Peter Iliev

The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices

This paper exploits a natural quasi-experiment to isolate the effects that were uniquely due to the Sarbanes-Oxley Act (SOX): U.S. firms with a public float under

Reconciling Estimates of the Speed of Adjustment of Leverage Ratios

75 million could delay Section 404 compliance, and foreign firms under

Editor's choice: : Shareholder voting and corporate governance around the world

700 million could delay the auditors attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms. Copyright (c) 2010 the American Finance Association.

Uninvited U.S. Investors? Economic Consequences of Involuntary Cross-Listings

A number of prominent papers in the literature have estimated the average speed of adjustment (SOA) of firms’ leverage ratios with estimators not designed for applications in which the dependent variable is a ratio. These statistics indicate mean reversion, which the papers mistakenly interpreted as deliberate readjustment. We propose a non-parametric way to model leverage ratios under the null hypothesis of random corporate behavior — a placebo process — and embed it with the common alternative of reverting to a target. We show that the empirical estimates previously documented were not only too low, but map into two estimates of the underlying parameter — one with a positive but very slow speed of readjustment, and one with a small negative speed of readjustment (as suggested in Baker and Wurgler (2002) and Dittmar and Thakor (2007)). The best inference to be drawn from the same estimators reported in the literature is the latter, i.e., the true SOA is mildly negative. The average manager does not seem to move back towards a target ratio.

The Effects of Removing Barriers to Equity Issuance

Using a sample of non-U.S. firms from 43 countries, we investigate whether laws and regulations as well as votes cast by U.S. institutional investors are consistent with an effective shareholder voting process. We find that laws and regulations allow for meaningful votes to be cast, as shareholder voting is both mandatory and binding for important elections. For votes cast, we find there is greater dissent voting when investors fear expropriation. Further, greater dissent voting is associated with higher director turnover and more M&A withdrawals. Our results suggest that shareholder voting is an effective mechanism for exercising governance around the world.

Venturing Beyond the IPO: Financing of Newly Public Firms by Pre-IPO Investors

We study the economic consequences of a recent Securities and Exchange Commission securities regulation change that grants foreign firms trading on the U.S. over-the-counter (OTC) market an automatic exemption from the reporting requirements of the 1934 Securities Act. We document that the number of voluntary (sponsored) OTC cross-listings did not increase following the regulation change, suggesting that it did not achieve its intended purpose of increasing voluntary OTC cross-listings through a reduction in compliance costs. We do find that the design of the regulation allowed financial intermediaries to create an unprecedented number of involuntary (unsponsored) OTC ADRs: 1,700 unsponsored ADR programs for 920 firms were created for companies that had previously chosen not to cross-list in the United States. Our difference-in-differences analysis based on a matched sample approach documents that foreign firms forced into the U.S. capital markets experience a significant decrease in firm value, and we further show that the decrease in firm value is related to an increase in U.S. litigation risk. We also find that depositary banks’ propensity to involuntarily cross-list firms is positively related to banks’ expected fee revenue, and that banks chose firms that incur high costs when involuntarily cross-listed. Our results provide evidence that securities regulation can be exploited for private gain and result in costly unintended consequences.

Public Versus Private Provision of Governance: The Case of Proxy Access

We study the consequences of an exogenous deregulation allowing small firms to accelerate public equity issuance. Post-deregulation, treated firms double their reliance on public equity (both overall and compared to a control group), transition away from private investments in public equity, and increase their total annual equity issuance by 40%. This is accompanied by a 5.6 percentage point reduction in equity issuance costs, a 19% increase in investment, and a 12% decline in financial leverage. Our findings provide evidence that reducing issuance frictions benefits issuers even in highly developed markets.We study the consequences of a U.S. deregulation allowing small firms to accelerate their public equity issuance. Post-deregulation, affected firms double their reliance on public equity and transition away from private investments in public equity compared to similar untreated firms. The net effect is a 5.7 percentage point or 49% increase in the annual probability of raising equity. This is accompanied by a reduction in equity issuance costs, an increase in investment, and a decrease in leverage. Our findings provide evidence that reducing equity issuance barriers benefits issuers even in highly developed markets.

Governance Transfer Through Directors’ Foreign Board Experiences

Contrary to generally-held notions regarding the private firm focus of venture capital firms, we find that many VCs take an active investing role in firms after the IPO. Over one-quarter of VC-backed firms receive VC financing within the first five years after the IPO, in many cases from a VC that also funded the firm prior to the IPO. VCs concentrate their investments in firms that are most likely to find it prohibitively costly to raise public equity. Consistent with the added capital enabling the firm to undertake positive NPV projects, these post-IPO investments are associated with positive abnormal returns. Moreover, results indicate that the option to raise capital from a VC firm has positive value: the tendency of a firm’s pre-IPO VC to back firms after the IPO is positively related to post-IPO returns and to firm survival.

The Effect of the Say-on-Pay in the U.S.

We use a unique setting to study the tradeoffs between universal regulatory mandates and private contracting in the field of corporate governance. Events surrounding the legal challenge of a 2010 proxy access rule allow us to benchmark the market’s expectation of the benefits of universally mandated proxy access even though this rule never came into effect. At the same time, a 2010 rule amendment facilitating shareholder proposals for proxy access opened a new channel for proxy access through “private ordering.” We document that this private channel has been active, spawning about 160 proxy access proposals, and use the unexpected announcement of a major private ordering initiative to identify a 0.5 percent increase in shareholder value for the targeted firms. However, our findings also underscore that private ordering may lead to a second best outcome. We find that proponents do not selectively target those firms that were expected to benefit the most from universally mandated proxy access, and that tailoring of proposal terms is limited. Moreover, management is more likely to challenge proposals at firms that stand to benefit more. Overall, we find that private ordering creates value, but it may not efficiently deliver proxy access at the firms that need it most. JEL classification: G34, G38, K22We use a unique setting to study the efficiencies and frictions in pursuing governance changes through private market channels. Recent regulatory changes made it possible to pursue proxy access at individual firms through shareholder proposals. We document a large wave of such proposals, and identify a 0.5 percent increase in shareholder value for targeted firms. However, we find that proponents do not selectively target the firms that the market expected to benefit most from a rule that would have mandated proxy access universally, and that management is more likely to challenge proposals at firms that stand to benefit more.

Are Mutual Funds Active Voters

We study the transfer of governance across countries through overlapping boards. Companies converge to the governance characteristics and board practices of foreign firms through their directors’ foreign board experiences. Learning from foreign firms’ governance practices is as important as learning from connected domestic firms, and increases with the number of directors with foreign board appointments. This learning is stronger in firms domiciled in less-developed governance markets, suggesting a potential channel through which better governance practices are propagated. Our results are also obtained when we use an exogenous shock to board practices, are present in the time series, and don’t exist in in placebo samples.