Samuel H. Szewczyk

Board Composition and Corporate Fraud

The study reported here examined how various characteristics of the board of directors and other governance features affected the occurrence of U.S. corporate fraud in the 1978-2001 period. The findings suggest that board composition and the structure of a boards oversight committees are significantly correlated with the incidence of corporate fraud. In the sample, as the number of independent outside directors increased on a board and in the boards audit and compensation committees, the likelihood of corporate wrongdoing decreased.The study reported here examined how various characteristics of the board of directors and other governance features affected the occurrence of U.S. corporate fraud in the 1978-2001 period. The findings suggest that board composition and the structure of a boards oversight committees are significantly correlated with the incidence of corporate fraud. In the sample, as the number of independent outside directors increased on a board and in the boards audit and compensation committees, the likelihood of corporate wrongdoing decreased.

Does Coordinated Institutional Investor Activism Reverse the Fortunes of Underperforming Firms

We investigate the impact of Focus Listing by the Council of Institutional Investors on targeting poorly performing firms. Post-listing stock returns for the targeted firms differ insignificantly from those of a suitable benchmark group. Institutional investors increase their holdings of targeted firms, but not by more than those of the benchmark firms. Similarly, though analysts revise earnings forecasts up for Focus Listed firms, they do so well after the listing event and positive revisions are no greater than the benchmark group. Moreover, there appears to be little difference between Focus List and benchmark firms in the incidence of post-listing events such as mergers and stock repurchases. Overall, we find very little evidence of the efficacy of shareholder activism.

Bond rating agencies and their role in bank market discipline

This study examines whether changes in the ratings of bank debt have any information content. Bank holding companies are monitored both by bank regulators and by debt rating agencies, leading to the view that duplication of effort may render superfluous the monitoring service of rating agencies. However, our results show that downgrades of bank debt are associated with statistically significant wealth losses, irrespective of whether the rating change is across rating classes or within a rating class. Moreover, the results hold even when observations with potentially confounding events are removed from the sample. These results suggest that rating agencies provide valuable information to the capital market regarding the risk exposure of bank holding companies.

The private placement of bank equity

Abstract This paper investigates the role of private placements of common stock as a source of bank capital. Our results show that information asymmetry problems that typically attend new offers of bank equity are mitigated in the private placement process. Moreover buyers of privately placed common stock seem to provide a quality certification of capital deficient bank holding companies. Our evidence is also consistent with the notion that buyers of privately placed common stock provide a monitoring service that aligns the interest of the banks managers and shareholders. Finally, we find no evidence that private placements are predominately motivated by incumbent managements attempts to sell equity to a friendly buyer at the expense of the banks current shareholders.

Voluntary vs. Forced Financial Restatements: The Role of Board Independence

Using a sample of companies that restated their earnings over the period 1997–2002, this study finds that the probability of voluntary as opposed to forced restatements is positively related to the independence of both the board of directors and the audit committee. Following both voluntary and forced earnings restatements, companies increase the proportion of independent directors on both the board and the audit committee; three years after restatements, both types of restating companies attain similar levels of director independence. Moreover, the study finds comparable postrestatement long-run stock performance for all restating and matched companies, which suggests that postrestatement enhancements to internal control systems help restore companies’ blemished reputations. This article reports the results of our investigation of the role of corporate governance in monitoring earnings manipulation in which we examined the independence of boards of directors and audit committees in companies that restated their earnings. Extant empirical evidence on board independence and the incidence of accounting irregularities is mixed. Our investigation of 187 restatements from 1997 to 2002 finds that director independence is not associated with a lower incidence of earnings restatements. Companies that make voluntary restatements, however, have greater board and audit committee independence than do companies forced to restate earnings by the U.S. SEC and other external agencies. Moreover, the probability of voluntary restatements is positively related to board and audit committee independence. Our results also show that restating companies, especially those forced to restate, increase the independence of their boards and audit committees after restatements. And long-run stock performance after both voluntary and forced restatements is similar to that of matched companies. Our findings point to the importance of independent boards of directors and audit committees in improving the accuracy of financial reporting. Although director independence does not ensure a lower incidence of earnings restatements, it increases the probability that a company will initiate a restatement instead of waiting for outsiders to force it to restate. These findings are relevant to the current controversy surrounding the rising number of restatements since 2001 and support the requirements for greater board and audit committee independence mandated by the Sarbanes–Oxley Act and the rules of major exchanges. Our findings suggest that greater director independence is associated with more efficient internal monitoring of financial reporting and results in a greater number of voluntary restatements. Consequently, the recent increase in restatements may indicate that the corporate governance laws enacted in this decade have taken root rather than the contrary, as some observers believe. The restating companies in our sample responded to the significant cost imposed on them by financial markets by making reputation-enhancing changes to their internal monitoring systems, changes that are evidenced by the increase in the independence of their boards and audit committees. The incentive that restating companies have to maintain their reputations with investors in the capital markets ensures that the negative impact of restatements is short-lived. Our results indicate comparable postrestatement long-run stock performance for all restating and matched companies, which suggests that postrestatement enhancements to internal control systems help restore both blemished reputations and investor confidence. Thus, concerns that the current increase in restatements will erode investor confidence may be unwarranted.

“Too big to downgrade”: the response of financial analysts to bond downgrades of money center banks

Outlines previous research on the effects of bond rating changes on the share prices of US banks, noting opposing views on whether they contain new information. Examines revisions in analysts’ earnings forecasts for downgraded and non‐downgraded banks (separating regional banks from large money centres) to test the value of this information using 1981‐1991 data on 14 downgrades of money centre banks; and explains the methodology used. Shows that downgrades affected forecasts for the downgraded banks and other money centre banks but not for regional banks. Concludes that bond rating agencies assist market discipline by providing useful information on risk.

Corporate governance structure and strategic change: evidence from major acquisitions

Purpose When major reallocations of the firm’s assets are necessary, a balance in the corporate governance structure favoring the CEO can be a necessary condition for planning and initiating major strategic moves. The purpose of this paper is to examine firms making major acquisitions to identify corporate governance elements that are particular to undertaking major strategic initiatives. Design/methodology/approach The authors test the proposition that firms making major strategic acquisitions will exhibit a corporate governance structure that is different in a number of its governance elements from firms making other acquisition decisions. The authors categorize the elements of corporate governance structures into CEO characteristics, internal monitoring, external monitoring and CEO compensation. Findings The authors find the propensity of acquiring firms to make major strategic acquisitions is abetted by the CEO’s attributes and compensation, by the structure of the audit committee and compensation committee, and by the firm’s prior financial performance. Originality/value The analysis of firms making major acquisitions presents the corporate governance dynamics of an environment that is conducive to strategic risk taking.

Why Do Investment Banks Buy Put Options from Companies

Companies collected billions in premiums from peculiarly structured put options written on their own stock, while almost all of these puts expired worthless quarter after quarter. Buyers of these options, primarily investment banks, lost money as a result. Although these losses might seem puzzling, we model how by offering to buy put options from better informed parties, investment banks receive private information about the issuing company. Empirically, we find a 12% increase in the stock prices and a 40% increase in the trading volumes around the put sales, indicating indeed that investment banks, the bankers personally or their clients may have acted on information obtained from these transactions.

Pollution control revenue bond sales and public utility share prices

Abstract This article examines the effect of pollution control revenue bond offerings on public utility common stock prices. These securities provide a unique case in which public utilities were permitted to issue a limited quantity of debt offerings investors an income stream exempt from federal taxes with the proceeds from the issue targeted for a specific capital investment. Significant negative stock price effects are reported around the announcement of these securities. However, the stock price response to pollution control revenue bond sales is more favorable than that reported in earlier studies for straight debt offerings used to finance a utilitys investment program.