https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=5961&context=lkcsb_research

Socially responsible firms

opment, which includes social capital as one of its explanatory factors. In the absence of this analysis, we do not know if social capital is really driving political development or some other factor, such as economic development. Overall, this is a bold and ambitious book which examines participation across the world with a big theoretical canvas and a broad range of data. However, a more judicious analysis of the data and a greater recognition of the limitations of the sources would have made it a better book.

The Futures of European Capitalism

Using a sample of U.S. financial institutions, we exploit recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3 to test whether greater information risk in financial instrument fair values leads to higher cost of capital. We derive an empirical model allowing asset-specific estimates of implied betas, and find evidence that firms with greater exposure to level 3 financial assets exhibit higher betas relative to those designated as level 1 or level 2. We further find that this difference in implied betas across fair value designations is more pronounced for firms with ex ante lower quality information environments: firms with lower analyst following, lower market capitalization, higher analyst forecast errors, or higher analyst forecast dispersion. Overall, the results are consistent with a higher cost of capital for more opaque financial assets, but also suggest that differences in firm’s information environments can mitigate information risk across the fair value designations.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1742871_code292871.pdf?abstractid=1439851&mirid=1&type=2

Information Risk and Fair Values: An Examination of Equity Betas

I examine the timeliness of write-downs taken by U.S. financial institutions during the financial crisis of 2007–2008. The timeliness of write-downs is measured by benchmarking the quarterly accounting write-down schedule with the devaluation schedule implied by exposure-specific credit indices such as the ABX. The results show that the accounting write-downs are less timely than the devaluations implied by credit indices. In a cross-sectional analysis of the determinants of the timeliness of write-downs, I document that corporate governance quality, regulatory investigations, and litigation pressure are positively related to the timeliness of write-downs, whereas the write-downs by firms with higher financial leverage, tighter regulatory constraints, and more complex exposures are less timely. I control for numerous exposure-specific characteristics and document that less risky exposures and exposures that were affected later during the financial crisis were written down later. Regarding the consequences of timeliness, I find that the exposure to risky assets is reflected faster in stock returns for firms with timelier write-downs.

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The Timeliness of Accounting Write‐Downs by U.S. Financial Institutions During the Financial Crisis of 2007–2008

The EU and the US responded to the global financial crisis by changing the rules for the functioning of financial services and markets and by establishing new oversight bodies. With the US Dodd–Frank Act and numerous EU regulations and directives now in place, this book provides a timely and thoughtful explanation of the key elements of the new regimes in both regions, of the political processes which shaped their content and of their practical impact. Insights from areas such as economics, political science and financial history elucidate the significance of the reforms. Australia's resilience during the financial crisis, which contrasted sharply with the severe problems that were experienced in the EU and the US, is also examined. The comparison between the performances of these major economies in a period of such extreme stress tells us much about the complex regulatory and economic ecosystems of which financial markets are a part.

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The Regulatory Aftermath of the Global Financial Crisis

We propose a management insulation index based on banks’ charter and by-law provisions and on the provisions of the applicable state corporate law that make it difficult for shareholders to oust a bank’s management. We show that banks in which managers were more insulated from shareholders in 2003 were roughly 18 to 26 percentage points less likely to be bailed out in 2008/09. We also find that banks in which the management insulation index was reduced between 2003 and 2006 were more likely to be bailed out. We discuss alternative interpretations of the evidence. The evidence is mostly consistent with the hypothesis that banks in which shareholders were more empowered performed poorly during the crisis.

/pdf/shareholder-empowerment-and-bank-bailouts-1iifwb4vq9.pdf

Shareholder Empowerment and Bank Bailouts

Analyses the implementation of the board neutrality rule contained in the EU Takeover Directive in all EU member states. Previously published as ECGI - Law Working paper No 141/2010.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1584908_code512461.pdf?abstractid=1554616&rulid=127902&mirid=4

The takeover directive as a protectionist tool

The liability regime of executive and non-executive directors in companies constitutes a necessary corollary to control issues within a company. It is based on the determination of specific duties, it establishes the limits of management behaviour and it provides stakeholders and third parties dealing with the company with legislative protection against management misconduct. In that respect, directors' liability is an important and effective compliance and risk-allocation mechanism. The European Commission has not, to date, considered directors' liability issues in a comprehensive way. It is the purpose of this study to provide the relevant information in a comprehensive manner, in order to support to European Commission to consider its future policy in this area. To this end, the analysis spans from national laws and case law to corporate practice in respect of companies’ directors duties in all 27 EU Member States and Croatia.1 The overarching goal is to provide for a better understanding of certain important drivers of directors' behaviour. This study shows the extent to which the content and extent of duties and the corresponding liabilities, as well as the understanding of the persons to whom they are owed, fluctuate over the life of a company, i.e. during the "normal" phase of operation, and in the so called "twilight zone", i.e. shortly before insolvency. The study is mainly a stocktaking one. However, its comparative analysis also identifies similarities and differences between national regimes and identifies relevant cross-border implications.

Study on directors’ duties and liability

The Eurozone banking and sovereign debt crisis has brought the fragility of European monetary union into sharp focus and exposed the lack of effective instruments at the European level to maintain financial stability. The policy responses of the European and national institutions included an announcement made by the European Central Bank (ECB) in September 2012 in which the ECB envisages purchasing bonds issued by certain Eurozone countries in so-called “Outright Monetary Transactions” (OMT). The announcement of OMT has had a profound stabilising impact on financial markets, and has widely been regarded as a turning point in the Euro crisis. The OMT Decision has been challenged before the German Federal Constitutional Court (Constitutional Court) for exceeding the ECB’s mandate and violating the prohibition on monetary financing under the Treaty on the Functioning of the European Union. This article discusses critically the OMT Decision and the decision of the Constitutional Court. For the first time in its history, the Constitutional Court has made a reference to the Court of Justice of the European Union for a preliminary ruling, but also expressed the view that the OMT Decision is likely to be in violation of the principle of conferral, and hence of German constitutional law, unless it complies with precise conditions as to its scope, duration, and technical features set out in the Constitutional Court’s decision. We argue that the potential constitutional conflict invoked by the decision of the Constitutional Court is largely based on an incomplete understanding of the economic rationale and intended functioning of the OMT Decision. We draw on the economics of monetary union to show that the OMT Decision is intended to address deficiencies in the design of European monetary union and market distortions created by investor behaviour that is individually rational, but suffers from a failure of coordination. We argue that in light of the economic rationales of OMT, the Constitutional Court’s conclusion that the OMT Decision constitutes an illegal act by the ECB is unconvincing.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2413942_code575861.pdf?abstractid=2408712&mirid=3

Law Meets Economics in the German Federal Constitutional Court: Outright Monetary Transactions on Trial

Corporate mobility in Europe continues to be on the rise, both creating space for regulatory arbitrage by companies and influencing legislative decisions in corporate law and related fields This has triggered debates in European company law that centre on questions of harmonisation, cross-jurisdictional convergence and the superiority of certain regulatory approaches and legal families This article uses a large cross-country sample of EU Member States to classify legal strategies in corporate governance and assess claims of convergence and the superiority of legal families We analyse board structure, the most important duties of directors, namely the duties of care and loyalty, questions of enforcement, and the position of directors in the vicinity of insolvency, and develop a taxonomy of legal strategies across the Member States We find that, in spite of differences in regulatory technique and legal tradition, the effect of the legal strategies employed by the Member States is often remarkably similar and legal systems exhibit interconnections in the form of mutual learning across borders In addition, we show that, in contrast to claims by parts of the literature, judicial innovation is not restricted to particular legal families We argue that all legal families are, in principle, well equipped to react to new developments and draw on general or unwritten principles of law to fill regulatory gaps However, a precondition for the emergence of effective rules seems to be a sufficiently large body of case law and, accordingly, access to the courts and an efficiently functioning judicial system Consequently, we submit that questions of enforcement are of greater importance than a particular legislative or regulatory style

Edmund-Philipp Schuster

Papers

Shareholder Empowerment and Bank Bailouts

The takeover directive as a protectionist tool

Study on directors’ duties and liability

Law Meets Economics in the German Federal Constitutional Court: Outright Monetary Transactions on Trial

The Evolving Structure of Directors’ Duties in Europe