Article focuses on Google Search, the concerns regarding manipulation apply to any other search engine (e.g., Bing or Yahoo) or other platforms that use algorithms to find information for users (e.g., Facebook, Twitter, and even Amazon).

Risk mitigation by institutional participants in the secondary market: Evidence from foreign Rule 144A debt market

Abstract We study secondary market trades of debt issues by foreign firms in the U.S. under SEC Rule 144A, a unique market where the counterparties are qualified institutional buyers (QIBs). We find that even though the secondary yield spreads of foreign 144A debt issues are larger than comparable public debt issues by foreign and domestic firms in the U.S., the incremental impact of common risks – namely, credit, illiquidity, governance, and familiarity risks – on spreads are lower for foreign 144A issues compared to various control samples. Our finding is consistent with the notion that institutional participants, namely QIBs, play a specialized role in mitigating risk exposures in the foreign 144A secondary market.

Corporate Social Responsibility and Rule 144A Debt Offerings: Empirical Evidence

Rule 144A allows a firm to issue securities without a public registration statement with the Securities and Exchange Commission, and only qualified institutional investors can purchase such securities. In this study, focusing on corporate bonds issued under Rule 144A, we empirically investigate the relationship between the corporate social responsibility (CSR) of issuing firms and the bond yield spread at issuance. We document a significant and positive relation between CSR concerns, whereas CSR strengths seem to play an insignificant role in determining bond yield spread. Our main findings are robust to the instrumental variable approach and simultaneous equation estimation to address the potential endogeneity issues. We further explore the time-series changes in issuing firms’ CSR profiles, and report that institutional investors demand a higher bond yield spread when issuing firms’ exposure to higher social, environmental, and stakeholder concerns. Our analyses reveal that the main sources of such risk exposure are stakeholder conflict and concerns from primary stakeholder groups.

Comment Letter to the SEC: Proposed New Disclosures for Investment Advisers to Mutual Funds

This submission is in response to Chairman Clayton’s July 30 press release announcing a staff roundtable on the proxy process and calling for submissions from interested parties. It refers in particular to two of the topics under consideration, Voting Process and Shareholder Proposals. According to the Release establishing the Proxy Voting Rule (“Release”), an investment adviser “is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client’s behalf, including proxy voting.” This was the rationale behind the Proxy Voting Rule requiring investment advisers, including mutual fund advisers, to create and disclose their proxy voting policies and procedures. However, the SEC and its staff have yet to clarify what these fiduciary duties mean for the largest mutual fund advisers now that they control an extraordinary amount of shareholder voting power at many of our largest public companies. This concentration of voting power creates significant value for an adviser if it can be traded for something that the adviser wants in return. For example, an adviser may use its voting power to support the activism of current and potential institutional clients in exchange for the ability to acquire more assets under management. Or, an adviser may use its voting power to support the activism of its own shareholders at the advisor’s portfolio companies in exchange for those shareholders agreeing not to target the adviser itself for such activism. The result is that an adviser has not cast its delegated voting authority “in a manner consistent with the best interest of its client” and has subrogated the “client interests to its own,” a breach in its fiduciary duties to its mutual fund clients and its shareholders. The Commission should provide clarification that mutual fund advisers must disclose, consistent with their fiduciary duties to act in the best interests of their mutual fund clients and their shareholders, how they will deal with these new conflicts in their voting policies. In addition, shareholder proposals are a prime area where this opportunistic use of an adviser’s voting power may be in play. Therefore, the adviser’s voting policy must also explain how voting on these proposals are linked to maximizing shareholder value. Specifically, this submission requests the Securities and Exchange Commission (“SEC” or “Commission”), in whatever form it deems appropriate, to clarify that investment advisers to mutual funds must disclose, under the Proxy Vote Rule, their policies and procedures: to avoid using their voting power at public companies opportunistically to obtain new business from activists such as public pension funds and investment funds associated with labor unions; and to eliminate pressures to support the activism of its own shareholders at its portfolio companies; and to identify an actual link between support for a shareholder proposal under Rule 14a-8 and the enhancement of shareholder value before voting in favor of any such proposal.

Assessment of Credit Risk Models on Rule 144A Corporate Bonds

Accurate assessment of credit risk can improve the performance of bond portfolio managers. Using credit ratings and market-based credit risk models from S&P and Bloomberg, we investigate the performance of four credit risk models in the Rule 144A corporate bond markets in the United States over the 1990–2015 period. The authors divide their sample into straight bonds and convertible bonds and find that (1) when it comes to straight bonds, discrete models such as S&P’s credit ratings and Bloomberg ratings determine yields more accurately than the continuous market-based models of S&P and Bloomberg; (2) with regard to convertible bonds, a convertible option has a stronger effect than credit ratings in determining yields, and only Bloomberg default risk ratings, not S&P credit ratings, determine the yields; (3) for convertible bonds, the continuous market-based models of S&P and Bloomberg affect yields more significantly than discrete models; and (4) when it comes to predicting actual defaults, Bloomberg models are superior to S&P’s models, and the Bloomberg discrete model has more power than its continuous counterpart.