Gaizka Ormazabal

Outsourcing Shareholder Voting to Proxy Advisory Firms

This paper examines the economic consequences of institutional investors outsourcing research and voting decisions in public company elections to proxy advisory firms. We investigate the implications of these decisions in the context of shareholder say-on-pay voting required in 2011 under the Dodd-Frank Act. We find three primary results: proxy advisory firm recommendations have a substantive impact on say-on-pay voting outcomes, a substantial number of firms change their compensation programs in the time period before formal shareholder votes in a manner consistent with the features known to be favored by proxy advisory firms in an effort to avoid negative voting recommendations, and the stock market reaction to these compensation program changes is statistically negative. These results suggest that outsourcing voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.

Proxy Advisory Firms and Stock Option Repricing

This paper examines the economic consequences associated with the board of director’s choice of whether to adhere to proxy advisory firm policies in the design of stock option repricing programs. Proxy advisors provide research and voting recommendations to institutional investors on issues subject to a shareholder vote. Since many institutional investors follow the recommendations of proxy advisors in their voting, proxy advisor policies are an important consideration for corporate boards in the development of programs that require shareholder approval such as stock option repricing programs. Using a comprehensive sample of stock option repricings announced between 2004 and 2009, we find that repricing firms following the restrictive policies of proxy advisors exhibit statistically lower market reactions to the repricing, lower operating performance, and higher employee turnover. These results are consistent with the conclusion that proxy advisory firm recommendations regarding stock option repricings are not value increasing for shareholders.

Follow the Money: Compensation, Risk, and the Financial Crisis

This Closer Look illustrates the relation between executive compensation and organizational risk through the context of the financial crisis of 2008. We demonstrate that the incentives that bankers had to increase firm risk not only increased but increased substantially in the years preceding the financial crisis. We ask: • How well do boards understand the relation between compensation and risk? • How much attention do directors pay to the risk-taking incentives provided by CEO wealth? • Do boards consider the relation between incentives and the risk tolerance of the firm? • How much risk should an executive be encouraged to take? The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews

This paper studies the effect of the public disclosure of the Securities and Exchange Commission (SEC) comment-letter reviews (CLs) on firms’ financial reporting. We exploit a major change in the SEC’s disclosure policy: in 2004, the SEC decided to make its CLs publicly available. Using a novel dataset of CLs, we analyze the capital-market responses to firms’ quarterly earnings releases following CLs conducted before and after the policy change. We find that these responses increase significantly after the policy change. These stronger responses partly occur while the review is ongoing and persist on average for two years. Corroborating these results, we also document a set of changes that firms make to their accounting reports following CLs. Our results indicate that disclosure of regulatory oversight activities can strengthen public enforcement.

Does Regulating Banks’ Corporate Governance Help? A Review of the Empirical Evidence

The financial crisis of 2007–2008 fueled the idea that corporate governance in the financial sector urgently needed reform. The perception that poor corporate governance was a primary cause of the breakdown of the financial markets prompted extensive regulatory actions around the world. However, whether and how regulating banks’ corporate governance results in a better-functioning economy is a subject of ongoing debate. In this chapter we summarize the theoretical arguments for regulation and survey the empirical evidence on the role of corporate governance in the financial industry. The focus of our review is the post-crisis reform of banks’ corporate governance, as seen from a historical perspective. The discussion will be structured around the main corporate governance mechanisms, namely (i) internal governance mechanisms (i.e., managerial compensation, board monitoring, and internal control systems), (ii) market discipline (i.e., the roles of competition, the takeover market, and the shareholder activism), and (iii) regulatory intervention (i.e., capital requirements and regulatory supervision). Although a large part of the available evidence uses US data, our analysis also reviews corporate governance developments in important economies around the globe. We conclude by pointing out the limitations of empirical research in informing the debate on regulatory activity.

Whistleblowers on the Board? The Role of Independent Directors in Cartel Prosecutions

Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors serving on their boards. This finding is robust to self-selection and is more pronounced when those directors hold more outside directorships and have fewer stock options — when they have fewer economic ties to the indicted firms. Results are stronger when independent directors’ appointments were attributable to SOX, preceded the CEO’s appointment, or followed class action suits — when they have fewer direct ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support across their directorships in other firms. Moreover, firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs and to dismiss CEOs after cartel indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to reduce those costs. Understanding these incentives is key for antitrust authorities in designing strategies for cartel prosecution.

Capital Structure under Collusion

We study the financial leverage of firms that collude by forming a cartel. We find that cartel firms have lower leverage ratios during collusion periods, consistent with the idea that reductions in leverage help increase cartel stability. Cartel firms have a surprisingly large economic footprint (they represent more than 20% of the total market capitalization in the U.S.), so understanding their decisions is relevant. Our findings show that anti-competitive behavior has a significant effect on capital structure choices. They also shed new light on the relation between profitability and financial leverage.

An evaluation method with imprecise information for multi-attribute decision support

This paper presents a method using intervals for representing and synthesizing imprecise information for multi-attribute evaluation and decision-making support. An implementation is given for selecting an alternative for a project in a real case in the context of construction in civil engineering. As a previous step to aggregate the available information, a methodology is proposed for summarizing and normalizing values in an intervals context, representing the alternatives by means of rectangles in R n (products of n finite closed intervals in R). A distance is introduced in the set of rectangles, defining a total order once a reference rectangle is considered. A method is given for the choice of the best alternative based on the comparison of distances to a reference rectangle. The constraints which guarantee consistency are determined and the consistency of the method is established.