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Abstract:
The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom.

We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board.

Abstract:
The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom.

We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board.

Note: This paper is identical to the article as published in the Journal of Corporation Law. The published article is available, without the Stanford Law and Economics cover page, at
http://papers.ssrn.com/abstract=313026

Abstract:
We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decrease firm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have "supermajority-independent boards" with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests that it may be useful for firms to have a moderate number of inside directors (say three to five on an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and, often, affiliated) directors, and the value of interaction between different types of directors who bring different strengths to the board.

Abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.

Abstract:
This paper is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The paper concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.

Abstract:
How is corporate governance measured? What is the relationship between corporate governance and performance? This paper sheds light on these questions while taking into account the endogeneity of the relationships among corporate governance, corporate performance, corporate capital structure, and corporate ownership structure. We make three additional contributions to the literature:

First, we find that better governance as measured by the Gompers, Ishii, and Metrick (GIM, 2003) and Bebchuk, Cohen and Ferrell (BCF, 2004) indices, stock ownership of board members, and CEO-Chair separation is significantly positively correlated with better contemporaneous and subsequent operating performance.

Second, contrary to claims in GIM and BCF, none of the governance measures are correlated with future stock market performance. In several instances inferences regarding the (stock market) performance and governance relationship do depend on whether or not one takes into account the endogenous nature of the relationship between governance and (stock market) performance.

Third, given poor firm performance, the probability of disciplinary management turnover is positively correlated with stock ownership of board members, and board independence. However, better governed firms as measured by the GIM and BCF indices are less likely to experience disciplinary management turnover in spite of their poor performance.

The above results highlight the strategic importance of board incentives. Our recommendations on board incentives are consistent with the implications of Hermalin and Weisbach (2007).

Corporate governance, corporate performance, corporate ownership, capital structure, management turnover

Abstract:
This chapter reviews the empirical literature, especially the event study literature, as it relates to corporate and securities law. Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This chapter begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then discusses one of the limitations of more conventional empirical work (cross-sectional analysis), the problem presented by the fact that the characteristics of firms that are studied in relation to each other (such as ownership and mechanisms of corporate governance) or to firm performance are not exogenous but self-selected by firms. Thereafter it reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation. Subsequently, we focus on the methodology's application to corporate law and corporate governance issues, supplemented with discussion of other relevant empirical work as well. Event studies are emphasized because they have played an important role in the making of corporate law and in applied corporate finance and corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. A further reason for emphasizing event study data is that they avoid the endogeneity concerns that can limit the results of other modes of empirical research in this area. Because the empirical literature related to corporate and securities law is vast, the chapter is necessarily selective and omits important topics and individual contributions in the field.

event studies, corporate governance, empirical research in corporate law

Abstract:
One of the goals of the corporate governance movement has been to replace the current procedurally based duty of care with an equity-based model. For such an approach to be viable, a linkage between better director management monitoring and heightened board equity ownership must be demonstrated. This Article finds such a linkage empirically. The authors report that based on an examination of a substantial number of public companies, the greater the dollar value of the outside director equity ownership: (i) the better the company?s overall performance, and (ii) the more likely in a poorly performing company that there will be a disciplinary-type CEO turnover.

Abstract:
Financial economists and commercial providers of governance services have in recent years created measures of the quality of firms' corporate governance which collapse into a single number (a governance index or rating) the multiple dimensions of a company's governance. The aim of this paper is twofold, to analyze the performance of corporate governance indices in predicting corporate performance, and to consider the implications for public policy that follow from that assessment. We highlight methodological shortcomings of the extant papers that claim a relation between particular governance measures and corporate performance. Our core conclusion is that there is no consistent relation between governance indices and measures of corporate performance. Namely, there is no one "best" measure of corporate governance: the most effective governance institution appears to depend on context, and on firms' specific circumstances. It would therefore be difficult for an index, or any one variable, to capture critical nuances for making informed decisions. As a consequence, we conclude that governance indices are highly imperfect instruments for determining how to vote corporate proxies, let alone for portfolio investment decisions, and that investors and policymakers should exercise caution in attempting to draw inferences regarding a firm's quality or future stock market performance from its ranking on any particular corporate governance measure. Most important, the implication of our analysis is that corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable, because there is considerable variation in the relation between the indices and measures of corporate performance.

corporate governance, corporate performance, governance indices

Abstract:
A substantial academic and popular literature argues that the
performance of American corporations might improve if American
corporations had long-term outside investors (relational
investors) who would hold large stakes, actively monitor
management performance, and engage with management in
setting corporate policy. Institutional investors can
perhaps play this role. We provide the first large-scale
test of the hypothesis that relational investing can affect
corporate performance. We consider ownership and performance
data for more than 1,500 large U.S. companies over a
thirteen-year period (1983-95). Our results provide a
mixed answer to the question of whether relational investing
affects corporate performance. Our data suggest that there
was a period in the late 1980s - a period with a
high level of hostile takeover activity - when the presence
of a relational investor was associated with higher stock
market returns. This cohort of relational investors may have
been able to induce corporate restructuring, whose principal
effect was to reduce growth rates while improving profitability.
But this pattern was not found in the early 1980s, or repeated
in the early 1990s.

Abstract:
We examine the valuation of accounting variables, growth opportunities, and insider retention for a sample of 1,625 IPOs from three time-periods: 1986-1990, January 1997 through March 2000 (designated as the boom period), and April 2000 through December 2001 (designated as the crash period). Specifically, we test for valuation differences in the boom and crash relative to the more stable 1980s. Additionally, we investigate whether accounting variables, growth, and insider retention of technology IPOs and internet IPOs are valued differently. Our major findings are as follows. For profitable non-tech firms in the 1980s, income, sales, R&D, industry price-to-sales comparables, and insider retention are positively related to offer values. In the boom period, relative to the 1980s, income, industry comparables, and insider retention are valued more. Sales, book value of equity, and R&D are valued less. The finding on income is surprising and contrary to claims made in the financial press. In the crash period, relative to the 1980s, income is valued more, but R&D and industry comparables are valued less. We also document that, relative to the boom period, crash period sales were valued more, whereas insider retention and industry comparables were valued less. Relative to non-tech firms, tech firm earnings and insider retention are valued more, but their sales and R&D are valued less. Internet firms' sales are valued less; but their income, book value, and insider retention are valued more. We also investigate whether first-day investors and investment bankers agree on the weights assigned to income, book value of equity, sales, R&D, industry comparables, and insider retention. We find that while the two groups value accounting variables and growth proxies differently, these differences are not economically important for the most part. With respect to insider retention, first day investors valued it less in the 1980s and during the crash period and more in the boom period, than do investment bankers. Additionally, investors value insider retention of tech, internet, and loss firms more than do investment bankers. First-day investors assign lower valuations to tech firms, internet firms, and loss firms than do investment bankers.

Initial public offerings, equity valuation, accounting data, insider ownership, new economy

Abstract:
We develop the Probability Scaling Method, which rescales short-window announcement period returns; and the Intervention Method, which uses returns associated with intervening events, to estimate value improvements from tender offers. These methods address biases in conventional techniques, which measure only a fraction of the total tender offer gain; and which include revelation about bidder stand-alone value. Perceived value improvements are much larger than traditional methods indicate, so that we cannot reject the hypothesis that bidders on average pay fair prices for targets. Furthermore, our new methods affect inferences about economic forces in the takeover market. We identify several effects (higher combined bidder-target stock returns for hostile offers, lower for equity offers, and lower for diversifying offers) that reflect differences in revelation about stand-alone value, not gains from combination.

Tender offers, value improvements, truncation dilemma, revelation bias, agency

Abstract:
Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. We suggest that executive incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold or the option cannot be exercised for a period of at least two to four years after the executive’s resignation or last day in office. This will provide superior incentives for executives to manage corporations in investors’ longer-term interest, and diminish their incentives to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation.

executive compensation, restricted stock, financial institution regulation, emergency economic stabilization act

Abstract:
We investigate IPO valuation for a sample of 1,655 IPOs from three time-periods: 1986-1990, January 1997 through March 2000 (designated as the boom period), and April 2000 through December 2001 (designated as the crash period). We find that firms with more negative earnings have higher valuations than do firms with less negative earnings and firms with more positive earnings have higher valuations than firms with less positive earnings. This V-shaped pattern to the relation between value and earnings suggests that inference based solely on firms with positive earnings is inaccurate. This is especially true for the boom and crash periods. Our results suggest that negative earnings are a proxy for growth opportunities for internet firms. We also find that investment bankers and first-day investors assign different weights to post-IPO ownership and changes in ownership around the IPO for different classes of pre-IPO shareholders (CEOs, VCs, other blockholders, and officers and directors) when pricing the IPO.

Initial public offerings, equity valuation, insider ownership, investment banker prestige, new economy

Abstract:
We review here the evidence, principally from the United States, on the relationship between board independence and firm behavior and performance. Board composition affects board behavior on a number of discrete board tasks. However, there is no strong evidence that higher board independence predicts better firm performance.

For a longer, somewhat updated survey of the evidence on board independence, see Sanjai Bhagat & Bernard Black, Is There a Relationship Between Board Composition and Firm Performance?, 54 Business Lawyer 921-963 (1999), available at http://ssrn.com/abstract=11417.

For the published version of Bhagat and Black (working paper 1997), cited in this review, see Sanjai Bhagat & Bernard Black, The Non-Correlation Between Board Independence and Long-Term Firm Performance, 27 Journal of Corporation Law 231-274 (2002), available at http://ssrn.com/abstract=133808.

boards of directors, independent directors

Abstract:
We study the relationship between corporate governance and company performance. We consider five measures of corporate governance during the period 1998-2007. Given the passage of Sarbanes-Oxley Act (SOX) during 2002, we separate the sample into pre-2002 and post-2002 periods to study how governance-performance relationships might have been impacted by this regulation.

We find a negative and significant relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. The stock ownership of directors is consistently positively and significantly related to performance through each of the subperiods. Other measures, such as the governance indices introduced by Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (2009) provide inconsistent results. We conclude that corporate governance studies should consider director stock ownership as the most reliable measure of governance.

We further investigate the relationship between SOX, governance and performance by examining how CEOs are disciplined following poor performance. We find that board independence and director stock ownership appear to be effective governance mechanisms for replacing the CEO following poor performance.

Board independence, corporate governance, corporate performance

Abstract:
We theoretically and empirically investigate the effects of manager-specific characteristics on capital structure. We develop a dynamic structural model in which a manager affects a firm's earnings through her ability and effort. The manager receives dynamic incentives through explicit contracts with shareholders. We derive the manager's contracts and implement them through financial securities. The firm's resulting capital structure is dynamic, and consists of long-term debt, short-term debt, inside equity, and outside equity. The different components of the firm's capital structure reflect the interactive effects of taxes, bankruptcy costs, as well as agency conflicts between the undiversified manager and well-diversified outside investors. The analysis of the model generates the following novel testable predictions: (i) Long-term debt declines with the manager's ability and with her inside equity ownership in the firm. (ii) Short-term debt declines with the manager's ability and increases with her equity ownership. (iii) Long-term debt increases with the firm's short-term risk and decreases with its long-term risk risk. (iv) Short-term debt declines with short-term risk. With the exception of the predicted relation between short-term debt and manager ownership, we show significant support for the above testable implications in our empirical analysis. Our theoretical and empirical results show that managerial discretion and manager-specific characteristics are important determinants of firms' financial policies.

Manager Ability, Risk Aversion, Manager Ownership, Capital Structure

Abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. This article begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: defendants experience economically meaningful and statistically significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as for criminal ones. The article concludes with some recommendations for researchers: the standards for conducting an event study are well established; researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time frame as possible. The companion article reviews the use of event studies in corporate law and regulation.

Abstract:
This article is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth, and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The article concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.

Abstract:
This Article advances an executive compensation reform proposal that is specifically addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that all firms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold nor the options exercised for a period of at least two to four years after an individual resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives(and traders whose actions can substantially impact an organization) to manage firms in investors longer-term interest, and diminish their incentive to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management incentive to take on unwarranted risk, our proposal would therefore also decrease the probability that public resources will be dissipated in bailouts of financial firms, particularly those deemed by public officials as “too big to fail.”

executive compensation, restricted stock, financial institution regulation, emergency economic stablization act

Abstract:
This article is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The article concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.

corporate law, corporate governance, event studies

Abstract:
A vast theoretical and empirical literature in corporate finance considers the inter-relationships between corporate governance, takeovers, management turnover, corporate performance, corporate capital structure, and corporate ownership structure. Most of the extant literature considers the relationship between two of these variables at a time - for example, the relationship between ownership and performance, or the relationship between corporate governance and takeovers. We argue that takeover defenses, takeovers, management turnover, corporate performance, capital structure and corporate ownership structure are interrelated. Hence, from an econometric viewpoint, the proper way to study the relationship between any two of these variables would be to set up a system of simultaneous equations that specifies the relationships between these six variables. However, specification and estimation of such a system of simultaneous equations is non-trivial.

To illustrate the above problem in a meaningful manner we consider the following two questions that have received
considerable attention in the literature and have significant policy implications: Do antitakeover measures prevent takeovers? Do antitakeover measures help managers enhance their job-tenure? In this research, we examine the impact of firm performance, ownership structure and corporate takeover defenses on takeover activity and managerial turnover. Our focus is the efficacy of corporate takeover defense. A vast literature suggests that takeovers and the managerial labor market serve to discipline poor performers in the managerial ranks, and also suggests that corporate takeover defenses are designed to shield incumbent managers from these forces. If this is in fact the case, and the belief that motivates the adoption of takeover defenses is rational, the presence of these defenses should be associated with a decline in takeover activity and extended job tenure for managers. The results presented here provide little support for this hypothesis. We find that antitakeover measures are not effective in preventing takeovers, nor are they effective in enhancing management's job-tenure. We do observe a negative correlation between takeover activity and takeover defense that is statistically significant. However, when we control for the financial performance of the company, we do not observe the negative relation between takeover activity and takeover defense. In a model that allows the relationship between performance and takeover activity to vary with takeover defense, we find that defensive activity is ineffective. In the case of management turnover, our results are even stronger. The frequency of CEO departures is uncorrelated with the status of takeover defenses at firms in our sample. This statement is consistent with both simple correlations, and with the estimates from probit models, where we find that turnover is related to performance. At firms with poison pill defenses, there is a statistically significant relationship between management turnover and performance. We stress that these results do not imply that defensive activity is costless to shareholders. It may well be the case that managers who are shielded by takeover defenses perform less well than they would have had the takeover defenses not been in place. This hypothesis is consistent with both the results reported here, and with indirect evidence from announcement returns. Our evidence does, however, suggest quite strongly that takeover defenses are not completely effective in insulating managers from the consequences of poor corporate financial performance.

Abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. It reviews the event study methodology, its strengths and limitations for policy analysis, and how event studies have been used to evaluate the wealth effects of corporate litigation. The companion article reviews the use of event studies in corporate law and regulation. The event studies of corporate litigation indicate that defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. Those findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and the reputational losses are of equal magnitude for civil fines as criminal ones. The article concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, or/and narrowing the public announcement to as short a time-frame as possible.

Abstract:
This paper examines trading volume reaction to initiations of open market share repurchases. We observe no change in trading volume for repurchases announced immediately after the October 1987 stock market crash. In contrast, we find astrong announcement period volume reaction for a sample of firms that announced repurchases during "normal" periods. Using variation in analysts' earnings per share as a proxy for quality of information, we document the following: Trading volume is inversely proportional to the quality of preannouncement information. Second, market value is also inversely proportional to the quality of information about the firm.

Abstract:
We test for Granger-causality between trading volume and price volatility. We modify the standard regression procedure in several ways. We take the first difference of the logarithmic transformation of each series to account for potential nonstationarity in the data. We isolate the time series structure of each series and test for causality using pre-whitened residuals to eliminate problems associated with autocorrelation in the data. Finally we test for causality in both mean and variance to account for the presence of time varying variance (ARCH) in both series. Our results provide strong evidence that price changes lead (cause) volume in the Granger-causality sense. There is no evidence that volume causes volatility.

Abstract:
Under SEC Rule 10b-5, shareholders can sue a corporation that they believe has materially misled them about the firm's prospects. Recent legislation calls for reform of the rules governing shareholder class action litigation. This paper examines volatility and market sensitivity for both sued and nonsued firms. The approach is different from that of earlier papers in several ways. First, rather than selecting an arbitrary period prior to the lawsuit filing date, we examine both the financial performance and new-release characteristics of sued firms during the alleged misleading information period (MIP) of the suit, that is, during the period in which investors allege the firm misled the market. Second, we divide the lawsuit sample into categories depending on the allegations in the suit and the proximity of the MIP to the disclosure that caused the suit. Third, sued and nonsued firm samples, are larger than those in earlier papers. Comparison group samples have also been broadened to include industry, size and past behavior of sued firms, and firms acquitted of the charges. We find that sued firms are more likely to experience episodes of very poor performance as the population of nonsued firms. Sued firms exhibit higher systematic risk than the population of nonsued firms. Prior to the alleged misleading information period, sued firms experience abnormal positive returns for about three years. However, during the misleading information period, sued firms experience significant negative abnormal return. Sued firms issue more positive news in the MIP than matched groups of nonsued firms. Finally, we find that settlement values are significantly positively related to the seriousness of allegations in the suit, the length of time during which the shareholders allege they were misled, and to the overly optimistic tone of announcements about the firm during this misleading information period.

Abstract:
An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique , the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, this event does not occur at the discretion of the initial bidder. Hence, the arrival of a competing bid will reveal little or nothing about the non-takeover value of the initial bidder. We find four main results. First, takeover improvements from cash tender offers are perceived by investors to be large and positive - about 44.8 percent of target value. The conclusion that takeover improvements are positive is robust with respect to plausible variations in the parameters that have to be estimated and serve as input to computing the bidder's gain from the takeover. Second, the average profits that successful bidders earn from initial shareholdings are modest. This suggests that high concentration of share ownership may be more important for internal monitoring than for motivating takeovers. Third, point estimates indicate that bidders are overpaying for targets, but most of the premium can be explained by value improvements. Fourth, value improvements are of similar magnitude for friendly and hostile transactions. This suggests that both discipline of bad managers and the realization of business complementarities may be motivating takeovers.

Abstract:
This paper analyzes lawsuits in which at least one side, plaintiff or defendant, is a corporation. In particular, we provide evidence on the relative frequency of the legal issues involved, the incidence of suits by whether the opponent is another firm, governmental entity, or non- corporate private entity. Furthermore, we explore the direct and indirect costs and benefits to firms involved in different types of legal battles. Specifically, we examine the stock market reaction to filing and settlement announcements and find that characteristics of the suit, such as legal issue, type of opponent, and firm characteristics (i.e., firm size and proximity to bankruptcy) have power to explain cross-sectional variation in these wealth effects.

Abstract:
An unresolved issue in empirical research on corporate control is the extent to which takeovers improve target and bidder firm value. The bidder's abnormal return at the time of the bid gives a biased estimate of the market's valuation of the bidder's gain from takeover, because the form of the offer and the very fact that the bidder makes an offer may convey information about the stand-alone value of the bidder. For example, the fact of a bid may convey the good news that a bidder expects to have high cash flows, or the bad news that the bidder has poor internal investment opportunities. We provide a technique, the intervention method, that extracts the market's estimate of the value improvement due to the takeover from the abnormal return of the initial bidder when a competing bid arrives. The associated stock return is informative about value improvement because this event has a large effect on the probability of the initial bidder's success. Furthermore, this event does not occur at the discretion of the initial bidder. Hence, the arrival of a competing bid will reveal little or nothing about the non-takeover value of the initial bidder. We find four main results. First, takeover improvements from cash tender offers are perceived by investors to be large and positive - about 44.8 percent of target value. The conclusion that takeover improvements are positive is robust with respect to plausible variations in the parameters that have to be estimated and serve as input to computing the bidder's gain from the takeover. Second, the average profits that successful bidders earn from initial shareholdings are modest. This suggests that high concentration of share ownership may be more important for internal monitoring than for motivating takeovers. Third, point estimates indicate that bidders are overpaying for targets, but most of the premium can be explained by value improvements. Fourth, value improvements are of similar magnitude for friendly and hostile transactions. This suggests that both discipline of bad managers and the realization of business complementarities may be motivating takeovers.