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No, Matt, executive compensation is not all about norms

TOTM In a post titled, "Backdating: Yes, Virginia, Execs Do Want Inflated Pay," over at PrawfsBlawg, Matt Bodie weighs in on the backdating "scandal."

In a post titled, “Backdating: Yes, Virginia, Execs Do Want Inflated Pay?” over at PrawfsBlawg, Matt Bodie weighs in on the backdating “scandal”? As many of you know, the topic has been much-discussed of late here at TOTM and over at Larry Ribstein’s Ideoblog (who, it turns out, beat us to this punch), and you’re probably wondering when we’re ever going to stop. Well, we (Geoff and Josh) think Matt’s post is so misguided that it merits its own paragraph-by-paragraph rebuttal in this, TOTM’s first-ever co-authored blog post!

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Explaining Backdating (and Jenkins Channels Manne Again)

TOTM Holman Jenkins reports that a group of economists led by Milton Friedman and Harry Markowitz are getting behind the idea of putting an end to . . .

Holman Jenkins reports that a group of economists led by Milton Friedman and Harry Markowitz are getting behind the idea of putting an end to the expensing of options. It is a great column. Jenkins goes on to discuss options backdating and makes the following points, which will sound unfamiliar to TOTM readers..

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Financial Regulation & Corporate Governance

Jenkins channels Manne

TOTM Today’s WSJ has a great article by Holman Jenkins on reporting on the backdating “scandal.” Larry is, of course, on the case.  I would also . . .

Today’s WSJ has a great article by Holman Jenkins on reporting on the backdating “scandal.” Larry is, of course, on the case.  I would also — modestly — point out that much of what Jenkins says in his article today, I said in this space about four months ago, when the news was first breaking.

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Financial Regulation & Corporate Governance

Anabtawi on Spring-loaded Options

TOTM Over at Professor Bainbridge’s place, Iman Anabtawi has some thoughts on the granting of “spring-loaded” options, an option granted at a market price that does . . .

Over at Professor Bainbridge’s place, Iman Anabtawi has some thoughts on the granting of “spring-loaded” options, an option granted at a market price that does not incorporate some favorable non-public information, and insider trading laws.

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Financial Regulation & Corporate Governance

On rigged(?) markets, casinos and Steve Bainbridge

TOTM Greetings loyal fans (i.e., “hi mom”) (actually, I’ve made this gag before, and so I think it’s time to set the record straight: My mom . . .

Greetings loyal fans (i.e., “hi mom”) (actually, I’ve made this gag before, and so I think it’s time to set the record straight: My mom has almost certainly — nay, certainly — never, ever read this blog.  I’m pretty sure she has no idea what a blog is at all. She may not even be sure what a computer is.).

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Financial Regulation & Corporate Governance

An Insider Trading Policy a Monkey Would Love

TOTM As Josh noted, Henry Manne recently published a WSJ op-ed arguing for liberalization of insider trading on efficiency grounds — chiefly, because such trading “aids . . .

As Josh noted, Henry Manne recently published a WSJ op-ed arguing for liberalization of insider trading on efficiency grounds — chiefly, because such trading “aids capital allocation decisions and informs business executives through market-price feedback of the best predictions about the value of new plans.” (For a more complete statement of Henry’s argument, see here.)

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Financial Regulation & Corporate Governance

Henry Manne on Behavioral Finance & Insider Trading

TOTM When Henry Manne writes about insider trading, as he does this week in the WSJ op-ed, one can be sure that it is worth reading. . . .

When Henry Manne writes about insider trading, as he does this week in the WSJ op-ed, one can be sure that it is worth reading. The op-ed, which is the first installment of a two part series, offers two central points: (1) the behavioral finance literature does not support the regulation of insider trading, but has pushed usefully pushed economists to think beyond the realm of the “marginal trader” and into a Hayekian theory of price formation, and (2) this “wisdom of crowds” approach to price formation provides a new rationale insider trading regulations.

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Financial Regulation & Corporate Governance

The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership

Scholarship Abstract Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power . . .

Abstract

Corporate law generally makes voting power proportional to economic ownership. This serves several goals. Economic ownership gives shareholders an incentive to exercise voting power well. The coupling of votes and shares makes possible the market for corporate control. The power of economic owners to elect directors is also a core basis for the legitimacy of managerial authority. Both theory and evidence generally support the importance of linking votes to economic interest. Yet the derivatives revolution and other capital markets developments now allow both outside investors and insiders to readily decouple economic ownership of shares from voting rights. This decoupling, which we call the new vote buying, has emerged as a worldwide issue in the past several years. It is largely hidden from public view and mostly untouched by current regulation.

Hedge funds have been especially creative in decoupling voting rights from economic ownership. Sometimes they hold more votes than economic ownership – a pattern we call empty voting. In an extreme situation, a vote holder can have a negative economic interest and, thus, an incentive to vote in ways that reduce the company’s share price. Sometimes investors hold more economic ownership than votes, though often with morphable voting rights – the de facto ability to acquire the votes if needed. We call this situation hidden (morphable) ownership because the economic ownership and (de facto) voting ownership are often not disclosed.

This Article analyzes the new vote buying and its potential benefits and costs. We set out the functional elements of the new vote buying and develop a taxonomy of decoupling strategies. We also propose a near-term disclosure-based response and outline a menu of longer-term regulatory choices. Our disclosure proposal would simplify and partially integrate five existing, inconsistent ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed: we discuss strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

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Financial Regulation & Corporate Governance

The Froth Is Back

TOTM Today’s WSJ reports that professional stock analysts employed by brokerage firms are up to their old sunny ways. These “sell-side” analysts came under fire in . . .

Today’s WSJ reports that professional stock analysts employed by brokerage firms are up to their old sunny ways. These “sell-side” analysts came under fire in 2002 for rendering falsely optimistic trading recommendations. Congressional hearings revealed that during the late 1990s, analysts’ “buy” recommendations outnumbered “sell” recommendations by nearly 100 to one.

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Financial Regulation & Corporate Governance