Private Regulation of Insider Trading in the Shadow of Lax Public Enforcement: Evidence from Canadian Firms
Laura Nyantung Beny and Anita Anand
Like firms in the United States, many Canadian firms voluntarily restrict trading by corporate insiders beyond the requirements of insider trading laws (i.e., super-compliance). Thus, we aim to understand the determinants of firms’ private insider trading policies (ITPs), which are quasi-contractual devices. Based on the assumption that firms that face greater costs from insider trading (or greater benefits from restricting insider trading) ought to be more inclined than other firms to adopt more stringent ITPs, we develop several testable hypotheses. We test our hypotheses using data from a sample of firms included in the Toronto Stock Exchange/Standard and Poor’s (TSX/S&P) Index. Our empirical results suggest that Canadian firms do not randomly restrict insider trading, but rather do so predictably and with a predictable level of intensity, suggesting that some firms wish to control insider trading to enhance corporate performance. Our most robust finding is that firms with a greater prevalence of controlling shareholders are more likely to have adopted a super-compliant ITP than firms with fewer such shareholders, implying that influential shareholders may oppose insider trading and challenging the claim that private restrictions of insider trading would not arise in the absence of insider trading laws.
Scotland M. Duncan
Quantifying the amount of actual loss within securities fraud cases is crucial to criminal sentencing. The United States Sentencing Guidelines recently adopted a “modified rescissory method,” whereby loss is measured by comparing average stock prices during and after the fraud. This paper argues that the Guidelines imprudently opt for ease of judicial application over precise culpability. The new law’s arithmetic suffers from a number of serious flaws, including upward bias with respect to the number of damaged shares and skewed sentencing disparity (both upward and downward) due to the inclusion of extrinsic factors wholly unrelated to a defendant’s conduct. This paper instead proposes conforming criminal sentencing for securities fraud with its civil counterpart, as promulgated by the Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo. A “market-adjusted method,” which focuses on normalized change in a damaged security’s value, is a more precise way to calculate actual loss. And such precision need not come at the expense of ease of application.
Combating managerial opportunism is a difficult task. Managers do not tend to sit idle when facing a regulatory attempt to restrict their activities. They often seek ways to circumvent the regulation or new, alternative avenues for enriching themselves. This Article uncovers one recent and pervasive form of this phenomenon. Specifically, I show how managers tend to take excessive risks in response to regulation that hinders stock price manipulation, stock option backdating or repricing and a variety of additional ill-conceived schemes. This novel theoretical argument is particularly pertinent in the wake of the recent financial crisis in the American market. Indeed, the lesson for regulators should be that any reform that improves disclosure and prevents managerial rent-seeking must also curb risk-taking tendencies.
Do Different Standards of Judicial Review Affect the Gains of Minority Shareholders in Freeze-Out Transactions? A Re-Examination of Siliconix
Freeze-out transactions have been subject to different standards of judicial review in Delaware since 2001, when the chancery court, in In re Siliconix Inc. Shareholders Litigation, held that, unlike merger freeze-outs, tender offer freeze- outs were not subject to “entire fairness review”. This dichotomy, in turn, gave rise to a tension in the literature regarding the potential impact of Siliconix, as well as the treatment that freeze-outs should receive. While some defended the regime established by Siliconix, others argued for doctrinal convergence through a universal application of entire fairness, and still others proposed alternative variations of convergence based on how the negotiation process is conducted. The Delaware Chancery Court itself, in fact, subsequently made a partial step toward convergence by narrowing the scope of its precedent, as reflected in In re CNX Gas Corporation Shareholders Litigation. The empirical evidence on the effect of Siliconix (and, therefore, on the practical relevance of different standards of judicial review), however, is limited. In particular, in “Post-Siliconix freeze-outs: Theory and Evidence,” Guhan Subramanian found that minority shareholders obtain lower cumulative abnormal returns (CARs) in tender offer freeze-outs relative to merger freeze-outs, and, based on this finding, Subramanian advocates for doctrinal convergence. That article, however, does not formally examine whether Siliconix generated a structural change in relative CARs in both transactional forms and, therefore, whether the differences in outcomes are actually attributable to the disparity in standards of judicial review. The purpose of this work is, therefore, to fill this gap in the literature. To this end, this work uses a difference-in-differences approach, which compares changes over time (before and after Siliconix) between CARs in tender offers (the treatment group) and CARs in statutory mergers (the control group). As further discussed in the text, the results seem to suggest, in line with Subramanian’s intuition, that Siliconix actually had at least some negative effect on CARs in tender offers, since the estimator of difference-in-differences is consistently negative and generally significant. Based on the results, this work discusses specific policy implications, particularly in terms of regulatory convergence.
SYMPOSIUM ON CORPORATE POLITICAL SPENDING
Materiality: A Bedrock Principle Protecting Legitimate Shareholder Interests Against Disguised Political Agendas
James R. Copland
Professors Lucian Bebchuk and Robert Jackson argue that the Securities and Exchange Commission (SEC) should engage in rulemaking to consider rules mandating new corporate political-spending disclosures, but their rationale is inconsistent with the agency’s statutory purpose of protecting investors, improv- ing market efficiency, and facilitating capital formation. Corporations’ political expenditures are tiny in relation to corporate budgets and clearly immaterial, in and of themselves, to investors’ financial interests. Bebchuk and Jackson’s argument that corporate political spending is more related to agency costs than to corporate leaders’ legitimate desire to ameliorate the potential adverse impacts of government action on businesses’ earnings, and that such agency costs could helpfully be reduced by further disclosures, is highly speculative. Instead, evidence strongly suggests that special-interest groups with viewpoints adverse to corporate interests have attempted to leverage existing disclosures to chill corporate political participation. Finally, shareholder proposals involving corporate political spending and political-spending disclosure have been overwhelmingly sponsored by some of these same special-interest groups and universally rejected by shareholders at large, when opposed by boards of directors.
Bradley A. Smith and Allen Dickerson
Over the past 15 years advocates of campaign finance reform, frustrated by the structure and design of the Federal Election Commission (FEC), have at- tempted to offload the duties of campaign finance regulation to other federal agencies, most notably the Internal Revenue Service (IRS) but also the Federal Communications Commission (FCC). Recently, these efforts have expanded to include the Securities and Exchange Commission (SEC).
We respond specifically to Professors Lucian A. Bebchuk & Robert J. Jackson, Jr., who in their recent article “Shining Light on Corporate Political Spending,” urge the SEC to adopt compulsory disclosure rules to govern corporate political activity. We argue that whatever the theoretical merits of this position, the reality is that the current pressure on the SEC to adopt new compulsory disclosure regulations is a direct result of a desire to use the SEC to regulate not corporate governance or the world of investment and trading, but campaign finance. We suggest that, as a result, any rules adopted are likely to be ill- advised and co-opted in the enforcement process. Additionally, we note that efforts to require the IRS and FCC to regulate speech have resulted in very bad unintended consequences, the natural result of agencies operating outside their area of expertise.
At the core of the theory of the independent agency is a belief that administrative bodies will develop unique technical competence and will operate within that sphere of expertise. Pressure on the SEC (or other agencies) to regulate campaign finance takes these agencies out of their area of professional expertise and competence, and is thus likely to result in bad law, damage to institutional reputation, and a distraction from the agency’s core mission.
The Securities Exchange Act is a Material Girl, Living in a Material World: A Response to Bebchuk and Jackson’s “Shining Light on Corporate Political Spending”
This Article responds to a piece by Lucian Bebchuk and Robert Jackson, “Shining Light of Corporate Political Spending,” which argues in favor of a rulemaking petition submitted by the authors to initiate a mandatory rule pursuant to the Securities Exchange Act requiring companies to disclose political expenditures, including contributions to politically active non-profits. This Article explores the economic cost-benefit analysis requirements that constrain SEC rulemaking and argues that when making a mandatory disclosure rule the SEC must demonstrate that the subject of the disclosure is material to investors. It shows how Bebchuk and Jackson have not made a sufficient case that corporate political expenditures meet that materiality threshold, nor that a mandatory disclosure rule would meet the SEC’s cost-benefit analysis requirements. This is true particularly in light of how a mandatory disclosure rule risks inhibiting corporate freedom of speech.